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Courts

2 hedge fund firms sue Kentucky Retirement Systems

Blackstone Alternative Asset Management and Prisma Capital Partners filed separate lawsuits this week against the $18 billion Kentucky Retirement Systems, Frankfort, and its board, alleging breach of contract connected to an earlier lawsuit against those firms and other hedge fund firms.

Both lawsuits were filed in the Court of Chancery in the State of Delaware and are in response to a December 2017 lawsuit, Mayberry vs. KKR, filed on behalf of state taxpayers and the retirement system by a group led by William Lerach, a former lawyer with Milberg Weiss Bershad & Shulman. Disbarred in 2009 after a conviction for a client-kickback scheme, Mr. Lerach is a consultant to the plaintiffs' lawyers in the 2017 suit through his firm, Pensions Forensics. That lawsuit alleged that Blackstone, Prisma, KKR & Co. and Pacific Alternative Asset Management Co. were negligent and breached their fiduciary duties in persuading the retirement system to invest as much as $1.5 billion in three hedge funds of funds. The customized funds of funds performed far worse than their sellers predicted, the plaintiffs claimed. Prisma was acquired by KKR in 2012 and merged with PAAMCO in 2017 to form PAAMCO Prisma Holdings.

The first lawsuit in response to the earlier suit, filed Monday by Blackstone, alleges that KRS' public declarations of support for the lawsuit is a "blatant breach of its representations," according to the court filing. While KRS is not a plaintiff in the 2017 lawsuit, Blackstone said that lawsuit is a "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 BAAM for its costs in defending this meritless lawsuit, and in the unlikely event of an adverse judgment, for that judgment." The lawsuit alleges that KRS said in plain language in its contract with Blackstone for an investment in BAAM's Blackstone Henry Clay Fund that the investment was "suitable" and that the retirement system fully understood the methods of compensation and the nature of and risks associated with the fees involved.

Tuesday's lawsuit filed by Prisma makes similar allegations regarding KRS' 2011 investment in its Daniel Boone Fund, a customized fund of funds in which the lawsuit alleges KRS "actively participated" in the formation of the fund and that its $139 million in net returns through Dec. 31 shows that "Prisma discharged its obligations to Daniel Boone Fund and KRS in good faith and in accordance with the governing contracts and Delaware law."

Don Kelly, partner at Wyatt Tarrant & Combs, Blackstone's attorney, said in statement emailed by a Blackstone spokesman: "This action is in response to a meritless lawsuit brought against us on behalf of KRS by contingency-fee lawyers looking for a payday. 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."

Gregory P. Williams, director at Richards, Layton & Finger, Prisma's attorney, could not be immediately reached to provide comment. David L. Eager, executive director of the Kentucky Retirement Systems, declined to comment.