Judge declines to OK settlement in challenge of hedge funds’ handling of KY pension money

FRANKFORT — Franklin Circuit Judge Thomas Wingate has declined to approve a final settlement in the longrunning lawsuit against big hedge funds over their role in controversial investments by the Kentucky Retirement Systems more than 13 years ago.

The settlement was announced Jan. 8 by Kentucky Attorney General Russell Coleman, who said the hedge funds had agreed to pay $227.5 million to Kentucky’s pension programs for public employees.

But in a four-page order issued on Friday, Wingate said, “The Court is left without a sufficient reason as to why the Court’s approval is necessary for this settlement or why this Court is being asked to make findings that the Court is without sufficient knowledge to make.”

Wingate wrote that he “welcomes the parties to settle the matter as they best see fit, however, the Court declines to bless an agreement and enter an order that asks the Court to make findings that the Court believes to be outside of its role.”

While the order leaves open the door to further settlement talks, it is a setback for Coleman, the hedge funds and the other parties who had agreed to a global settlement of this case — and related cases — and submitted it to Wingate for approval. 

Kevin Grout, a spokesman for Coleman’s office, said late Monday, “We’re reviewing the court’s order and discussing with the Kentucky pension board leaders.”

The order appears to be a big win for four Kentucky public employees who filed a separate case against the same hedge funds in 2021. That’s because a key part of the proposed settlement order would have required that their case, as well as other related litigation, be dismissed.

The employees in that separate case are represented by attorney Michelle Ciccarelli Lerach, who released a statement Tuesday that said Wingate’s order highlighted many flaws of the proposed settlement — primarily that it would have extinguished “the valuable claims” of her clients.

Lerach said, “We will continue to prosecute our case with the full intention of garnering a result more in line with the actual losses sustained in order to provide significant benefit to the plan and its beneficiaries.”

Wingate’s Friday order also included a directive that will slash the potential amount that could be paid in fees to attorneys who represent Coleman’s office in the case.

The contract between Coleman and those private attorneys led by Ann Oldfather, of Louisville, calls for the fees to be 20% of the first $250 million gross recovery in the case.

The proposed settlement called for hedge funds to turn over $227.5 million, but that total had two parts — $82.5 million in new money plus $145 million held in reserve by Prisma, one of the hedge fund defendants in the case.

Wingate’s order said the $145 million has belonged to Kentucky’s pension funds all along and is “not to be considered ‘recovered funds’ and/or a portion of the ‘settlement recovery’ for the purpose of determining attorneys’ fees.”

Don Kelly, the attorney representing Blackstone, one of the defendants in the case, emphasized in a statement Monday that Wingate’s order leaves the door open for the parties to settle the case. “The settlement is clearly in the best interests of the Commonwealth and its pensioners and will result in significant assets being paid to the pension plans,” Kelly said. “As stated by the Attorney General and the KPPA (Kentucky Public Pension Authority), who are best positioned to make decisions in the public interest, now is the time to put an end to this long running expensive and distracting litigation.”

From the case’s outset the hedge funds have denied allegations that the investments resulted in high fees, low transparency and massive losses for Kentucky public pension plans. Kelly said in his statement Monday that Blackstone Alternative Asset Management had “delivered a net return of 30 percent on investment.”

KY state workers group blasts pension settlement with hedge funds, presses its own lawsuit

Lerach and Oldfather initially worked together to represent a group of state government retirees when the case was filed in late 2017. They alleged that the financially troubled  Kentucky Retirement Systems (since reorganized as the Kentucky Public Pensions Authority) irresponsibly gambled with hedge fund investments in hopes of big returns but the result was big losses.

A key development in the case came in July 2020 when the Kentucky Supreme Court ruled that the plaintiffs — whose own benefits had not been cut and were protected in state law by a legal doctrine called the “inviolable contract” — did not have standing to press their claim.

But then-Attorney General Daniel Cameron intervened and the court allowed him to take over as plaintiff to recover damages for the pension system’s benefit.

His office contracted with the group of Louisville attorneys led by Oldfather to handle the case for the state.

In 2021 the public employees represented by Lerach filed their separate suit. These new plaintiffs have been given standing by the courts because they were hired after enactment of a 2013 pension reform law that put them into a new hybrid cash balance pension plan whose benefits do not enjoy the same security as plaintiffs in the original lawsuit who were hired before 2013. 

This story has been updated.

Read the judge’s order