Kentucky Retirement Systems Ordered to Disclose Controversial $1.2 Million Report Used to Justify Inaction in Apparent Pension Looting by Hedge Funds

Once in a great while a story comes full circle. And here, the outcome is gratifying even at a 50,000 foot level for those of you who have not had the time to follow the very long running Kentucky Retirement Systems pension litigation closely. Sadly, Kentucky Retirement Systems lacks the vivid personalities of CalPERS to enliven the story. But it’s a also an even more clear-cut case of incompetence and misconduct.

The short version is Kentucky Judge Philip Stephens has decided, in a public records case, to side with the plaintiff, Glenn Cohen, and order the release of a very pricey investigation that Kentucky Retirement Systems had once before fought to keep secret, and back then prevailed.

It’s a welcome surprise to see a straightforward Kentucky Open Records lawsuit blow a hole in the long-standing practice of private companies and governments to hide internal investigations by hiring a law firm to run them, or even more amusingly, to hire the consulting firm or other expert that actually does the work. The whole enchilada is then declared to be attorney-client privileged because lawyers were at the top of the billing chain. But in fact, “attorney client privilege” applies only to the seeking and provision of legal advice. It does not apply when a lawyer to negotiates a commercial deal for you or when a lawyer is preparing an report or investigation for a purpose other than giving legal advice.

We’ve embedded the order by Judge Stephens for the Kentucky Public Pension Authority to release a $1.2 million report prepared by law firm Calcaterra Pollack, supposedly for the purpose of whether the fabulously underperforming Kentucky Retirement System, only about 13% funded, should join a legal action to potentially recover monies from big bad Wall Street players like Blackstone and KKR. The very simplified version of the basis for pursuing Blackstone, KKR et al was that they had misrepresented some customized hedge funds they sold to Kentucky Retirement System, both their risk/return profile and their fees, and had also in some cases violated fiduciary duty by wearing too many hats and acting as advisor while steering Kentucky Retirement System to their own product.

It’s helpful as well as gratifying to see a judge reject the idea that paying big bucks to an attorney means you get to shield documents from public disclosure laws and discovery. However, there are lots of other layers in this sorry tale.

The first is the question of why this report was commissioned at all. Kentucky Retirement Systems had previously, after some study, decided not to join in any of the litigation…but the pension system did take the unusual step of saying they supported the initiative. Nothing had changed factually since then and discovery had not gotten off the ground before the case, unusually, was appealed.

The nominal excuse might be that the original suit looked to have gone hopelessly on the rocks due to an unfavorable Kentucky Supreme Court ruling on standing, based on unfavorable appellate and Supreme Court rulings after the original case, Mayberry v. KKR, was filed. But normally plaintiffs are allowed to replead their cases. Judge Stephens was unreceptive when the case wound up again in his court.

So one might think Kentucky Retirement Systems might have wanted to consider saddling up, particularly since the extensive Mayberry v. KKR filings would make it comparatively easy for Kentucky Retirement System to pursue the case, since it could no longer be a free rider.

But that theory looks questionable when you look at the second issue, that Regina Calcaterra, the attorney that Kentucky Retirement System engaged, is more a fixer than a lawyer, and with a very checkered past. The attorneys who pursued Mayberry v. KKR and then reconfigured the case in light of the Kentucky Supreme Court smackdown, made a stink about her, as we recounted in a May 2021 post:

It isn’t unusual in Kentucky to find corruption. What is unusual is the extent of the paper trial that shows the insider dealing in hiring tainted New York attorney Regina Calcaterra to conduct an at best redundant Kentucky Retirement Systems investigation.

Not only did Calcaterra not meet any of essential hiring criteria for the already-questionable Kentucky Retirement Systems investigation, but even a cursory background search shows that Calcaterra is up to her eyeballs in past charges and allegations of corruption and fraud.

The most infamous black mark is that the Department of Justice targeted Calcaterra for her role as Executive Director in the collapse of the Moreland Commission, launched by Governor Andrew Cuomo to investigate corruption in New York State. Numerous press reports, including an in-depth investigation by the New York Times, unearthed considerable evidence that Calcaterra had repeatedly intervened to squash any line of inquiry that might implicate Cuomo. But as we’ll explain below, that is far from the only one. Calcaterra considers herself so well protected that she’s even bragged about cheating on tests and had depicted lying as important to her career success. In other words, she’s open about her role as an unethical fixer.

The vehicle for this sordid tale coming to public and court attention is a series of filings by the so-called Tier 3 Plaintiffs in the public pension fund lawsuit Mayberry v. KKR. These plaintiffs provided extensive documents supporting their contention that the hiring of Calcaterra and her and the Attorney General’s subsequent actions were so suspect as to warrant making the investigation report public and preserving all of the supporting records. We’ve embedded the central filing, which includes the exhibits, at the end of this post.

And yes, there was plenty not to like. More from our post:

By contrast, just about everything about this new “investigation” stinks. Recall that on July 20, the Kentucky Attorney General filed his unexpected intervention. On July 29, the plaintiffs’ attorneys filed a motion asking permission to file a Second Amended Complaint on behalf of a rejiggered “Mayberry 8,” this time including three Tier 3 beneficiaries in place of three of the original beneficiaries.

On August 24, the Commonwealth of Kentucky solicited bids on a contract to ascertain “if there are any improper or illegal activities on the part of the parties involved,” meaning KRS and the Kentucky Public Pensions Authority, with a due date of September 14. Such a tight time frame that included the Labor Day weekend smacks of an intention to discourage submissions. We saw the same behavior when CalPERS was trying to hand its private equity investment program over to BlackRock, well, except that CalPERS provided for a four-week bid period, as opposed to three for the KRS.

How could a bona fide investigation question if there were any improper/illegal behavior when an independent litigation committee, much closer to the date of the alleged frauds, had concluded there was enough to take the virtually unprecedented step of endorsing litigation? One has to wonder it the plan was to have the report minimize misconduct so as to pave the way for a lowball settlement.

Calcaterra’s Shocking History of Sleaze

It’s difficult to see how anyone who cared about appearances, let alone competence, would consider Calcaterra. The filing contains pages and pages of derogatory material, all from press accounts. The centerpiece is her sabotage of the so-called Moreland Commission, established in 2013 to investigate corruption. It was shuttered with no report issued due to resignations and infighting. And that appears to have resulted from the heavy-handed interventions by Calcaterra on behalf of Cuomo. Note that Calcaterra was rewarded with a $175,000 a year job at a state insurance fund shortly after the Moreland Commission collapsed. As a source for the New York Post observed, “Anything in parole or insurance is a reward.”

The Moreland fiasco, or happy result, depending on your point of view, followed Calcaterra mismanaging an investigation into the Long Island Power Authority’s poor response to Hurricane Sandy…

Judge Stephens reacted very badly to this filing (he was also then the judge on the Kentucky Retirement Systems case; he has since removed himself after being called out by KKR for including press stories approving of his pension-defender stance in his campaign for re-election). He depicted the New York Times as an unreliable source (despite it being unusual for the Times to attack a Democratic party operative) and that anyone who has done anything important has gotten some bad press.

But now we get to the third layer: that this mystery report served as a weird plot device in the sudden intervention by the Kentucky Attorney General Daniel Cameron, in the Kentucky Retirement Systems case. Normally an attorney general riding into the rescue would be seen as a last minute save of sorts. But Cameron is a protege of Mitch McConnell. The two biggest players targeted in the case, KKR and Blackstone, along with their controlling partners, are huge Republican donors.

The cynical line of thought was that Cameron was intervening to get a cheap settlement out of Blackstone and KKR, so Cameron could still pretend to be a hero by getting some dough for Kentucky Retirement Systems while putting a legal and perhaps also a PR problem for these financial big fish to bed.

But then Cameron kept using the fact that he hadn’t gotten the Calcaterra report as promised by Kentucky Retirement Systems (the big excuse being that it was still not yet final) to push back the date his filing to intervene was due in. That was a pretty clear signal that things weren’t going as planned.

And then when Cameron finally submitted his filing, there was no mention of the Calcaterra report.

So now we get to fourth layer, the Open Records issues at hand.

The Stephens order is fun, if you like legal skewerings. The investigation from the outside does not look bona fide; Stephens points out that Calcaterra submitted a proposal months before the RFP went out, implying the RFP looked designed to legitimate an already-made decision to hire Calcaterra.

Stephens also points out the law favors disclosure and the bar for exceptions is pretty high, particularly given a $1.2 million taxpayer price tag. He reviewed the records in camera. Stephens found they were mainly factual summaries and it was a strain to contend that the limited discussion of legal questions rose to the level of legal advice.

And even more deadly: even if these documents had been legitimately privileged, Kentucky Retirement Systems gave that up by handing them to the Attorney General (the Attorney General was not representing Kentucky Retirement Systems; the pension gets to hire its own counsel and had not enlisted the Attorney General on this matter). The Attorney General in filings even stated that the office did not represent Kentucky Retirement Systems/Kentucky Public Pension Authority.

Oh, and Kentucky Retirement Systems had repeatedly told the court the Calcaterra report would be made public when final, and didn’t even deign to offer an explanation as to why not when it later refused to do so.

The local press has publicized this ruling approvingly. The Lexington Ledger-Herald, along with other news organizations, had sought to get the documents and had been turned down. From its story:

A judge has ordered Kentucky’s state pension agency to release a suppressed report about possible wrongdoing in its controversial hedge fund investments, ruling that taxpayers deserve to see a report that cost them $1.2 million. …

In 2020, the Kentucky Public Pensions Authority hired New York law firm Calcaterra Pollack to investigate “any improper or illegal activities” in billions of dollars in hedge fund deals that have led to lawsuits alleging wrongdoing. The initial suits were filed by public employees and, later, the attorney general’s office….

After initially saying that Calcaterra Pollack’s report would be shared with the public, the KPPA rejected requests by many — including the Lexington Herald-Leader — to release it under the Kentucky Open Records Act…

But Shepherd shot down the pension agency’s defenses. In two separate opinions that he issued Thursday, Shepherd gave the KPPA 10 days to publicly release the final report.

So this was a good day for the public. I expect an appeal, but I don’t see how that goes anywhere, since if nothing else Kentucky Retirement Systems/Kentucky Public Pension Authority handing the report to an outside party blows any basis for asserting attorney-client privilege.

00 Cohen v. Kentucky Public Pension Authority
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  1. Paul Art

    All public pension systems should be nationalized. In fact I would argue that ALL pensions should be nationalized. Retirement security is too precious to be handed over to the Private sector. Of course this could be an opt in system that leaves out those who prefer greater risk for higher returns. In 2016 I interviewed at Youngstown State University and I recall a nice conversation with the Dean of the EE department who mentioned how 3 Professors who had planned to retire in 2008 had to postpone because the pension fund was eviscerated by the GFC.

  2. orlbucfan

    Reading about white collar $$finance$$ thieves being exposed to the bright light of the public eye has always fascinated me. My only hangup is I didn’t major in banking or finance. Some of the highly technical terms confuse me. Still, it’s fun seeing them squirm under the bright light. Thanks, Yves!

  3. Mark

    I was in the Kentucky Retirement System in the late 80’s/early 90’s. The generous benefits were a strong selling point by agencies paying low wages. I did some research on the benefits it offered and it did not take much math to see how unsustainable it was.

    So I left for a better paying private sector position with promises of the great 401K retirement.

    Sadly, both were scams, but KRS is still paying those in its “old” system very, very generous income and benefits.

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