Investment Firms Sued Over Kentucky Retirement Systems Hedge Fund Investments

The lawsuit alleges investment firms sold investments to KRS that were “extremely high-risk” and produced “excessive fees, poor returns and ultimately, losses.”

Eight public employees have filed a lawsuit against investment firms and current and former trustees and officials of the Kentucky Retirement Systems (KRS).


According to the Lexington Herald-Leader, the lawsuit filed Friday in Franklin Circuit Court seeks to represent the interests of others with retirement benefits paid by KRS as well as Kentucky taxpayers generally. KRS faces a $27 billion pension shortfall largely due to inadequate funding by the state government, according to one news report.


The lawsuit says the systems lost money on more than $1.5 billion in hedge fund investments in recent years, although its own advisers privately urged the agency to stay away from such “unacceptable risks.” The investment firms named in the suit are KKR & Co., Prisma Capital Partners, The Blackstone Group and Pacific Alternative Asset Management.


The Herald-Leader reports that the plaintiffs allege that, starting in 2011, the investment firms sold KRS hedge fund investments that were “extremely high-risk, secretive, opaque, high-fee and illiquid vehicles.” The hedge funds produced “excessive fees … poor returns and ultimately losses.” A report prepared for KRS by CEM Benchmarking found that its actual investment costs in 2014 were $126.6 million, or more than 100% higher than the $62.4 million it had publicly disclosed, the suit alleges. Most of this money was fees paid to investment managers.


“Trustees, with the knowing assistance of all the other defendants, chose to cover up the true extent of the KRS financial/actuarial shortfalls and take longshot imprudent risks with KRS funds to try to catch up for the funds’ prior losses and deceptions,” the suit alleges, according to the Herald-Leader. “They misled, misrepresented and obfuscated the true state of affairs inside KRS from at least 2009 forward.”


The lawsuit seeks to recover what KRS lost on hedge fund investments and management fees to those firms, plus damages.


The court asked KRS to decide whether it intended to join the suit as a co-plaintiff, and according to one news report, in a meeting, it decided not to join.