FRANKFORT — The high-profile lawsuit alleging that Wall Street money managers and others caused Kentucky Retirement Systems to gamble as much as $1.5 billion on risky hedge fund investments will proceed.
Franklin Circuit Judge Phillip Shepherd on Friday rejected motions of three big hedge fund firms and most other defendants to dismiss the lawsuit filed 11 months ago.
Shepherd ordered the parties in the case to confer and submit a schedule for taking depositions and other actions needed for preparing for trial.
The lawsuit was filed by eight current or former Kentucky public employees, and it charges that international hedge fund sellers — KKR/Prisma Capital Partners, Blackstone Group, and Pacific Alternative Asset Management — breached their fiduciary duty by luring the Kentucky systems in 2011 into making investments without fully disclosing the risk, high fees and lack of transparency.
Also named as defendants were major consultants to KRS and several former or current KRS board members and administrators. The suit alleges theses defendants also breached their fiduciary duties as part of a civil conspiracy that masked the severity of the worsening financial condition of the systems.
The many defendants denied the allegations and asked to be dismissed on many different grounds, including that the eight plaintiffs lacked legal standing to bring this type of case.
Generally, the Wall Street defendants argued they were selected by KRS through a competitive and transparent process, provided sound advice, and the investments that they sold eventually made money for the systems.
In a 35-page order, Shepherd rejected nearly all arguments of all defendants on Friday, dismissing only one of the minor defendants – the Government Financial Officers Association – from the case.
He ruled that the plaintiffs "have a property interest" in the pension funds and that they "allege sufficient facts to demonstrate taxpayer standing."
The judge further ruled that the allegations of the plaintiffs against former KRS officials and the Wall Street firms were sufficient for the case to proceed.
"For example, plaintiffs reference the massive fees collected by these defendants in breach of the common law fiduciary duty not to charge excessive fees," Shepherd wrote. "After factual discovery is completed, those allegations may be disputed or disproven. At this time, however, without full disclosure of all fees, costs, and other expenses related to the management of these hedge funds, the court cannot dismiss these defendants."
Don Kelly, an attorney with Wyatt Tarrant & Combs, which represents Blackstone, released a statement late Friday that said Blackstone looks forward to demonstrating that the plaintiffs' claims are false The statement said in part that Blackstone's investments "produced more than $150 million in net profits for KRS and out performed – by three times – the benchmark target set forth in its contract."
Barbara Edelman, the Kentucky attorney representing KKR, Prisma Capital Partners, and Pacific Alternative Asset Management, did not immediately return a phone call seeking a response to the order.
Vanessa Cantley, a Louisville attorney representing the plaintiffs, said, "This is a big day for Kentucky. We're thrilled with the ruling and excited about proceeding with the discovery process."
In the lawsuit, the plaintiffs seek to recover losses resulting from the alleged irresponsible actions of defendants for the Kentucky Retirement Systems – not for themselves. While the suit does not seek a specific amount in damages, it alleges that the Kentucky systems today are "billions of dollars" worse off because of the defendants' actions.