Illustration: Jason Doiy/ALM

Hedge fund managers slept a little bit easier last Thursday night. 

On July 9, the Kentucky Supreme Court handed down a long-awaited decision shutting down an attempt by a group of state pension holders to bring claims of breach of fiduciary against three hedge funds they accused of sticking the state retirement system with overly risky investments and cranking up unnecessary fees.

Eight plaintiffs who hold defined benefits pensions in the Kentucky Retirement Systems, or KRS, the body that manages public employee pensions in the state, brought a derivative lawsuit in 2018 against KRS's trustees and officers, and three so-called "funds of funds": PAAMCO, Prisma, and a fund manager affiliated with The Blackstone Group. 

The lawsuit, spearheaded by Ann Oldfather of Oldfather Law Firm in Louisville and Michelle Ciccarelli Lerach of Bottini & Bottini, claimed that the funds lured in $1.5 billion in retiree funds into "black box" investments without fully disclosing the risks and high fees that would be wracked up by the perennially underfunded state pension. The suit, which also named Prisma's parent, KKR & Co., and its top executives Henry Kravis and George Roberts, as well as Blackstone's CEO Stephen Schwarzman, was seen by many in the industry as a trial balloon that, if successful, could be replicated in other states where hedge funds have been brought in to help ramp up returns for the chronically underfunded public-employee retirement pools. 

And in case Lerach's name didn't jump out at you in the paragraph above, Oldfather made it clear that Lerach's husband, Bill was acting on the case as a consultant. Oldfather told a team from PBS's Frontline reporting on Kentucky's pension problems that the plaintiff's team was "blessed" to have Bill Lerach acting as a consultant for the plaintiffs on the inner workings of pension funds. Bill, who led the team that scored a record $7 billion settlement in securities litigation involving Enron Corp., spent nearly two years in prison after pleading guilty to paying kickbacks to plaintiffs in securities fraud cases and can no longer practice law.

Faced with a possible new plaintiff's business-model-in-the-making, the big-name defendants brought on big-name defense lawyers. A team from Simpson Thacher & Bartlett including partners Paul Curnin, Michael Garvey and Peter Kazanoff, senior counsel David Elbaum, counsel Sara Ricciardi and associates Shannon McGovern and Michael Carnevale stepped up for PAAMCO and Prisma. Meanwhile, Blackstone leaned on a Paul, Weiss, Rifkind, Wharton & Garrison team led by firm chairman Brad Karp which included litigation partners Andrew Ehrlich, Lorin Reisner and Brette Tannenbaum.

This is the part of the column where I should disclose that, as a native Kentuckian who spent the first half of my life in the Bluegrass, I have more than a passing interest in the goings-on in the Commonwealth. That said, I wasn't aware of the derivative lawsuit until the opinion dropped last week, even though my father is a current state employee set to receive a defined-benefit pension. 

The good news for dad AND the defendants is that the Kentucky Supreme Court found the plaintiffs didn't have standing to sue since they hadn't experienced any disruption in their benefits. In fact, the court held that there is plenty of law on the Kentucky books that says that if KRS faces a shortfall in the future, the state is on the hook for it.   

"In essence, then, the full faith and credit of the Commonwealth serves as a backstop for plaintiffs' pension benefits even in the event that severe plan mismanagement renders KRS insolvent," Kentucky Chief Justice John D. Minton Jr. wrote. Minton concluded that "as a matter of law, these eight Plaintiffs, as beneficiaries of a defined-benefit plan who have received all of their vested benefits so far and are legally entitled to receive their benefits for the rest of their lives, do not have a concrete stake in this case." Without a concrete stake, Minton wrote, the plaintiffs lack constitutional standing to bring their claims in Kentucky courts which, unlike some states, have the same justiciability requirements as federal courts. 

Thursday's ruling comes almost a year after Kentucky's high court heard oral argument from Simpson Thacher's Curnin in the case and a little more than 14 months after defendants successfully got the brakes put on the suit by winning a seldom-granted writ of prohibition on the jurisdictional issue at the Kentucky Court of Appeals.

Karp of Paul Weiss said that his client never should have been sued in the first place since its work resulted in 6.5% annual return during the life of the investment and its fund nearly tripled benchmarks set out in its investment agreement with KRS. 

"In the end, the Kentucky Supreme Court saw plaintiffs' gambit for what it was: an effort by contingency-fee counsel to step into KRS's shoes with absolutely no legal authority to do so," Karp said via email Monday. "This case involved an effort by some aggressive and clever plaintiffs' lawyers to assert claims that properly belonged to KRS, but which KRS itself never asserted because they were transparently meritless, and to assign blame for KRS's massive funding deficit on some deep-pocketed parties that concededly did not create the deficit, which long pre-dated their arrival and which they helped to mitigate. Suffice it to say that no court in Kentucky or in any other jurisdiction has ever sustained claims and theories like those asserted here by plaintiffs."

Neither Oldman nor Michelle Lerach responded to messages seeking comment Monday, nor did representatives of KRS.