Hedge fund dealer sues KY state pension system to recover costs from fraud lawsuits

Kentucky’s state pension system is being sued by a New York hedge fund dealer that wants to recover the costs of several years of expensive litigation over claims that it defrauded Kentucky’s state pension system.

Yes, it’s a little confusing.

On Friday, Blackstone Alternative Asset Management filed a lawsuit in Franklin Circuit Court against the Kentucky Public Pensions Authority, which manages the retirement benefits for nearly 400,000 state and local government workers or retirees.

Blackstone is upset because of pending suits filed against it by a handful of public employees in Kentucky — and later, by state Attorney General Daniel Cameron — alleging that it and several other hedge fund dealers cheated KPPA on $1.5 billion in risky, poorly disclosed, high-fee investments starting in 2011.

In its own suit, Blackstone said KPPA’s investment staff and advisors understood perfectly well how hedge funds operate, and that Blackstone’s Henry Clay Fund — created solely for KPPA — produced a 6.5 percent annual return for the pension system. The various fees charged on the fund were typical for the industry, Blackstone said.

However, once outsiders began suing Blackstone in 2017 over allegedly fraudulent business dealings with the pension system, KPPA negligently stood by and let it happen, according to the suit. Citing a breach of contract, the suit demands an unspecified sum to compensate Blackstone for its legal costs and other related damages.

“We followed our agreement with KRS to the letter and delivered $158 million in net profits to Kentucky pensioners — representing returns three times the benchmark,” said Don Kelly, an attorney representing Blackstone, referring to the state pension system’s former name, Kentucky Retirement Systems.

“We would like nothing more than to cooperate with KRS to end this wasteful and unfounded litigation, but KRS’ unfortunate decision to breach its representations leaves us with no choice,” Kelly said.

KPPA officials did not immediately respond Tuesday to a request for comment on the suit.

KPPA is one of the nation’s worst-funded public pension systems, with roughly $20 billion in assets and $25 billion in unfunded pension liabilities. In particularly bad shape is the pension fund that covers most state workers, which is only 14 percent funded.