Wellie, even though the private equity industry is famed for its brazenness, KKR has managed to take it to a new level. KKR is trying to get the presiding judge in its long-running Kentucky Retirement Systems lawsuit, Mayberry v. KKR, along with a related suit that may get a green light, on behalf of so called Tier 3 beneficiaries (in a defined contribution plan) removed. This is an astonishingly aggressive move, and to add insult to injury, KKR has gone about it in a procedurally improper manner.
We’ve embedded the key filings at the end of this post: KKR’s Affidavit for Designation of Special Judge, the Opposition to Affidavit for Designation of Special Judge (this one by Michelle Lerach; there may also be one from the Kentucky Attorney General, but I have not succeeded in finding it) and the Order Remanding by the Kentucky Supreme Court. If you want the quick version, read the Lerach filing.
As an aside, note that none of the other defendants, most importantly Blackstone, has joined KKR in this action.
If you are new to this many-chaptered saga or want a refresher course, see the posts below or have a gander though the major filings here:
Misunderstanding Public Pension Fund Implications of Thole v. US Bank and Mayberry v. KKR
Back to the new drama. Recall that the defendants, KKR, Blackstone, PAAMCO, and a host of smaller fry, managed to lodge an appeal even before meaningful discovery was underway. The defendants lost on all issues except standing. Between the time of the original filing and when Mayberry v. KKR got to the Kentucky Supreme Court, an appellate court decision and a US Supreme Court decision had the effect of changing the standing rules. The original plaintiffs were not allowed to replead standing (which is pretty irregular). The state attorney general instead intervened (even though he had years to take up the case and arguably cannot properly represent all the interested parties). The original plaintiffs’ counsel took up a narrower case that would still fly under the new standing rulings, based on the harm suffered by “Tier 3” defined contribution plan participants.
So out of the blue comes this KKR filing. KKR has long had its knickers in a twist over “personal jurisdiction,” the idea that it has enough of a business nexus with Kentucky over this case for Kentucky courts to have jurisdiction. Kentucky is not a good place for fund managers like KKR to do bad things because Kentucky has strict and extensive statutory fiduciary duty requirements. That means, among other things, that any investment agreement language that attempted to weaken or contract out of fiduciary duties would be legally void.
The plaintiffs argued that not only were KKR entities liable but so were KKR founders Henry Kravis and George Roberts personally, based on the unusual governance structure of KKR, which makes it their personal instrumentality despite it nominally being a public company. The trial court judge, Philip Shepherd, bought that argument. It survived appeal, due among other things, KKR having made extensive visits to Kentucky and advising Kentucky Retirement Systems while also pitching its business and then devising and managing a custom hedge fund, and KKR’s description of its management structure and Kravis’ and Roberts’ rights in SEC filings.
KKR is trying to get Judge Shepherd removed from the case due to some material on his campaign website that KKR argues shows bias. A lawyer friend did groan and said talking about a current case was not such a hot idea. However, despite KKR attempting to depict the website information about the Mayberry v, KKR case as prominent, it’s apparently shown as one of 18 news clips, and not formatted to make it more noticeable than the others. The opposition brief cites precedents, relying on the First and Fourteenth Amendments, that judges are allowed to discuss their record when campaigning.
The other substantive beef is that the news clip on the Shepherd campaign website indicates that he did his own research during the trial. Frankly, he would have been remiss not to. The plaintiffs’ filings contained many excerpts and screenshots from SEC filings. It would seem important to at least spot check them to make sure they weren’t altered digitally and/or taken out of context.
Here is the guts of the opposition argument:
The actual legal issues, after the smoke has been cleared, are:
- • Did Judge Shepherd commit error by conducting his own online review of certain “materials available to the general public,” principally “filings with the Securities and Exchange Commission”?
- • Should the KKR Parties have raised the alleged error with Judge Shepherd in the first instance to permit the Court to consider and rule on their objections?
- • Did the KKR Parties waive their right to seek relief in connection with the alleged error by failing to raise them with Judge Shepherd?
The answers, as explained below, are:
- • Judge Shepherd did not commit error — and even if he did, it was inconsequential and curable.
- • The KKR Parties could and should have raised the alleged error with Judge Shepherd and sought to have them cured. They did not do so, apparently because they opted instead for the “nuclear option.”
- • By failing to bring the alleged errors to the attention of the Court, the KKR Parties waived appellate review —including through this disqualification procedure.
A final issue is that even if KKR’s beefs were legitimate, they should have asked Judge Shepherd to consider recusing himself rather than trying to blow him out of the water. As you can see below, the Kentucky Supreme Court agreed with that argument and sent the affidavit back to Shepherd.
Sadly, this litigation is proving to be an exercise in how to use motions practice to prevent discovery. Keep in mind this case was first filed in December 2017
00 (2022-05-24) Order Remanding by Chief Justice Minton00 (2022-05-23) Opposition to Affidavit for Designation of Special Judge
00 (2022-05-16) Affidavit for Designation of Special Judge
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As a member of the California Bar these past 38 years, I am disgusted by the unbelievable gall of KKR and their lawyers, to treat the Kentucky Supreme Court as if it were the Law and Motion department of the Franklin County Circuit Court!
The pontificating white-shoe mandarins that KKR brings in from “the Big City” evidently have so little experience of actual courtroom litigation that they are incapable of grasping the concept of “developing a record” in the trial court. You know; actual lawyering.
However, their deeply-ingrained sense of elite impunity and limitless ability to Hoover-up fees from billionaire clients immunizes them from basic respect for the legal principles underlying adversarial Anglo-American due process. They are entitled to their opinions; they are not entitled to their own facts.
I know almost nothing of this case, but observe this, much like the ‘churning’ unscrupulous financial managers engage in to juice fees, lawyers are incentivized to make frivolous filings, if they can convince their clients of the merits, to increase their billable hours. In cases like this, it need not be a strong legal argument, but the real benefits of delay (more time to enjoy that loot), that seals the deal. Regardless the outcome in this case, the lawyers will be paid, even if the retirees who were harmed never see a dime before they die.
This must be an American version of the SLAPP* lawfare practiced in London.
Oligarchs hire London’s Magic Circle law firms to litigate libel cases to prevent or retract damaging information from getting out.
The UK’s Private Eye magazine does great work reporting on those abuses.
*SLAPP : Strategic Lawsuit Against Public Participation