KY settlement with hedge funds delayed as judge orders mediation in state workers' lawsuit
Franklin Circuit Judge Thomas Wingate has ordered hedge fund defendants into mediation with a group of Kentucky state employees who allege mismanagement of state pension funds. Wingate sits in the Franklin County Courthouse in Frankfort. (Kentucky Lantern photo by McKenna Horsley)
FRANKFORT — A Friday afternoon court order will delay and possibly jeopardize final approval of the recently announced settlement of a long-running lawsuit over controversial investments by Kentucky Retirement Systems in hedge funds more than a decade ago.
That high profile case alleged that some former officials of the retirement systems (since restructured as the Kentucky Public Pensions Authority or KPPA) and four big investment firms violated their fiduciary duties beginning in 2011 by gambling more than $1 billion of Kentucky pension money on hedge fund investments that carried high risk, high fees and low transparency.
Early last month Kentucky Attorney General Russell Coleman, who is pressing the case for the state, announced that he had reached a settlement in which the investment firms agreed to pay $227.5 million to the state's pension system, but admit no wrongdoing.
A key part of the settlement required dismissal of other lawsuits related to the same claims.
However, attorneys representing four Kentucky public employees who filed a separate case against the same defendants have objected to the proposed settlement in motions filed with Franklin Circuit Judge Thomas Wingate, who must approve the settlement before it becomes final.
These attorneys, led by Michelle Ciccarelli Lerach, said the settlement would recover only a 'pittance' for the state but result in a 'bonanza' of as much as $45.5 million from the settlement for private attorneys hired under contract by the attorney general's office to represent the state.
But the main objection by Lerach was that the proposed settlement of the original suit would dismiss her separate case.
Wingate heard arguments Wednesday on Lerach's motions, and late on Friday he granted Lerach's request that the separate case be referred for resolution to a mediator.
Wingate directed that parties in this separate case agree on a mediator. He said if they do not agree on a mediator they must give him a list of three mediators and he would pick one.
'The mediation shall be conducted by March 14,' Wingate ordered.
The judge had previously scheduled a hearing on whether to approve the proposed settlement of the original case for Feb. 26. Because of his order directing mediation in the separate case, Wingate postponed that hearing until March 26.
In response to Kentucky Lantern's request for comment on the impact of Wingate's order, Coleman released this statement: 'The Commonwealth's proposed settlement remains in place for Kentucky workers and retirees. We will continue reviewing the court's order to determine the path forward for the Commonwealth, KPPA, and all beneficiaries.'
But Lerach said the order was a 'complete victory' for her clients in the separate case.
'In light of Judge Wingate's order, it is extremely unlikely that the Attorney General's settlement will go forward as currently attempted — if at all,' Lerach said in a statement. 'The Court ordered our case to mediation and we intend to mediate with the hedge fund sellers to reach a real settlement. If that cannot be done, we will be able to go ahead and litigate our claims without any further interference from the Attorney General.'
Grahmn Morgan, an attorney representing three investment firms (KKR & Co., Prisma Capital Partners, Pacific Alternative Asset Management) who are defendants in the original case as well as Lerach's separate case, said he had no immediate comment on Wingate's order.
Vanessa Cantley, one of the Louisville attorneys working under contract with Coleman's office in the original case, also declined comment.
The original case was brought by a group of eight state pensioners in late 2017 alleging that the financially troubled Kentucky Retirement Systems gambled with the hedge fund investments that resulted in big losses. The defendants said there was no wrongdoing, that the actions were all legitimate investments.
A major development in the case happened in July 2020 when the Kentucky Supreme Court ruled that the plaintiffs — whose 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 claims. The high court sent the case back to Franklin Circuit for dismissal.
But then-Attorney General Daniel Cameron intervened and the court allowed him to take over as the plaintiff to recover damages to the pension system.
His office contracted with two of the attorneys for the plaintiffs in the original case — Ann Oldfather and Cantley, of Louisville — to handle the case for the state.
But in 2021 Lerach and some other attorneys who originally worked with Oldfather and Cantley in representing plaintiffs in the original case filed a new separate case on behalf of our state employees. These new plaintiffs had standing because they were hired after a 2013 pension reform law put them into a new hybrid cash balance pension plan whose state pensions do not enjoy the same security as the plaintiffs in the original case who were hired before 2013.
On Jan. 8 Coleman put out a statement announcing the original case had been settled and that boards of the KPPA had voted to approve the settlement. He said the big investment firms had agreed to pay $227.5 million, money he said would go to Kentucky's pension funds. Coleman's statement noted that this total included the return of about $145 million that had been held in reserve by Prisma, one of the defendants.
Lerach's objections to the settlement say that this $145 million is not a recovery by the state because it always has been the property of Kentucky's pension system. Lerach said the proposed settlement involves just $82.5 million in 'fresh money' to the state. Moreover, Lerach said that under terms of contracts with the attorney general's office, the attorneys representing Coleman in the original case can claim $46.5 million in legal fees if the settlement is approved by Franklin Circuit Court.
Among other things, Lerach's separate case argues that Prisma must return the $145 million to Kentucky's pension system with penalty and interest — a total of about $807 million.
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