A hearing in Frankfort, Ky., on Feb. 26 is set for approval of a settlement with fund of hedge fund investment firms – KKR/Prisma, Blackstone Alternative Asset Management (BAAM) and Pacific Alternative Asset Management (PAAMCO).

The long-running lawsuit and countersuits have resulted in the recovery of $227.5 million for the Kentucky Public Pensions Authority and would allow the funds of hedge funds and their executives named in the suit to continue to deny liability and maintain that the settlement is to avoid the expense, distraction and inconvenience of further litigation.

“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,” said Kentucky Attorney General Russell Coleman. “I’m proud of our team who delivered this long-awaited outcome, led by our talented Civil Chief Justin Clark. I look forward to fully resolving this case so Kentucky’s retirees can enjoy the benefits they earned.”

Over seven years in the making

The litigation began in 2017 with the Kentucky Retirement Systems (KRS) looking to recover damages suffered from the performance in three funds of hedge funds the system had invested in.

According to the settlement, the plaintiffs allege “breach of trust, breach of fiduciary duty, aiding and abetting such breach, and participating in a joint enterprise and/or civil conspiracy and/or pattern of racketeering activity in connection with certain investments made by the KPPA Entity with funds managed by certain of the Settling Defendants.”

The investments in this case date back to 2011 when Kentucky Retirement Systems chose Blackstone, PAAMCO and Prisma to split a $400 million mandate.

PAAMCO’s courtroom drama

In 2017, as the pension plans were underfunded and in an attempt to remedy the situation, PAAMCO alleged that a group of current and former Kentucky employees claimed to have suffered due to mismanagement of the assets and had been defrauded by the three investment firms.

The case was highly unusual and led to PAAMCO suing KRS in California arguing that KRS’s position in the Kentucky litigation contradicted various contractual representations it had made to PAAMCO regarding KRS ‘s degree of financial sophistication, investment goals, lack of reliance upon representations by PAAMCO. PAAMCO contended this constituted a breach of contract and sought damages.

The countersuit went all the way the Kentucky Supreme Court after a stay of the California case and ultimately PAAMCO was able to recover some of its legal costs at least as of 2022.

Blackstone plays up portfolio gains against claims

According to Blackstone, the claims centered on a breach of fiduciary duties in unlawfully selling to KRS unsuitably risky and expensive custom hedge funds in August 2011. The original complaint, Blackstone lawyers have said, alleged a civil conspiracy among the investment managers and a number of KRS trustees, officers and advisors to hide ‘the inappropriate nature of the funds’ from the citizens of Kentucky.

The plaintiffs in that original lawsuit sought $50 billion in damages, an amount equivalent to the entire KRS/KPPA funding deficit accrued over more than two decades, and more than 100 times the amount that KRS/KPPA invested with BAAM, lawyers for Blackstone stated in 2023 on behalf of the world’s largest allocator the hedge fund investments.

The Kentucky Supreme Court found that the plaintiffs lacked constitutional standing in 2020.

For its part, BAAM officials said in a countersuit they achieved a net return of 6.5% and returned $158 million in net profits to KRS/KPPA.

KKR/Prisma

Prisma also filed its own countersuits against KRS in Delaware. Ultimately, Prisma ended up overseeing a litigation indemnity reserve called the Daniel Boone Fund totaling $145 million, which is included in the settlement sum.

The settling hedge funds continue to deny liability and maintain that the settlement is to avoid the expense, distraction and inconvenience of further litigation. The settlement follows two days of mediation on July 11 and 12, 2024 in New York between all parties.

The KPPA, County Employees Retirement System and KRS Boards jointly approved a settlement agreement in the Hedge Fund litigation commonly referred to as Mayberry, retirees and employees were told in a joint announcement. 

Officials state that the settlement agreement has been filed with the court​ but is not effective until it receives court approval in February and because this is still pending litigation, officials declined to comment.