Kentucky Retirement System Litigation Against KKR, Blackstone, PAAMCO et. al. Takes New Class Action/Civil RICO Twist

Wellie, for once, not reporting on what seemed to be an “end of the line” ruling in the long-running Mayberry v. KKR can be depicted as astute, as opposed to a combination of dismay and distractions. By yet another turn of adept lawyering, the effort to do some real discovery on what KKR, Blackstone, PAAMCO, and key executives and trustees were up to when they sold underperforming, high fee hedge funds to the clueless Kentucky Retirement Systems has a new lease on life, in the form of filing a new civil RICO.

As you’ll see from the shaggy dog story of the process thus far, it’s a welcome surprise that the formidable Michelle Lerach, backed by her consultant/researcher husband and former securities litigation heavyweight, the now disbarred Bill Lerach, are back to continue to their battle to get into discovery with what sure looks like dirty dealings by some of the biggest boys in finance.

Readers may recall that the original Mayberry v. KKR lawsuit targeted not only KKR, Blackstone, and PAAMCO for breaching their statutory fiduciary duties and misrepresenting the risks and returns of customized hedge funds of funds sold to the Kentucky Retirement Systems, but also the likes of Henry Kravis, Steve Schwarzman, and other advisers and Kentucky Retirement System officers.

The Mayberry v. KKR legal team led by Michelle Lerach looked to have been taken out of action by a Kentucky Supreme Court ruling tossing the case without prejudice based on standing. After Mayberry v. KKR had been originally filed, an appellate and a US Supreme Court ruling, combined with Kentucky’s adoption of Article III standing rules, meant that there was no basis for defined benefit pensioners to step in and pursue damages that Kentucky Retirement System had failed to seek on its own. The beneficiaries needed to have suffered an actual, as in particularized, loss. Even though the pension plan is only 13% funded, it is still paying benefits in full. Oh, and the state is supposed to backstop it too.

To make a nearly year long story short, plaintiff’s counsel tried several routes to revive the claims. The trial court judge, Philip Shepherd, initially rejected all except those related to so-called Tier 3 beneficiaries, who made mandatory payments to a defined contribution plan and did not have a state guarantee of benefits. There are many precedents confirming the view that beneficiaries in defined contribution plans suffer when their account balance suffer; they don’t have to wait to experience a shortfall in payout to seek a recovery of damages.

The Kentucky Attorney General, Mitch McConnell protege Daniel Cameron, filed a surprise Motion to Intervene on July 20, 2020. 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.

Since Schwarzman and Kravis are both heavyweight Republican donors, and Schwarzman is also a big McConnell backer. So why would Cameron cross his mentor’s moneybags? First, Cameron needed a good headline; he was taking a lot of heat for not having prosecuted the Brionna Taylor shooting aggressively. Second, Cameron and McConnell may have believed it was worth something to McConnell’s heavyweight donors to make the case go away on the cheap….particularly if they could create the appearance that the settlement was fair, despite the egregious facts (note that any settlement would be a matter of public record).

Judge Shepherd set the calendar to consider Attorney General Cameron’s motion to intervene on the same timetable as the claims by the Tier 3 plaintiffs. The Attorney General asked for repeated delays on questionable grounds, like getting the results of a second investigation by the Kentucky Retirement System, to the tune of $1.6 million, up from a budgeted $1.2 million, that has been kept secret and appears to have had zero impact on either the Attorney General or the Kentucky Retirement System’s approach to this litigation. Perhaps that is because the attorney leading the investigation, Regina Calcaterra, never led a pension fund investigation before, and whatever she knows about pensions, she appears to have learned from her mentor, convicted New York controller Alan Hevesi.

Shepherd appeared to be trying to be as even-handed as possible, until he was very much put off by a filing by the plaintiffs’ counsel questioning Calcaterra’s past conduct and the process by which she’d been engaged.

The next conference was to hear both the Attorney General’s intervention and the Tier 3 filing. As legally experienced readers know, the notion of conflicts of interest is a major issue in representation; multiple parties to a legal matter seldom have perfectly aligned interests. That’s why, for instance, company officers routinely each have their own lawyers, in addition to the company hiring its own counsel, even if all are being sued on broadly similar factual and legal grounds. Yet the Attorney General, in his filing, insisted he would “fully occupy the field” and represent everybody, even though Kentucky Retirement Systems itself, which is empowered to hire its own counsel, had not designed the Attorney General as its representative. Shepherd, who is normally very astute, appeared to be feigning brain fog when he acted as if he could not wrap his mind around the idea as to why Cameron couldn’t properly represent every Kentucky party; there really were some differences in interests. And none of the affected parties had signed a waiver.

It’s not hard to think a fix was in. The Kentucky legislature passed a bill over Governor Andy Beshear’s veto that allowed Cameron to hire Ann Oldfather on a contingent fee basis through a no-bid contract. Oldfather was the original in-state co-counsel who fell-out with lead counsel over conduct of the case — in particular taking a settlement pre-discovery.

Nevertheless much as Shepherd’s demeanor was a real departure from that of previous hearings, he has consistently maintained that he’s deeply frustrated by the many years of legal jousting and want the case to move to the discovery phase. So the reason for his odd posture may not have much to do with political pressure but with not wanting to sit through months and longer of challenges to letting the Tier 3 derivative lawsuit advance in parallel with the Attorney General case. And even if the Lerach effort survived more attack, there would then be arm-wrestling over how to coordinate the two suits.

But as you can see below, Michelle Lerach and her Kentucky co-counsels are back with a private suit, and it’s hard to see how the Attorney General sticks his paws in it, or alternatively tries arguing that is substantially replicates claims he is making. We’ve embedded the filings below. I encourage knowledgeable reader input on the legal strategy.

I don’t see how Cameron will want to touch the civil RICO allegations with a ten foot pole. Admittedly, the reason RICO is far more talked about than deployed is RICO sets a high bar: you need to prove a conspiracy. But the way that Kentucky Retirement System acted a lot like a zombie ant with KKR having taken over its brain makes the conspiracy allegation seem plausible.

The second major leg is the breach of fiduciary duty. Fiduciary duty is owed to the beneficiaries, so again it does not seem like a big stretch for the Tier 3 plaintiffs to assert a breach of fiduciary duty directly, as opposed via deficient performance by and on behalf of Kentucky Retirement Systems. Recall that Kentucky imposes extensive fiduciary duty requirements by statute.

I assume there is plenty of consternation in Frankfort and New York City. Good. They deserve to break a sweat, and better yet, finally cough up some serious dough. But I also suspect that the Lerach team is intent on doing at least some discovery, both to force a more generous settlement and expose information that could support other suits.

00 (2021-07-09) As-Filed Class Action Complaint
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  1. Tom Stone

    Michelle Lerach and her assistant Bill are good at what they do, this is going to be an entertaining show because they have made it a real contest.
    I wonder who at CalPers might have standing?
    Nice deep pockets, Hubris rampant and overt corruption would seem to make CalPers worth a long hard look by this couple.

  2. The Rev Kev

    I suspect that this is a story which will not go away but unfold in the coming months with much schadenfreude. Michelle Lerach and her Kentucky co-counsels sound like a team that are not to be fobbed off or cheated as I am sure that Kentucky’s Attorney General has found out to his cost. No Christmas bonus for that boy. Out of curiosity, I looked up Michelle Lerach’s husband, Bill Lerach, and found out that he was the lead plaintiff’s attorney in the case against Enron which obtained $7.12 billion from those crooks. He was gunning for Halliburton and Cheney when he was disbarred in 2007 which a lot of suits must have been celebrating. But then a voice piped up-

    ‘He has a wife you know.’

    1. Yves Smith Post author

      Yes, just so you know that even though Lerach did engage in misconduct, the punishment looks to have been way disproportionate, and he had character witnesses like Ralph Nader arguing for leniency.

      Michelle Lerach is a very shrewd attorney. It’s perfectly kosher for Bill to act as a consultant to her cases, and even draft/edit filings. On these Kentucky Retirement Systems cases, the other side has repeatedly insinuated that he’s practicing law, when they know bloody well, for instance, that unlicensed paralegals, per the American Bar Association, “perform substantive legal work that would otherwise be done by attorneys.”

    2. Susan the other

      It looks like a halliburton-railroading. Bill Lerach sounds like he knows exactly what he is doing with RICO. Who doesn’t love RICO? …everyone who could be exposed if the Leraches succeed and the case then becomes case law to “support other suits.” The whole ball of twine.

  3. chuck roast

    If me and my crooked bud’ robbed Charles’ Five & Dime up the street, in addition to a small mountain of felony charges the “authorities” would bring against us would be a RICO charge. If, however, the Sackler family runs a massive drug scam resulting in a haul of billions of dollars and the death of tens of thousands of people, the “authorities” seem to loose the rule book. Odd that.

    1. jhg

      To paraphrase the late great George Carlin..It’s a big club, Chuck, except you and most of us ain’t in it….

    2. Questa Nota

      Some like that crooked bud Charles Keating and others did rob Five & Dimes, quaintly called Savings & Loans. There should’ve been RICO action against so many in those debacles, to alleviate what could be called deregulatory growing pains.

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