After seven long and winding years of litigation targeting large hedge fund firms for allegedly mismanaging more than $1 billion of Kentucky’s retirement pension system, the defendants have come to a settlement agreement with the state. Under the terms of the proposed settlement agreement reached last week and filed as a motion in Franklin Circuit Court on Wednesday, the big investment firms will collectively pay $227.5 million to the state under certain conditions, but admit no wrongdoing in their investment practices. Several boards of the Kentucky Public Pensions Authority (KPPA) — which manages $27 billion of pension funds for nearly a half million state and local government workers and retirees — voted to agree to the settlement terms in a meeting Friday. The terms of the agreement were not made public until attorneys for the state filed the motion for the settlement Wednesday. The motion to approve the settlement stated that its terms were “heavily negotiated over five-plus months” by parties’ counsel and a former federal judge who served as a mediator. If approved by the judge, the settlement will result in “a substantial recovery” of $227.5 million for the state. This includes the return of approximately $145 million in assets held by one company in a litigation-related indemnity reserve established by Prisma, one of the main defendants in the case. The recovered funds will go to the state and KPPA once all of the terms of the settlement are met, allocated to the pension trusts “for the benefit of all of its tiers of beneficiaries.” The terms of the agreement also require a complete resolution of all current or future litigation against the defendants based on these claims, as well as the defendants dropping their litigation against the KPPA, which they had accused of breaching their contracts. The lawsuit was originally filed in December 2017 by eight retired state workers, alleging that top officials in the state retirement system — then known as the Kentucky Retirement System — and several large investment firms they hired had breached their fiduciary duties and mismanaged pension funds with risky and secretive hedge fund investments. Among the firms sued were Wall Street giants Blackstone, KKR/Prisma Capital Partners and Pacific Alternative Asset Management. Numerous KRS executives, board members and consultants were also named as defendants, including former executive director Bill Thielen, former chief investment officer David Peden and former board member and Prisma executive William Cook. The litigation would take many turns from there. In July 2020, the Kentucky Supreme Court found the pensioner plaintiffs did not have standing and remanded the case back to the Franklin Circuit to be dismissed. However, then-Attorney General Daniel Cameron successfully intervened in the case to take over as a new plaintiff and seek damages for losses the state pension system incurred. In 2021, after a judge ruled that that attorney general would be the lone plaintiff, a separate lawsuit was filed by several “Tier 3” state workers — those in a hybrid cash balance pension plan hired after 2013 — who claimed they did have standing as plaintiffs. The Tier 3 litigation is ongoing, with the workers represented by Michelle Ciccarelli Lerach, one of the attorneys from the original lawsuit. Two of the other attorneys from the original lawsuit — Ann Oldfather and Vanessa Cantley — were contracted by the attorney general’s office in 2021 to pursue damages for the state. At least two of the hedge fund defendants filed countersuits against the KPPA, alleging the state pension system breached their contracts by supporting the litigation against them — though the KPPA never officially intervened in the lawsuits. In late 2020, the KPPA commissioned a law firm to conduct an investigation into any “improper or illegal activities” related to its past investments. The report was completed and delivered to Cameron’s office in 2021, but not made public by the KPPA until a year and a half later, when forced to by Franklin Circuit Judge Phillip Shepherd, who presided over much of the litigation. The report singled out Peden, Prisma Capital Partners and its co-founder and CEO Girish Reddy for “alleged fiduciary duty violations, conflict of interest and ethics code breaches” related to the pension system entering a strategic investment partnership with the firm from 2014-16. The lawsuit alleged Reddy, Peden and Cook were among those who conspired to give the firm full control of the system’s $1 billion hedge fund portfolio without disclosing their Prisma conflicts. As for Cook — a former Prisma executive who was appointed to the KRS board in 2016 — the report was unable to determine if the KKR Prisma investments benefited from his trusteeship, as investigators were not able to issue subpoenas or obtain personal correspondence and financial accounts. Examining the 2011 fund of funds investments by KRS with Blackstone, PAAMCO and Prisma (which later became KKR Prisma and is now PAAMCO Prisma), the report stated they could not find any violations of fiduciary duty or illegal activity by these firms or state pension officials, while also noting the same limitations of their investigation. In a statement released after the motion for the settlement was filed Monday, Kentucky Attorney General Russell Coleman said his office’s responsibility is to fight for public servants “against those who put their pensions at risk.” “I’m proud of our team who delivered this long-awaited outcome, led by our talented Civil Chief Justin Clark. I look forward to fully resolving this case so Kentucky’s retirees can enjoy the benefits they earned,” Coleman said. Following the KPPA’s approval of the proposed settlement last week, Blackstone attorney Don Kelly issued a statement indicating the firm agreed to this in order to “put an end to 7 years of litigation” that could have continued on for several more years. Kelly said Blackstone “makes no admission of liability or wrongdoing” in the settlement, which also stipulates that “the Lerach attorneys will not receive any fees.” He added that the firm “delivered a net return in excess of 30% significantly outperforming all of KRS’s own benchmarks”, citing the KPPA investigative report stating they “did an admirable job of protecting capital for their pensioners.” This story will be updated. State government and politics reporting is supported in part by the Corporation for Public Broadcasting. The post Kentucky, hedge fund firms reach $227 million settlement in long-running pension lawsuit appeared first on The Lexington Times.