Mayberry v. KKR: Kentucky Attorney General Shows True Colors, Looks Over-Eager to Settle Pathbreaking Pension Case Rather Than Inconvenience Private Equity Kingpins Blackstone and KKR
A key hearing next week, on February 8, ought to shed some light on how Judge Philip Shepherd intends to deal with Kentucky Attorney General Daniel Cameron, who is showing perilous little respect for the judge’s desire to move the landmark pension case, Mayberry v. KKR, along in a disciplined manner after it has languished for over three years. We’ve embedded Judge Shepherd’s order of December 28, the Attorney General’s request for an extension of time, and the Tier 3 Plaintiffs’ Motion of Opposition to the Attorney General’s extension of time. You can see the other major filings, including the complaint by the Tier 3 members that they hope to get leave to file, here.
We need to cover a lot of background before getting to the elephant in the room, that the timing of the Attorney General’s intervention looks suspect, particularly since he is a protege of Mitch McConnell and the suit he pulled from the jaws of apparent death by his intervention fingers heavyweight Republican donors Steve Schwarzman of Blackstone and Henry Kravis of KKR personally, along with their firms. Political insiders in Kentucky believe that Cameron needed some good headlines after getting considerable criticism in the national press for going easy on the cops that shot Brionna Taylor. One theory was that the revival of this lawsuit was also effectively a shakedown: Cameron would give the private equity firms a “cost of doing business” settlement, with no embarrassing discover, with an expected quid pro quo in dark money payments. Another theory is that Cameron might pursue the case a little but still enter into a cheapie settlement if he can use discovery to damage the Beshears, a Democratic party dynasty that had their fingers all over the Kentucky Retirement System mess.
But as you’ll see, Cameron may be hoist on his own petard.
The 50,000 foot version of the plot thus far is that in late December 2017, attorneys filed a derivative lawsuit for eight Kentucky Retirement System beneficiaries against three fund managers, KKR/Prisma, Blackstone, and PAAMCO, that had sold customized hedge fund products that contrary to their sales pitch, had high risk and underwhelming performance.1 The Kentucky Retirement System, at only 13% funded, is the most spectacularly underwater large pension fund in the US, despite Kentucky having some of the most stringent statutory fiduciary duty requirement in the US.
The fund managers allegedly focused on KRS and other desperate and clueless public pension funds who were unsuitable investors, particularly at the risk levels they were taking. KRS made what was a huge investment for a pension fund of its size. $1.2 billion across three funds all at once, in 2011, roughly 10% of its total assets at the time. They all had troublingly cute names. The KKR/Prisma funds was “Daniel Boone,” the Blackstone fund was “Henry Clay” and the PAAMCO fund, “Colonels”.
In the case of KKR/Prisma, the fund had installed an employee at KRS as well as having a KKR/Prisma executive sitting as a non-voting member of the KRS board. The filing argues that that contributed to KRS investing an additional $300 million into the worst performing hedge fund even as it was exiting other hedge funds.
The stakes here are much higher than the potentially meaty recoveries. Private equity and hedge funds fetishize secrecy because too often, their conduct will not stand up to scrutiny. The giant fund managers are almost certain to be most afraid of discovery, since they sharp practices they used with Kentucky Retirement Systems were very likely to have been replicated at other public pension funds. Even the limited discovery so far uncovered more misconduct and allowed the plaintiffs to add to their claims.
The initial case was appealed before discovery had gotten meaningfully underway, an unusual sequence of events. The plaintiffs lost on what most independent lawyers thought was an extremely strained ruling. The case then went to the Supreme Court, which dismissed the case without prejudice on standing due to intervening appellate and US Supreme Court decisions. The Supreme Court also got peculiarly snippy about private attorney pursuing these claims.
The Kentucky Attorney general, Mitch McConnell protege Daniel Cameron, filed a surprise Motion to Intervene on July 20. Bear in mind the attorney general’s office could have intervened at any time to support the case but oddly chose to now. Its filing was also clearly and wholly dependent on the earlier submissions by the private plaintiffs.
After a raft of oppositions, including multiple formulations by the somewhat reshuffled plaintiffs’ legal team (former lead counsel Anne Oldfather was replaced by her former co-counsel Michelle Lerach), Judge Shepherd issued an order on December 28. He rejected most of the plaintiffs’ reformulations to deal with the standing issues except having the so-called Tier 3 Plaintiffs effectively make their pitch. The reason the earlier case had been largely shot down was those intervening decision (such as Thole v. US Bank) required that the plaintiffs have suffered a “particularlized” loss. The Kentucky Retirement System beneficiaries hadn’t yet, since the fund has not yet missed a payment and arguably even if the system does, the State of Kentucky is also on the hook.
By contrast, the Tier 3 plaintiffs had mandatory deductions from their paychecks for a hybrid pension which is not state guaranteed. Even though public pension plans are not subject to ERISA, they are often managed in accordance with ERISA principles. The Kentucky Supreme Court in fact used ERISA cases to guide its decision. Unlike a defined benefits plan, which is what the Tier 1 and Tier 2 plaintiffs have, the Tier 3 plan is a defined contribution plan. Extensive case law backs the idea that under a defined contribution plan, the employee has suffered when his account balance is impaired. So the standard for loss is completely different than for the original “Mayberry Eight.”
Although the judge can’t let suspicions influence his legal judgment even if he harbors them,
1 Due to changes in ownership over time, the names of some of the legal entities listed as defendants had changed, but the suit is still targeting the funds who managed three separate hedge fund vehicles, and key executives.