Decisive Win for Pensioners, Taxpayers in Kentucky as Judge Wingate Rejects Attorney General’s “Get Out of Jail for Almost Free” Scheme for KKR and Blackstone

A plot that extended, in different forms, across two different Republican attorneys general in Kentucky, first Daniel Cameron, now Russell Coleman, has failed, and in a big and embarrassing way, as you can see from an order we have embedded at the end of this post. Both were trying to save the private equity giants KKR, Blackstone, Pimco affiliate PAAMCO, and importantly, finance barons like Henry Kravis, George Roberts, Steven Schwarzman and Tomlinson Hill, from the embarrassment of trying to ‘splain their feeding at the trough of the unsophisticated and underperforming Kentucky pensions (once called the Kentucky Retirement System, rebranded as the Kentucky Public Pension Authority. The defendants have been trying since a predecessor suit was filed in 2017 to prevent it from getting to discovery.

This latest gambit not only failed but should damage the attorney general by wasting time and legal fees to help Republican deep pockets at the expenses of an underwater pension fund backstopped by Kentucky, meaning its taxpayers. Keep in mind that, by contrast, an earlier Kentucky attorney general wrote in support of this litigation, which seems hardly surprising. What’s not to like about a private party expending time and resources clawing back the fruits of apparent misdeeds on behalf of wronged pensioners and the general public?

To give an idea of the chicanery, the pension fund investors in these customized hedge funds of funds (yes, sports fans, two layers of fees!) were sold the impossible combo of a low-risk/high return investment. It didn’t deliver because it could not deliver; the performance was worse than parking the funds in cash equivalents.

The ruse intended to kill the case was for the attorney general to, as Cameron first attempted, to “occupy the field” and settle all claims, including those brought by the plaintiffs, on the cheap. The Kentucky pension fund itself even weakly bleated, since it gets to select counsel and it had not authorized Cameron to act on its behalf. But this first go, embarrassingly, never got much of anywhere, as Cameron kept asking the court for delays because his settlement was supposedly just around the corner.

The defendants’ litigation strategy seemed to be working as the plaintiffs suffered a big defeat at the Kentucky Supreme Court over standing. Due to two intervening precedents, they lost on standing. The defined benefit plan beneficiaries were deemed not to have suffered any harm until they were getting shortchanged on pension payouts. The plaintiffs were not allowed to replead the case (a highly irregular decision).

But the plaintiffs reconstituted the case around the so-called Tier 3 beneficiaries, who have hybrid plans that include a defined contribution plan. For defined contribution plans, unlike defined benefit plans, the beneficiary is deemed harmed (and thus has standing) when the fund has sustained a loss, even if it is not yet paying out. So back to the races!

A short review of the second settlement attempt, under Cameron, from a February post:

This “settlement” was brazen since the Attorney General intended to extinguish claims by plaintiffs he did not represent, here the so-called “Tier 3 Plaintiffs” who have what amounts to hybrid defined benefit and defined contribution plans. Even though they may seem to represent a small portion of total fund assets, their lack of a state guarantee (unlike those in the defined benefit plans) puts them in a first loss position. And demonstrating the seriousness of their claims, their attorneys have filed for what on a current basis (as in with updated interest) would be $807 million of damages, penalties and interest on a single violation by one of the four hedge funds targeted in this case.

In a show of cheekiness, Coleman presented the settlement as $227.5 million, when that figure included $145 million of monies owned by the KRS pension funds that were improperly seized by KKR. The local press wised up to what was going on, including the possibility of a grotesque payout to crooked attorney Ann Oldfather, who after being fired by the original plaintiffs in the case, took their records and information to get hired by the Attorney General. What makes this situation even more offensive is that the earlier Attorney General and protege of Mitch McConnell, Daniel Cameron, who engaged Oldfather ,was widely seen as taking up the case at such a late juncture solely to settle it cheaply so as to curry favor with these powerful Republican donors.

The Courier-Journal recapped the meager returns to pensioners and the possibility of an egregious payout to Oldfather:

The deal Cameron’s office signed with Louisville lawyer Ann Oldfather’s office after the initial case was dismissed set terms for fees those attorneys could collect once the lawsuit was settled: 20% of the gross recovery’s first $250 million; 15% of the gross recovery between $250 million to $1 billion; and 10% of the gross recovery past $1 billion.

If the gross recovery is $227.5 million — a figure that includes the $145 million Kentucky had given to KKR (one of the four hedge funds in the case) that has been withheld as the litigation moved forward — then attorney fees would rise to $45.5 million, a higher sum than the $37 million in new money the state would receive. If the gross recovery does not include that $145 million, attorney fees would reach $16.5 million, with $66 million in new funds going to the state,

In February, judge Thomas Wingate had approved the Tier 3 case going to mediation. This was a backdoor way to have it proceed. Given the vanishingly low odds that mediation would succeed, the next step would be to go to trial, the thing the defendants were desperate to avoid.

As a litigator opined:

Discovery is the Wall Street defendants’ worst nightmare, because all of their phony “trade secret” claims that blew-up in their faces on the statute of limitations [the secrecy had resulted in a statute of limitations claim failing, since the plaintiff had been in an information black hole] are now going to be exposed as nothing but an artifice to cover-up unjust enrichment and fraud.

As we wrote in February, the ruling supporting mediation looked fatal in and of itself.

Nevertheless, the defendants still hoped to rescue victory from the jaws of defeat by getting the court to bless the attorney general settlement….which would include the Tier 3 Plaintiffs claims, which Wingate had already effectively said were a separate matter entirely by authorizing them to go to mediation. Were they hoping against hope that Wingate had a senior moment, forgot his earlier decision, and blessed the settlement?

Not surprisingly, Judge Wingate put another nail in the defendants’ coffin. He rejected their petition for him to approve the attorney general settlement, which would include a ginormous fee payment to Ann Oldfather.

Please read the short order in full. It’s a delicious bit of drafting. He adopts a tone of mystification as to why the defendants are before him (translation: wasted his time) when they were perfectly capable of settling the claims all on their own. He also professes puzzlement as to them asking him to do things beyond the authority of the court. That at a minimum means blessing the attorney general settling the Tier 3 claims, when the attorney general does not represent the Tier 3 beneficiaries and they have their own counsel.

But the best part is when Wingate rouses himself from this comparatively relaxed posture to smack down the attempt to inflate the settlement amount, and with it, the fees to crooked attorney Ann Oldfather. On page 3, Wingate, his firmness verging on annoyance, bars the parties from including in any “settlement” the $145 million of Kentucky pension fund monies that KKR has purloined and has yet to return under the lame and unsubstantiated excuse that the pension funds might somehow owe that much money. That means this $145 million would not be subject to payment of attorneys’ fees.

So where does this leave the plaintiffs and the attorney general? Worse off than when they started this exercise. In theory, the defendants could still settle for $82.5 million, but what would be the point? The Tier 3 plaintiffs, with a formidable legal team headed by Michelle Lerach, look finally on a path to get to court, and with it, the discovery that the defendants have worked so hard to prevent. Even though delay is normally very favorable to defendants, so much of the misconduct is certain to be documented that the normal level of information loss is not likely to make much difference.

So if the press notices (possible), the attorney general will have demonstrated that he wasted money and scarce enforcement resources to curry favor with out-of-state financiers working against the interest of state pension funds and taxpayers. Not a good look. The defendants wasted a lot of money. Their position may be that they have a lot to burn, but this is not a free exercise.

And keep in mind, what is at stake here is not just the actual and opportunity losses to the Kentucky pension funds. It’s the demonstration of the depth of misconduct at these supposedly prestigious alpha fund managers.

Recall, for instance, the Proctor & Gamble suit against Bankers’ Trust for large losses P&G suffered on derivatives sold by Bankers. Even though I knew from my industry contacts that Bankers was very skilled at selling overpriced derivatives (meaning they would not pay off well or enough from a financial perspective; you have to have an intuitive feel for calculus to get your mind around derivative pricing), I was not very sympathetic to P&G. They are a big, sophisticated multinational. They should have either understood what they were buying, or understood their ignorance and steered clear.

But discovery in that case changed the picture. A recap from ECONNED:

In 1994 and 1995, Bankers Trust, a premier derivatives trading firm, was getting a lot of bad press. Federal Paper Board, Gibson Greetings, Air Products and Chemicals, and Proctor & Gamble had sued the bank, claiming that it had taken advantage of them on derivatives trades and that they should re-
cover their losses.

On the surface, none seemed to have much of a case. The lawsuits looked like a desperate effort to welsh on bad bets. After all, these were large corpora tions with sophisticated treasury departments, particularly Proctor & Gamble, with globe-spanning operations, routinely dealing in foreign exchange and interest rate markets. How could a savvy multinational claim to have been duped?

And as the details emerged, the companies had policies against undue risk taking in their treasury departments, and their staff had violated them…

Procter was clearly a more sophisticated player, but even it appeared to be losing its case until BT was forced to produce some damning tape recordings. A few of many damaging remarks:

“We set ’em up.”

“They would never know. They would never be able to know how much money was taken out of that,” says one salesman.

In reply: “Never, no way, no way. . . . That’s the beauty of Bankers Trust.”

The objective was “to lure people into the calm and then just totally fuck
’em.”

Procter obtained recordings from eight BT clients and all of them contained similar evidence of a deliberate effort to exploit customers. Procter added RICO (Racketeer Influenced and Corrupt Organizations Act) charges to its suit, tripling the amount of the damages that would be awarded if Procter won the lawsuit.

BT settled the cases, and the claimants ended up clawing back a large per centage of the losses they had incurred. BT also paid a $10 million fine to fed eral securities regulators over the charge that it had deliberately misled Gibson on derivative prices.

This case, plus a large escheatment violation with New York State (keeping abandoned funds which by law are to be turned over to government) led to the demise of Bankers Trust via a shotgun marriage to Deutsche Bank in 1998.

While we can’t expect such a dramatic outcome here, the odds are not bad that there is a lot of rancidly embarrassingly material in these big financial kingpins’ files just waiting to see the light of day. Stay tuned.

00 Wingate May Kentucky order