The Franklin County Courthouse in Frankfort where Circuit Judge Thomas Wingate will preside over a Feb. 26 hearing on whether to approve a settlement involving state pension fund investments in hedge funds. (Kentucky Lantern photo by Sarah Ladd)
FRANKFORT — The recent proposed settlement of a long-running lawsuit against big hedge funds over their role in investing Kentucky pension funds will produce a “pittance” for the pension funds but a multi-million dollar “bonanza” for private attorneys representing the state, according to a group of state workers who are trying to press a separate lawsuit against the hedge funds.
On Jan. 8 Attorney General Russell Coleman announced that the state had settled the case with hedge funds agreeing to pay $227.5 million to Kentucky’s pension funds. The high profile case alleged that beginning in 2011 the hedge funds and some officials of the financially troubled Kentucky Retirement Systems gambled $1.2 billion of system funds on secretive, high-risk hedge fund investments that eventually went sour.
But in a 52-page motion filed Wednesday in Franklin Circuit Court the group of workers who initiated a separate lawsuit in 2021 trashed the settlement, part of which would throw out their case.
“Notwithstanding the Attorney General’s grandstanding claim of a $227.5 million recovery, the proposed settlement recovers only $82.5 million of ‘fresh money.’ The remaining $145 million is actually a return of funds that belong to Kentucky’s pension program that have been held in reserve by the Prisma-managed investment fund,” their motion argues.
Moreover, the Tier 3 plaintiffs say that under the settlement “contingency fee lawyers retained by the Attorney General … stand to pocket 20 percent” of the settlement amount — as much as $45.5 million.
Bad as that settlement is, these state workers — known as the Tier 3 Plaintiffs — said the court can accept it so long as their own case against the hedge funds is allowed to proceed.
“The court can approve this charade if it can stomach it,” they argue in their motion. “But the Court must leave the Tier 3 Plaintiffs, their claims, and their lawyers out of this, and must allow their separate claims to be prosecuted.”
The settlement must be approved by Franklin Circuit Court before it becomes final. Judge Thomas Wingate has scheduled a hearing on the matter for Feb. 26.
The spokesman for Coleman’s office did not return a phone call or respond to questions emailed Thursday by the Kentucky Lantern. Ann Oldfather and Vanessa Cantley, Louisville attorneys who were retained by contract to represent the attorney general in the case, did not return phone messages.
Also two attorneys for the Tier 3 plaintiffs, Michelle Ciccarelli Lerach, of La Jolla, California, and Jeff Walson, of Winchester, also did not return phone messages.
The original case drew national attention when filed by a group of eight state pensioners in late 2017 against some former officials of Kentucky Retirement Systems (now the Kentucky Public Pensions Authority) and major hedge fund companies KKR & Co., Prisma Capital Partners, The Blackstone Group and Pacific Alternative Asset Management.
The suit alleged the financially beleaguered retirement systems and the hedge funds violated their fiduciary duties by gambling on investments with extremely high risk, exorbitant fees and a lack of transparency. Defendants denied the allegations.
Tangled history of the case
The case took a dramatic turn in July 2020 when the Kentucky Supreme Court found that the plaintiffs — whose own pensions had not been reduced and were protected in law by a legal doctrine called an “inviolable contract” — did not have standing to file their claim and sent the case back to Franklin Circuit to be dismissed. But then-Attorney General Daniel Cameron intervened and the court allowed him to act as plaintiff to recover losses of the pension system. His office contracted with Oldfather and Cantley to represent it in the case.
But then in 2021, the Tier 3 plaintiffs — represented by Lerach and others — filed a new case claiming that they had standing. These employees are known as the Tier 3 plaintiffs because they were hired after a 2013 pension reform law put them into a new hybrid cash balance pension plan whose pensions do not enjoy the same protections as those of state workers hired before 2013.
Kentucky Public Pensions Authority boards voted Jan. 3 to approve the proposed settlement without releasing any of its details.
On Jan. 8 Coleman’s office put out a news release announcing that the original case had been settled with the hedge funds agreeing to pay $227.5 million to Kentucky’s pension funds. The release noted that this total included the return of about $145 million in assets that had been held in reserve by Prisma, one of the main defendants.
The settlement was the result of more than five months of negotiations between the lawyers for the attorney general and the defendants — negotiations mediated by a former federal judge, according to a motion to approve the settlement.
“As law enforcement, firefighters and other public servants, these Kentuckians dedicated their lives to our Commonwealth. It’s our Office’s responsibility to fight for them against those who put their pensions at risk,” Coleman said in the news release.
But the Tier 3 plaintiffs claim the actual recovery for Kentucky’s pension funds “does not even qualify as a drop in the bucket.” Wednesday’s filing by the Tier 3 plaintiff attorneys is a motion asking Franklin Circuit Court to consider their previous motion asking the court to order Prisma to return the $145 million in Kentucky pension funds held in reserve. With interest and penalty, the Tier 3 plaintiffs argued that the total due to the Kentucky pension funds would be just over $807 million.
In making this case, attorneys for the Tier 3 plaintiffs present their history of the prolonged case, blast the proposed settlement as inadequate, argue that further investigation is required into alleged misdeeds of some former pension officials and the hedge funds, and claim fees to be paid to the attorneys representing Coleman will be excessive.
They state that after the 2020 Supreme Court ruling that the original plaintiffs lacked standing, some of their former associates in pressing that case betrayed their original clients and “stole the case,” took it to Cameron “and solicited him to hire them.”
Will ‘full scope of any wrongdoing’ remain undiscovered?
Under a contract with the attorney general’s office, the attorneys who represented Cameron, and now Coleman, stand to make 20% of the first $250 million of gross recovery, the Tier 3 lawyers state in their motion.
This would amount to legal fees totaling $46.5 million if the attorneys for the attorney general claim 20% of the $227.5 million settlement. Fees would still amount to $16.5 million if the attorneys claim 20% of the $82.5 million “fresh money” and exclude the $145 million of pension fund money held in reserve by Prisma and to be returned as part of the settlement.
Amye Bensenhaver, co-director of the Kentucky Open Government Coalition and an assistant Kentucky Attorney General from 1991 to 2016, said her main objection to the settlement is that the case will conclude without a thorough investigation of possible wrongdoing in the complicated saga of the hedge fund investments.
“If approved by the circuit court, the proposed settlement enables the defendant hedge funds to escape accountability for a pittance — a nuisance settlement at best. Kentucky’s pensioners, and taxpayers, will never know the full scope of any wrongdoing that discovery might have revealed,” Benenhaver said. “Nor will we know if the proposed settlement amount is equivalent to the wrong that was done us.”