Kentucky Pension Lawsuit Alleging Hedge Fund Fraud Dismissed

Court rules plaintiffs couldn’t demonstrate how they had been damaged.

The Kentucky Court of Appeals has dismissed a fraud lawsuit filed on behalf of the Kentucky Retirement Systems (KRS) that alleged certain hedge fund managers, including Blackstone and KKR, breached their fiduciary duties and provided “unsuitable investments.”

The appellate court ruled that the employees did not have the right to sue because they could not demonstrate how they had been damaged by the hedge funds.

The lawsuit alleged that the private equity firms sold KRS $1.5 billion in hedge fund investments starting in 2011 that were announced as “absolute return” assets that would reduce the volatility of the portfolio.  

However, the plaintiffs argued that “these unsuitable ‘investments’ did not lower risk, reduce illiquidity, or generate sufficient returns to enable KRS to even approach, let alone exceed, the assumed rate of 7.75% on an on-going basis.”

The complaint added that “they did generate excessive fees for those hedge fund sellers, poor returns, and ultimately losses for the funds, in the end damaging KRS and Kentucky taxpayers.”

The plaintiffs accused the hedge funds of targeting underfunded public pension funds like KRS, saying that “to them, KRS was a potential buyer of the exotic, high-fee and high-profit hedge fund vehicles they sold.”

They said the funds of hedge funds were “extremely high-risk, secretive, opaque, high-fee, and illiquid vehicles” that were “impossible for trustees to properly monitor, accurately value or even calculate the total fee burden.”

The defendants The Blackstone Group, KKR & Co., Prisma Capital Partners, and Pacific Alternative Asset Management denied any wrongdoing. In 2018, the firms filed a motion to dismiss the case, saying that the plaintiffs did not show how they’ve been harmed in order to justify their involvement in a lawsuit. That motion was denied, but has now been overturned by the appellate court’s decision.

“The individual members have not alleged their benefits have been or will be decreased,” Court of Appeals Judge Pamela Goodwine wrote for the panel, according to Forward Kentucky.  “Rather, they assert only that KRS is currently in a budgetary shortfall due to improvident investments and the advice, mistakes and breach of fiduciary duty of the trustees and financial advisers.”

A lawyer for the plaintiffs said they will ask the state’s Supreme Court to review the case.

“Judge Shepherd upheld the right of the Mayberry plaintiffs, on behalf of the Kentucky Retirement Systems and every Kentucky taxpayer, to recover damages from Wall Street hedge fund sellers,” said Louisville attorney Vanessa Cantley, according to the Forward. “We are confident the Kentucky Supreme Court will, likewise, protect Kentucky citizens’ rights to recover from all wrongdoers by reinstating Judge Shepherd’s ruling.”

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