LOUISVILLE, KY (WAVE) - The opening paragraph of a summary report highlighting key points of a new lawsuit against Kentucky Retirement Systems officials sums things up pretty clearly:
Three international hedge fund sellers and their top executives are being called to account for targeting and selling unsuitable "black box" investments to the Kentucky Retirement Systems in a derivative suit filed by current and former public employees, whose retirement funds have been decimated. With the sales of these mysterious, risky, hedge-fund-of-fund vehicles, KKR/PRISMA, BLACKSTONE and PAAMCO2 are accused of breaching their fiduciary duties and creating a false sense of security about the true nature of these investments, whose massive fees, lack of transparency, sub-par returns and later large losses helped cripple the KRS funds, significantly contributing to the current underfunding crisis in Kentucky's pension systems. Had the trustees not been sold the black boxes and the funds invested in prudent investments, like simple, no-frills, low-fee index funds, the KRS funds would be vastly better off. Instead, KRS's largest fund – once overfunded – is now a mere 14% funded, the worst-performing (most severely underfunded) public pension fund in the country.
The plaintiffs -- eight current and former state employees -- filed the lawsuit in Franklin Circuit Court on Wednesday. In the 143-page document, they accuse KRS trustees, the three hedge fund firms and several others of "participating in a scheme, civil conspiracy, and concerted course of conduct in violation of Kentucky law."
READ: Scroll down for the complete 143-page lawsuit
"Its $2 billion surplus in 2000 is gone, and has been replaced by a $13.5 billion deficit," the complaint continued.
The plaintiffs are seeking "compensatory and punitive damages and equitable and injunctive relief," though no specific dollar amount is mentioned in the lawsuit.
"We believe that the evidence will show that the individuals we named worked together to keep information from Kentucky taxpayers, and the beneficiaries, to hide the fact that they had violated their duties for so long," attorney Vanessa Cantley said. "We believe the people of Kentucky have been damaged in the billions of dollars. And we'll be seeking to recover every penny."
Cantley is part of a team of attorneys representing state employees in the suit against hedge fund firms KKR, PAAMCO Prisma and the Blackstone Group. The firms are accused of selling the Kentucky Retirement System trustees on high risk "black box" investments without being fully transparent about the risk and the fees.
"The individuals, and in this case pension funds, who are investing in these vehicles have no idea what or who they are investing in, what fees they are paying," Cantley told us. "It's completely non-transparent."
KKR responded to the allegations with this statement: "We take our fiduciary duty very seriously and believe that the allegations about our firm are meritless, misplaced and misleading."
Cantley said the case could be the first of its kind in the country, and predicted similar suits could be soon filed in other states where public pension funds made similar investments with these firms.
The Kentucky General Assembly convenes next week and is expected to take on the issue of the state's underfunded pension system. Rumors swirled last month about whether Gov. Matt Bevin was going to call a special legislative session to address the pension crisis, but such a meeting never materialized.