Decisions Finally Coming in Long-Running Battle with Hedge Fund Titans in Kentucky Pension Case, Mayberry v. KKR

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Below we are posting a pair of key filings in Mayberry v. KKR, the very long running effort by various beneficiaries of the fabulously broke Kentucky Retirement System to claw some of their abusively managed monies back from private equity titans slumming as hedgies. Next Monday, Judge Philip Shepherd will hear arguments about the effort of Kentucky attorney general Daniel Cameron to intervene in the case. That included taking up claims asserted by so-called Tier 3 plaintiffs, who are beneficiaries in a “hybrid” defined contribution plan (Tiers 1 and 2 are defined benefit plans and thus effectively senior). The first filing is on behalf of the Tier 3 Plaintiffs, the second is by the attorney general.

Because the filings are very readable, we will limit ourselves to some background and a few comments. But the very big picture is that this case has been dragged out for years, by design, by the defendants. That is normally a very successful approach since memories fade and it thus becomes harder to make allegations stick. However, with a case like this one, the overwhelming majority of the damaging information will be in contracts, financial accounts, and e-mails. So the stymieing, while costly and frustrating, isn’t as damaging as it would normally be. And Judge Shepherd has made it clear he wants to get this case out of stall speed.


The short version is Daniel Cameron’s intervention scheme has developed not necessarily to his advantage. Mayberry v. KKR targets the biggest backers of his mentor, Mitch McConnell. Why would Cameron not let a case, which as we’ll see soon, looked to be dead, rest in its legal grave? Perhaps he did correctly recognize that the legal team, headed by the impressive lawyer Michelle Lerach and her feared husband, Bill Lerach, was not going to go away. Lerach was disbarred in securities litigation involving dot-bomb era accounting frauds like Enron and Worldcom. The Lerachs’ net worth, estimated at $900 million, gives them plenty of staying power. As we’ll see, Cameron’s move made sense if he thought he could settle the case. Absent that, he looks like the dog that caught the car.

The plot thus far: in late December 2017, attorneys filed a derivative lawsuit for eight Kentucky Retirement System beneficiaries against three fund managers, KKR/Prisma, Blackstone, and PAAMCO, that had sold customized hedge fund products that contrary to their sales pitch, had high risk and underwhelming performance. The Kentucky Retirement System, at only 13% funded, is the most spectacularly underwater large pension fund in the US, despite Kentucky having some of the most stringent statutory fiduciary duty requirements in the US.

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.

The stakes here are 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 initial case was appealed before discovery had gotten meaningfully underway, an unusual sequence of events. The plaintiffs lost on what most independent lawyers thought was an extremely strained ruling. The case then went to the Supreme Court, which dismissed the case without prejudice on standing due to intervening appellate and US Supreme Court decisions. The Supreme Court also got peculiarly snippy about private attorney pursuing these claims.

The Kentucky Attorney general, Mitch McConnell protege Daniel Cameron, filed a surprise Motion to Intervene on July 20. Bear in mind the attorney general’s office could have intervened at any time to support the case but oddly chose to now. Its filing was also clearly and wholly dependent on the earlier submissions by the private plaintiffs.

The plaintiffs also sought to get back in the saddle, since the case was dismissed without prejudice. After a raft of oppositions, Judge Shepherd rejected most of the plaintiffs’ reformulations to deal with the standing issues except having the so-called Tier 3 Plaintiffs effectively make their pitch. The reason the earlier case had been largely shot down was those intervening decision (such as Thole v. US Bank) required that the plaintiffs have suffered a “particularlized” loss. The Kentucky Retirement System beneficiaries hadn’t yet, since the fund has not yet missed a payment and arguably even if the system does, the State of Kentucky is also on the hook.

By contrast, the Tier 3 plaintiffs had mandatory deductions from their paychecks for a hybrid pension which is not state guaranteed. Even though public pension plans are not subject to ERISA, they are often managed in accordance with ERISA principles. The Kentucky Supreme Court in fact used ERISA cases to guide its decision. Unlike a defined benefits plan, which is what the Tier 1 and Tier 2 plaintiffs have, the Tier 3 plan is a defined contribution plan. Extensive case law backs the idea that under a defined contribution plan, the employee has suffered when his account balance is impaired. So the standard for loss is completely different than for the original “Mayberry Eight.”

Mind you, here it is, nearly eleven months later, and Shepherd still has not been able to give a green light to discovery or settle whether the Tier 3 Plaintiffs can move forward in parallel with attorney general. The attorney general asked for multiple delays, one of them to consider the results of a $1.2 million study commissioned by the Kentucky Retirement System by the Calcaterra law firm, when its principals have never performed an independent investigation, let alone of pension funds. The requisitioning of this study was eyebrow-raising, since the Kentucky Retirement System has examined the same general question of how to pursue its legal claims years ago. It issued a motion praising the plaintiff’s counsel as highly qualified and wished them well, but said it would sit on the sidelines rather than join them in the action.

Current Round of Filings

You can find all the major filings at Kentucky Pension Case. The two below are over the most heated current issue: whether the Tier 3 Plaintiffs can move forward. Judge Shepherd said effectively that he needed to see what the attorney general planned to do before he decided that.

Given that the justification for the attorney general repeated extension requests was to wrap his mind around the case, and the Calcaterra report looked like Kentucky Retirement Systems hiring an outside firm to brief the attorney general, the new filing is entirely old hat. It has not only has no new arguments, it is even more openly cribbed from older plaintiff filings that the original attorney general intervention, where his office at least re-wrote a fair bit of the material into white shoe tall building lawyer style. Here, nearly all of the filing is a cut and paste, including the charts.

However, it does differ in some key subtractions, as in the removal of defendants and some matters. From a related plaintiff filing, petitioning to have the Calcaterra report made public:

The AG’s AIC eliminates KRS’s 2015–2016 secret self-dealing advisory-services agreement(“ASA”) with KKR/Prisma.The AG cuts out the involvement of KRS’s current CEO/Executive Director David Eager or current and longest-serving,most powerful and most involved Trustee T.J. Fulkerson in that conflict-laden arrangement and the follow-on self-dealingby KKR/Prisma, omits partner Michael Rudzik, they permitted inside KRS —while on the KKR/Prisma payroll —to season the self-dealingto taste.The AGalso eliminatedas a defendant KRS’s current fiduciary counsel Ice Miller—who back then approved or permitted that (and much more) self-dealing,conflicts of interest and breaches of fiduciary duties to persist, even though this Court previously upheld the claims against Ice Miller as pleaded in the Tier 3 Complaint now, set out in the Mayberry Five’sF irst Amended Complaint (“FAC”)earlier. This white-wash of current KRS insiders is the apparent result of the $1.2 million investigation and Secret Report.

The attorney general maintains that he will “fully occupy the field” of the litigation, when the Tier 3 filing below describes constraints and conflicts that make that impossible. The most glaring one is that any recovery goes into the state coffers, not Kentucky Retirement Systems or specifically the Tier 3 defined contribution plans. From the plaintiff’s filing:

The AG asserts that he represents the Commonwealth — as both party and attorney — but overreaches by attempting to include competing and conflicting interests within his remit.1 Specifically, the AG seeks to “assume complete control” of all claims on behalf of the “Commonwealth or KRS, including … any claims that might otherwise be brought “derivatively” by Commonwealth taxpayers, citizens, pension fund beneficiaries (regardless of whether such beneficiaries are classified as Tier 1, Tier 2, or Tier 3).” But the Commonwealth and KRS are not one and the same.3 KRS is a state agency, but it is more than that; its Board is the trustee of trust funds, required to act “solely in the interest of the members and beneficiaries.” That “sole” interest is inimical to the broad duty of the AG to act in the “best interests” of the Commonwealth and all of its citizens. The Tier 3 members and beneficiaries have unique interests and uniquely valuable legal claims. This stems from the hybrid plan design, with its “Upside Sharing” feature, from the absence of any “Inviolable Contract” protection plus their uniquely valuable claims anchored by § 61.645(15)(f) and their trust-beneficiary claims, which only they have standing to assert in a derivative format, immune for imputation/in pari delicto defenses. As a result, their interests lie in achieving the highest possible recovery and in directing all of it to the KRS trust funds, while in contrast the Commonwealth’s citizens and taxpayers are principally interested in the recovery going into the state treasury (where the AG is statutorily bound to direct any recovery he makes).

There’s a lot more meat in these filings, so I hope you can give them a gander. And we’ll see how things progress next week.

00 As-Filed Opposition to AG's Motion to File AIC
00 2021_0524_NotofComplianceFAIC
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    1. Yves Smith Post author

      Launched early so the headline would be in our 7 AM e-mail blast. I hate it when I get done late. So please have a look now.

  1. Qufuness

    Yves has focussed and done outstanding coverage on this case and CAlPERS. In the US is corruption more pervasive at the state level or perhaps easier to see than at the federal?

  2. JBird4049

    I think some states are more corrupt than others just like how some police departments are, but yes, the nation government probably does have an easier time hiding its laundry due to size and using such as “national security” for an excuse.

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