Kentucky Attorney General Russell Coleman announced an agreement with Blackstone, Prisma Capital Partners, KKR & Co. and Pacific Alternative Asset Management Co. to settle a 2020 fiduciary-breach lawsuit related to the Kentucky Retirement Systems’ investments in the managers’ hedge funds of funds.
The agreement is pending approval by the Franklin County Circuit Court on Feb. 26 along with “the dismissal of other lawsuits not involving the Commonwealth,” according to a Jan. 8 news release from Coleman’s office.
The total agreed-upon amount announced by Coleman is $227.5 million, which includes the return of $145 million in capital from KRS’ 2011 investment in the Daniel Boone Fund, a customized hedge fund of funds managed by Prisma Capital.
The KRS board in August 2011 had approved investments of $400 million each in hedge funds of funds managed by Prisma, PAAMCO and Blackstone. They were KRS’ first such investments following the creation of a 10% target allocation to absolute return, which was gradually reduced until it was completely eliminated in November 2020.
Prisma was acquired by KKR in 2012 and merged with PAAMCO in 2017 to form PAAMCO Prisma Holdings.
Minus the return of capital from the Daniel Boone Fund, the settlement amount is $82.5 million divided among the four manager defendants.
After more than seven years of litigation, the long, drawn-out dispute related to the Kentucky Retirement Systems’ inaugural investments in hedge funds of funds may be coming to an end.
Daniel Cameron, the commonwealth’s previous attorney general, had filed a lawsuit in July 2020 against the managers and others seeking "compensatory and punitive damages" and the relief sought included damages due to losses incurred by the Frankfort-based Kentucky Retirement Systems (KRS) by utilizing unsuitable investments, loss of assets, and loss of "prudent" investment opportunities and positive investment return, and the "disgorgement of fees" from sellers of "unsuitable investment products," according to the original court filing.
A spokesperson for KKR declined to comment on the settlement agreement.
That firm, as well as the other three managers named in the lawsuit, “continue to deny liability with respect to all the Commonwealth’s claims and maintain that they have settled solely to avoid the expense, distraction and inconvenience of further litigation,” according to the joint motion to approve the agreement.
A Blackstone spokesperson said in that firm’s statement, that “to put an end to seven years of meritless litigation initially brought by private plaintiffs' attorneys Bill and Michelle Lerach, with the prospect of a multi-year litigation going forward, BMXA (Blackstone Multi-Asset Investing, its multimanager hedge fund business) has entered into a settlement agreement with the Commonwealth of Kentucky and (its retirement systems). As part of the settlement, BXMA makes no admission of liability or wrongdoing, and the Lerach attorneys will not receive any fees.”
“BXMA delivered a net return in excess of 30%, significantly outperforming all of KRS’s own benchmarks, and KRS’s own investigation showed that BXMA ‘did an admirable job of protecting capital for their pensioners,’” said the Blackstone spokesperson.
KRS is now known as the Kentucky Public Pensions Authority, which oversees the state’s five pension funds with a total of $20.1 billion in assets.
Other defendants in the July 2020 lawsuit were actuarial firm Cavanaugh MacDonald Consulting and Thomas Cavanaugh, the firm's co-founder; Rebecca Gratsinger, chairman, senior consultant, CEO (now emeritus) and principal at investment consultant RVK; Jim Voytko, RVK's president (now emeritus), director of research, senior consultant and principal; David Peden, KRS CIO from 2014 to 2017 and currently a senior investment consultant at Mercer; T.J. Carlson, KRS CIO from 2010 to 2013 and currently the CIO of the $12 billion Missouri State Employees’ Retirement System, Jefferson City; and William A. Thielen, KRS executive director until his retirement in 2015.
The Franklin County Circuit Court in May 2024 granted all those defendants’ motions to dismiss, and the Commonwealth’s appeals to those dismissals are still pending.
The July 2020 lawsuit by former AG Cameron was filed two weeks after the Kentucky Supreme Court upheld an earlier court of appeals' dismissal of a previous – and nearly identical – lawsuit.
The previous suit, Mayberry vs. KKR, was filed in December 2017 by eight members of KRS. The plaintiffs alleged that defendants – which included Blackstone, Prisma Capital, KKR and PAAMCO – enticed KRS to invest in fund-of-funds investment vehicles, when KRS could have earned higher returns in the stock market.
Kentucky Supreme Court Chief Justice John D. Minton Jr. in his July 9, 2020 opinion said the plaintiffs did not have standing to bring their claims of funding losses sustained by the pension fund because they "do not have an injury in fact that is concrete or particularized."
In April 2019, the appeals court reversed an earlier decision by a state circuit court judge in November 2018 denying the firms' motion to dismiss. In PAAMCO Prisma’s February 2018 memoranda of motions to dismiss, the firm said the plaintiffs had "no standing to assert such claims on behalf of KRS or the Commonwealth," citing among other items of support that the breach of fiduciary duty and aiding and abetting claims were governed by a five-year statute of limitations.
