KKR & Co., Blackstone Group LP and their founders are accused of failing to deliver hedge fund returns as advertised, in a Kentucky lawsuit that could preview new legal challenges for managers of alternative investments.
The lawsuit was filed on behalf of state taxpayers and the $12.1 billion Kentucky Retirement Systems' pension plans by a group whose lawyers are advised by William Lerach, who once sent shivers through corporate boardrooms for his rapid-fire filing of securities class actions.
The plaintiffs, including a retired state trooper and a firefighter, allege that the big asset managers misrepresented expensive and risky "black-box" bundles of hedge funds as safe ways to generate high returns. Instead, those investments contributed to the pension system's virtual insolvency, the plaintiffs said, while the managers pocketed excessive fees.
The defendants include KKR co-founders Henry Kravis and George Roberts, Blackstone founder Stephen Schwarzman, Prisma Capital Partners CEO Girish Reddy and PAAMCO CEO Jane Buchan. Claims are also made against several outside advisers and Kentucky pension fund officers and directors.
KKR, Blackstone, Prisma and Paamco didn't immediately respond to requests for comment on the lawsuit.
Among the allegations is that the fund managers were negligent and breached their fiduciary duties in convincing Kentucky Retirement Systems to invest as much as $1.5 billion in three hedge funds of funds. Tailor-made to attract Kentucky retirement investments, the funds of funds performed far worse than their sellers predicted, the investors claim.
Contrary to the managers' sales pitch, "these unsuitable 'investments' did not lower risk, reduce illiquidity or generate sufficient returns" to sustain the pension system, according to the lawsuit. "They did generate excessive fees for the hedge fund sellers, poor returns and ultimately losses for the funds, in the end damaging KRS and Kentucky taxpayers."