After backing a lawsuit against Blackstone and Prisma Capital Partners for matters pertinent to lackluster fund performance, the Kentucky Retirement System (KRS) received a countersuit last week by those same firms in order to recoup their expenditures on legal fees and other expenses to defend themselves.
The original lawsuit, coined the “Mayberry Action,” was filed by state taxpayers in December 2017 and alleges that Prisma, Blackstone, Pacific Alternative Asset Management, and KKR breached their contractual obligations to KRS with funds that performed far worse than their general partners originally forecasted, subsequently being “unsuitable” for the Lexington-based institutional investor.
However, in litigation papers prepared by Blackstone’s legal representatives, the private equity firm stated they delivered an annualized return of 6.5% to KRS, exceeding the benchmark agreed upon by the two by nearly three times, with KRS receiving more than $158 million net of fees.
“This action is in response to a meritless lawsuit brought against us on behalf of KRS by contingency-fee lawyers looking for a payday,” said Don Kelly, Blackstone’s representative and a partner at Wyatt Tarrant & Combs. “We followed our agreement with KRS to the letter and delivered $158 million in net profits to Kentucky pensioners—representing returns three times the benchmark set by KRS. We would like nothing more than to cooperate with KRS to end this wasteful and unfounded litigation, but KRS’ unfortunate decision to breach its representations leaves us with no choice.”
KRS has publicly declared its support for the Mayberry lawsuit, even having embarked on a joint litigation effort with the plaintiffs from the case, but strayed from formally joining the suit itself as a plaintiff.
“Because the Mayberry Action is predicated on the plaintiffs’ rejection of KRS contractual representations to BAAM, and because KRS continues to be actively engaged in the prosecution of the Mayberry Action, KRS should be required to reimburse [Blackstone] for its costs in defending this meritless lawsuit, and in the unlikely event of an adverse judgment, for that judgment,” Blackstone said in its litigation papers.
Blackstone continued that KRS said in contractual agreements that its investments in Blackstone’s vehicles were suitable for the portfolio, and understood the nature and risks associated with the fund.
Prisma’s suit against KRS concerns the firm’s Daniel Boone Fund, a tailored fund of funds where KRS received $139 million in net returns, showing that “Prisma discharged its obligations to Daniel Boone Fund and KRS in good faith and in accordance with the governing contracts and Delaware law.”
KRS declined to provide additional comment on the cases. It is also facing internal challenges with the state government, which recently proposed to allow secondary institutions to disband from the retirement system to save themselves from mandatory increased contributions, which could potentially leave many of them with no choice but to stop operations.
The system also recently appointed a new chief investment officer (CIO) and deputy CIO earlier this year, who will help shepherd the pension out of its $43 billion-plus deficit.