The Mayberry v. KKR situation has developed not necessarily to Kentucky Attorney General Daniel Cameron’s advantage.
As we’ll explain in more detail, a legal move that made sense only as a political gambit now is at serious risk of backfiring on Cameron.
Last July, a hard-fought case, Mayberry v. KKR, appeared dead as a result of the Kentucky Supreme Court dismissing the complaint over standing by applying rulings made in other jurisdictions after the original case has been lodged.1 Attorney General Cameron unexpectedly intervened as the counsel for the original plaintiffs reconfigured their arguments to deal with the standing issues. As we noted then:
The politics of this move are extremely perplexing. Cameron is a protege of Mitch McConnell, and two of the defendants in this suit, Steve Schwarzman and Henry Kravis, are not just Republican heavyweight donors; they are (or at least have been) specifically top McConnell funders. What gives?
Cameron’s filing was almost entirely dependent on the original plantiffs’ documents. It’s become increasingly evident that Cameron never intended to litigate. The best guess is that Cameron needed a distraction from bad Brionna Taylor headlines, and also saw the Mayberry v. KKR case as an opportunity to engage in a little shakedown by making a potentially explosive case go away via a cost-of-doing-business settlement.
But Cameron appears to have badly underestimated his opponents, led by the formidable attorney Michelle Lerach and her husband, the disbarred but still very much feared Bill Lerach, who acts as a consultant. A quick and cheap settlement can occur only if the defendants can escape what they fear most, discovery. But the latest order from Judge Philip Shepherd shows he is moving forward with the reconfigured case, now involving “Tier 3” beneficiaries in a hybrid plan that does not have a state guarantee. That upsets Cameron’s plans to settle the case before the Tier 3 plaintiffs go going, which would allow his to go lowball based on public information and the limited discovery to date.
Mayberry v. KKR is a high stakes case, confirmed by the legal scorched earth tactics of the defendants, Blackstone, KKR/Prisma, and PAAMCO, along with key principals, including Blackstone founder and CEO Steve Schwarzman and KKR co-founder and CEO Henry Kravis. The case was first filed in December 2017 derivatively, on behalf of eight beneficiaries of the fabulously badly managed, corrupt, and underfunded Kentucky Retirement System. The plaintiffs alleged that that Blackstone, KKR/Prisma and PAAMCO had each sold KRS high fee, high risk customized hedge funds that they falsely billed as the impossible combination of “low risk, high return,” contradicting what their own SEC filings said about the very same products. The Kentucky Retirement System made a sudden, large commitment to all three funds and even added to the pot despite underperformance. As we explained:
The fund managers allegedly focused on KRS and other desperate and clueless public pension funds who were unsuitable investors, particularly at the risk levels they were taking. KRS made what was a huge investment for a pension fund of its size. $1.2 billion across three funds all at once, in 2011, roughly 10% of its total assets at the time. They all had troublingly cute names. The KKR/Prisma funds was “Daniel Boone,” the Blackstone fund was “Henry Clay” and the PAAMCO fund, “Colonels”.
In the case of KKR/Prisma, the fund had installed an employee at KRS as well as having a KKR/Prisma executive sitting as a non-voting member of the KRS board. The filing argues that that contributed to KRS investing an additional $300 million into the worst performing hedge fund even as it was exiting other hedge funds.
The ante is much higher than the potentially meaty recoveries. Private equity and hedge funds fetishize secrecy because too often, their conduct will not stand up to scrutiny. The giant fund managers are almost certain to be most afraid of discovery, since they sharp practices they used with Kentucky Retirement Systems were very likely to have been replicated at other public pension funds. Even the limited discovery so far uncovered more misconduct and allowed the plaintiffs to add to their claims.
The Kentucky Retirement System stated it endorsed the case but would not formally join it.
Cameron Flips Judge Shepherd the Bird
With Mayberry v. KKR sent back to his court, Judge Philip Shepherd made clear he was eager to move it along. He originally set a date of February 1 for the Attorney General to make a new filing. Among other things that the Tier 3 plaintiffs were pressing to be heard by the court. In a January 12 order, following a January 11 hearing, Judge Shepherd instructed the Attorney General to file his amended compliant by February 1 so he could assess the motions the Tier 3 plaintiffs and any other intervenors in light of that. Shepherd gave the Tier 3 Group, as he called it, until February 11 to file its motion to intervene, and set a hearing date for February 22. 2
Late on January 29, literally the latest possible moment before the February 1 due date, Cameron blew off Judge Shepherd, filing a motion asking for an extension of time. Cameron said he’d been getting his mind around the case by having tea and cookies meeting with the defendants. He asked for ten more weeks to get up to speed, even though he’s had since last July, and then wanted the Tier 3 plaintiff’s filing deadline to be set two weeks after his new due date.
The centerpiece of the attorney general’s argument for delay was that he’d gotten the Kentucky Retirement System to agree to spend up to $1.2 million on an outside law firm to do some poking around. We’ve embedded their proposal at the end of this post. The typo in the very first paragraph does not speak well to their attentiveness. Nor does the fact that the firm is newly formed and none of its attorneys have meaningful relevant experience. As one prosecutor snorted:
This is ridiculous. The terms are left undefined: “specific investment activities” and “any improper or illegal activities” need to be called-out in the contract. The parties haven’t even defined who decides which “specific investment activities” to “investigate”!
This reeks of “the horse left the barn 10 years ago.” It’s just cover for Cameron. Now that we’re being sued, we’d better get on this…
Even more damaging was the argument from Michelle Learch at a February 8 hearing. She pointed out that KRS had already hired independent counsel to investigate years ago. That firm had found significant wrongdoing and had endorsed the legal team (then Anne Oldfather and Michelle Lerach) as eminently qualified to pursue the claims. Moreover, she pointed out the Attorney General’s office was in no position to pursue the matter. His staff did not have relevant expertise and his office could only hire outside attorneys on one year contracts and then at pay scales that made it impossible to secure and keep a team that could purse this sort of complex litigation.
In other words, there was no way Cameron was going to find anything new via his KRS-paid runway extension.
Judge Shepherd issued a short order on February 12 approving a request by the defendants. The Tier 3 plaintiffs’ counsel continued to send in filings, which they may regard as love letters but I suspect Shepherd might find to be a bit much. On February 15, they sent in a “Memorandum in Support of Motion for Entry of Pre-Trial Order No. 1.” This was a fairly long missive arguing, with the usual citations, that there was boatloads of precedent for public-private litigations to go forward and models for how the court could manage them. I gather the point was to show Shepherd that lots of courts had found ways to let cases proceed in parallel and he didn’t have to let the Attorney General go first just because he wanted it that way.
The second filing, “Memorandum In Support Of The Tier 3 Plaintiffs’ Motion for Accounting” falls into the evil genius terrain. Normally, this sort of document would be filed as part of the prospective settlement conference which is normally required once a suit gets past summary judgment, but before full-blown discovery. The Lerach team pulled it out now to preempt a cheap settlement by Cameron.
It blows up the idea that the Attorney General could settle the case without doing actual discovery. It provides an estimated range of what the hidden hedge funds fees might be, based not only on academic studies but estimates by KRS’ own consultant, the authoritative CEM Benchmarking. We’ve embedded it below.
The defendants howled and quickly filed a “Combined Response” basically arguing that the Tier 3 “individuals” weren’t parties to Mayberry v. KKR (following the attorney general, the document depicted them as “non parties”) and the Judge Shepherd should tell them to cut it out. However, some things cannot be unsaid, and in keeping, the defendants didn’t (and presumably could not) demand that the filings be stricken from the record.
Judges do not have to rubber stamp settlements. Judge Jed Rakoff famously rejected several post-crisis settlements as being inadequate and ordered the parties to trial, which usually resulted in meatier settlements. So the Motion for Accounting is a huge impediment if Cameron’s plan is indeed to settle on the cheap.
Judge Shepherd issued an order on the 18th which further complicates matters for the Attorney General. As you can see from the final embedded document, Judge Shepherd is not letting the Attorney General dictate the overall timetable, which is in the hands of the court (Shepherd did say in the February 8 conference that he was inclined to grant the Attorney General’s request for more time). The order states that the Tier 3 plaintiffs’ arguments, that they don’t need to wait on the Attorney General investigation to proceed, and that the Attorney General represents different interests than the Tier 3 plaintiffs, is sufficient grounds for their motions to proceed independent of the Attorney General’s research project. Judge Shepherd also reiterated his frustration with the delay.
Judge Shepherd cancelled the February 22 conference, granted the Attorney General an extension until April 12 to file his Amended Compliant, gave those who wanted to oppose the Tier 3 plaintiffs Motion to Intervene until March 2 to respond, and gave the Tier 3 Plaintiffs until March 8 to file their rejoinder. Judge Shepherd will determine how to dispose of the Tier 3 two February 15 motions after he rules on their motion to intervene. The next conference is April 19. Expect fur to fly!
1 Those decisions, subsequent to the filing of the litigation, found that the defendants in defined benefit plans did not have standing because they have not suffered a “particularlized,” as in actual, loss. Not only are the pensioners still getting full benefits, but their pensions are (supposedly) also backstopped by the state. Kentucky has adopted Federal Article III rules which makes this standard germane. Note that this would not apply in states like California that have not adopted Article III.
2 From Judge Shepherd’s order:
00 KRS legal investigation contract
The Court believes that the Civil Rules require the Movants (state employees with defined contribution, rather than defined benefit pensions, or “the Tier 3 group”) to obtain leave of Court under CR 24 in order to assert their claims in this action. The Court cannot adequately evaluate the factors for intervention under CR 24 in a vacuum. The Court cannot rule on the motion to allow the Tier 3 Group to intervene and assert claims until it knows the nature and scope of the
claims that will be asserted by the OAG in its proposed Amended Intervening Complaint under
00 Brief re Motion for Accounting
00 Feb 18 Shepherd Mayberry v. KKR order