Remember when I said last week that a little birdie told me there was a secret plan to bring the path-breaking fiduciary duty lawsuit, Mayberry v. KKR, back from the dead? Recall this effort to claw back fees and win punitive damages from hedge fund operators KKR/Prisma, Blackstone, and PAAMCO along with other defendants including Henry Kravis and Steve Schwarzman personally, on behalf of the beneficiaries of the just about bankrupt Kentucky Retirement System seemed to have been dispatched by a Kentucky Supreme Court ruling that found the defendants lacked standing because they hadn’t suffered actual losses.

We has assumed the secret plan was revealed with the stunning development of the new Kentucky Attorney General Daniel Cameron intervening in the case, joining the plaintiffs.

But maybe the secret plan was the filing made yesterday on behalf of the original plaintiffs addressing as in refuting the Supreme Court standing issues, or to put it in legal nomenclature, curing the standing defects identified in the Supreme Court ruling. While this is a dramatic development, unlike the Attorney General intervention, it’s not radical.

As the filing embedded at the end of the post explains, the Supreme Court ruling instructed the trial court to dismiss the case, which by implication was without prejudice. The loss on standing issues was based entirely on court decisions made after the initial complaint was filed and amended.

Parties to litigation are permitted to re-file their cases; as the filing below notes, for instance, “….ample federal authority exists for the proposition that a plaintiff is entitled to amend his complaint to comply with intervening change in the law.”

The specific issue was so-called Article III standing, which is a Federal law principle which only some states have incorporated into their laws. Kentucky is one of them. In simplified terms, for a plaintiff to have Article III standing, he must have suffered an “injury in fact”. The very recent US Supreme Court ruling. Thole v. US Bank, on which the Kentucky Supreme Court relied heavily, found that pension fund plaintiffs had not suffered a loss since they had not had their pension benefits reduced; mark to market losses are irrelevant.¹ The Kentucky Supreme Court noted that not only were Kentucky Retirement System beneficiaries still getting their payments as promised, but that Kentucky had also made an “inviolate contract” to provide the pension benefits, so the state would step in if Kentucky Retirement System went bust.

The Supreme Court did not hear new arguments from the plaintiffs; it made its ruling based on their so-called First Amended Complaint. It didn’t consider supplemental filings and evidence submitted at the trial court even though those were part of the record. The filing stays just short of grumbling that an argument presented in supplemental filings cited by the trial court judge, Philip Shepherd in his favorable ruling on standing, were not considered by the Kentucky Supreme Court by virtue of considering only the First Amended Complaint

The filing below describes how the plaintiffs were harmed in tangible ways. It also differentiates between the initial plaintiffs, all hired before 2014, who were “Tier 1” or “Tier 2” beneficiaries and together represent roughly 80% of all KRS beneficiaries and later “Tier 3” beneficiaries.

Tier 1 and Tier 2 beneficiaries were stripped of their Cost of Living Adjustments (COLAs) in 2013 which were never part of the state’s “inviolate contract” yet were a benefit the employees were supposed to receive when they had 5% to 9% deducted from their pay. The filing contends that theses individual plaintiffs each lost between $2,000 and $40,000 and collectively, the Tier 1 and Tier 2 beneficiaries, using conservative estimates, have lost over $200 million.

The new filing also removed some of the original plaintiffs (only five of the original Mayberry eight remain) and added three, all of whom are “Tier 3 beneficiaries” hired after January 1, 2014. They do not have a defined benefit pension and their pensions are not backed by the state (they are a hybrid “cash balance” plan where individuals make contributions as in a defined contribution plan, but eventual payouts are based on how the pooled monies perform). The Second Amended Complaint contends they were harmed because even though the plan did show positive returns from 2014 to present, they were diminished due to the high fees and misrepresented performance of the defendant’s products and that more specifically, KRS added to rather than exited hedge funds, as most of its peers did, due to self-serving actions of a KKR staffer who was tasked to work at KRS and deliberately not supervised (juicy new details include an “earn out” contract).

Finally, all beneficiaries were damaged by the fact that their annual deductions also fund health and life insurance plans that are not state backed, are deeply underfunded, and were invested in part in the dodgy hedge fund vehicles.

The filing also points out that the plaintiffs have standing to pursue a derivative case against the defendants. Due to the hour, I don’t have time to review the Kentucky Supreme Court decision, but my dim recollection is they utterly ignored this argument.

The new complaint drops the claims regarding harm to the plaintiffs as taxpayers, as well the KRS trustees and officers to simplify pursing the litigation. However, the Introduction cheerily notes that the Attorney General might take up the taxpayer claim against them and makes clear that the plaintiffs are happy to help.

The complaint adds a new defendant, KKR/Prima’s Michael Rudzik, who is accused with another defendant, Prisma’s then senior executive William Cook, of scheming with KRS Chief Investment Officer David Penden for KKR/Prisma to achieve control of KRS’ entire $1.6 billion hedge fund investments. One reason for adding Rudzik is as a Kentucky resident, he will be unable to escape personal jurisdiction. The filing also adds KKR “John Doe” entities to curtail KKR arguments that whatever Bad Stuff it was up to was outside a legal vehicle included in the pleading.

Other tidbits: the case is going back to the original trial judge Phillip Shepherd. As we pointed out, Shepherd is Kentucky’s analogue to Judge Jed Rakoff: progressive but also seen as careful and well-reasoned. The filing pumps as politely as it can for consolidating discovery with the Attorney General’s effort, which the Attorney General and judge ought to prefer.

Finally note that Michelle Lerach is the lead attorney on this filing with Jeffrey M. Walson as local co-counsel. Anne Oldfather, who had been lead on the original case, with Lerach as her co-counsel, is now one of the many parties who received this document via electronic service, as “Counsel for Certain Plaintiffs”. Maybe another little birdie will tell me what happened here.

In any event, the plaintiffs are seeking an August 17 hearing. After so much delay and so many twists and turns, we’ll see how quickly they can move forward. The defendants are sure to try to put up lots of procedural roadblocks. Assuming the plaintiffs beat those challenges back, the defendants will be highly motivated to settle, since the dirty laundry in this case is not only very damaging but could serve as useful grist for legal action in other venues. That means that the plaintiffs would be best served, in terms of maximizing their recovery, to inflict some pain by proceeding with discovery as well as seeing how damaging the evidence is.

Pass the popcorn. This ought to be fun.

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¹ For those who take interest in pension rulings, the filing has a long discussion of how Thole in many ways is not apposite to Mayberry v. KKR.

00 Mayberry v. KKR Second Amended Complaint