Thanks to a very busy 2022, some ongoing shaggy dog stories have not gotten the attention they deserve. One is the persistent battle by counsel working on behalf of the much abused beneficiaries of the Kentucky Retirement Systems, the most spectacularly underfunded pension system in the US. Its latest subplot, involving the New York state fixed Regina Calcaterra, oddly reincarnated as a pension expert when her only pension expertise seems to be as a protege of felonious former pension fund overseer Alan Hevesi, is moving forward, per the filing embedded at the end of this post.
To make an extremely long story short, in the initial suit, Mayberry v. KKR, the plaintiffs targeted various officials and advisers, and centrally, KKR, Blackstone, and the then Pimco affiliate PAAMCO for breaching their fiduciary to Kentucky Retirement System by fundamentally misrepresenting customized hedge funds each devised, which among other things had high fees and did not perform well (rest assured, many sneaky and sordid twists and turns supporting this headline).
The lower court ruled favorably on all the defendants’ challenges, but the case was successfully appealed before it even got to meaningful discovery (and unheard of sequence of events) where the appeals court found for the defendants on what most experts considered to be dodgy grounds. The case then went to the Kentucky Supreme Court, which based on two decisions after the case was first filed, found that the plaintiffs did not have standing to sue because, as members of defined benefits plans with a supposed state guarantee, they had not yet suffered a loss (mind you, the plans were projected to run out of money in 2027). No loss = no harm = no standing.
The is a ginormous body of case law which says plaintiffs are allowed to replead their case in the event of intervening changes in case law. Oddly, or perhaps predictably, those efforts were denied.
However, the anti-big-bad finance team, led by the formidable Michelle Lerach, with her co-counsel Jeffrey Walson and their consultant Bill Lerach, reconstituted the case around the so-called Tier 3 Plaintiffs, who are in what amounts to defined contribution plans. They are considered to have suffered a loss if the balances in their accounts are diminished.
But then the Kentucky Attorney General intervened, despite his predecessor having voiced support for the initial litigation and the new attorney general having sat on his hands. The defendants are trying to get his filing tossed, with big arguments in their favor including that he has unclean hands plus his claims are time-barred. The Tier Three plaintiffs are also objecting to his contention that he can fully occupy the field and represent everyone, including them, when Kentucky Retirement Systems has to engage the Attorney General and didn’t, plus various groups have divergent interests and he can’t properly represent them all.
Into this mess comes the matter of the so-called Calcaterra Report, which as you will soon see was awarded in a highly suspect manner. This investigation was allegedly to determine if Kentucky Retirement System should join the pension litigation. But why ask that question now after so many many years of sitting on the sidelines?
The plaintiffs’ attorney initially annoyed the judge by filing to demand the release of the full Calcaterra report, arguing she was scandal-ridden and unqualified and the contracting process was a crock. The judge saw that as one big ad hominem attack.
However, the report became public via FOIA. It looked like a seriously overpriced ($1.6 million) poorly executed exercise in “Nothing to see here.”
The plaintiffs’ attorneys were not about to let sleeping dogs lie. They filed suit against Calcaterra based on the FOIA and other information. From a September post:
What passes for the elite in this country is normally immune from prosecution or even career harm if they follow their monetary interests: curry favor with the right people, never cross anyone important unless the potential payoff is worth it. Morals be damned.
We may have the gratifying spectacle of someone who openly, as in too openly, followed that creed having a day of reckoning. Regina Calcaterra, partner in the law firm Calcaterra Pollack and a notorious New York State fixer is charged with bid rigging….
The Kentucky Courier Journal has a good write up. Important sections:
Following the recent release of the Kentucky public pension system’s $1.2 million investigative report on alleged illegal actions involving its hedge fund investments, a new lawsuit claims there was an illegal bid-rigging conspiracy behind the hiring of the firm contracted to do the report….
The 88-page complaint filed by California-based attorney Michelle Ciccarelli Lerach alleges not only that the law firm conspired with pension employees to violate the Kentucky Model Procurement Code and illegally secure the investigative contract, but also that the report itself served as a “whitewash” and “cover up” of wrongdoing by the pension authority’s leadership.
The lawsuit seeks to hold the Calcaterra Pollack firm and its partners liable for damages, the voiding of the firm’s contract with the pension authority and the return of the $1.2 million it was paid. It also seeks a judicial order for the firing of the authority’s executive director, David Eager, and its general counsel, Victoria Hale….
Lerach’s complaint cited Shepherd’s order questioning the bidding process, which notes Calcaterra Pollack first submitted a proposal to investigate the allegations more than two months before the KPPA put out the initial request for proposals in 2020.
Shepherd wrote that Calcaterra Pollack’s second bid-winning proposal was substantially identical to its first one, adding that this and the report’s final content raised questions about whether its purpose and intent was to “fully expose all the relevant facts (and to determine if the KPPA and its employees made mistakes)” or to “cover up or minimize those mistakes in an effort to convince the (attorney general) to not pursue claims that could prove embarrassing to the current or former management of KPPA.”
The new complaint picks up from there, alleging Regina Calcaterra had long been friends with Hale, KPPA’s general counsel…
So now we are up to the filing below, which is a response to the Calcaterra team’s Motion to Dismiss. It’s a very nicely done, readable document. It creates the strong impression that the Calcaterra filing follows the classic template of:
If you have the facts on your side, pound the facts; if you have the law on your side, pound the law; if you have neither the facts nor the law, pound the table.
Among other things, this filing points out and have acted as if the plaintiffs have to prove out their allegations at this stage, which is clearly nonsense. Here is the core argument:
Defendants wasted $1.6 million in Trust assets and caused the Trusts consequential damages, while delaying the related litigation for months. This was done to try to shield the Trustee, Eager and other wrongdoers from liability for their wrongdoing as pleaded in Taylor v. KKR & Co. LLP, No. 21-CI-00645 (the “Tier 3 BoT Action”), and was a continuation of the conspiracy and cover-up pleaded there. ¶¶ 3, 10, 155; Tier 3 BoT Action ¶¶ 79, 326–335. In short, Defendants and Additional Actors:
- induced the Culpable Trustee to breach trust, fiduciary and statutory duties by entering into the Calcaterra Contract in violation of their respective duties to the Trusts and the Trusts’ beneficiaries, violating Kentucky’s Procurement, Antitrust and Pension laws; and
- knowingly aided and abetted the Culpable Trustee and each other while pursuing a conspiracy and joint-enterprise for their selfish economic gains and personal benefit — at the expense of and damage to the KRS Trusts and their beneficiaries.¶¶ 3, 122–147.
Defendants’ Motions to Dismiss misconceive the nature and thrust of this case. Here, Defendants are alleged to have knowingly participated in the effort by the sole Trustee of the KRS trusts (i.e., the KRS Board) to whitewash and cover up breaches of trust by the Trustee. In so doing, these Defendants joined an ongoing conspiracy and thus became liable as if they had participated all along. These allegations state a direct (not derivative) claim by Plaintiffs, as trust beneficiaries who have been harmed by the conduct alleged.
3 The claims asserted are based on and involve violations of common law and trust law, as well as several Kentucky statutes, excerpts of which are in Appendix A. See also ¶ 20. ¶¶ 1, 32.Rather than deal honestly with the Complaint’s allegations, Defendants resort to ad hominem attacks, accusing Plaintiffs’ counsel of “concocting unsubstantiated,” “baseless,” “absurd” allegations, filing a Complaint filled with “highly sensationalized” claims creating a “shot gun pleading” filled with “vague and conclusory” allegations, none of which are “under oath” or supported by “affidavits” as if such affirmations were necessary at the pleadings stage.
Defendants’ sanitized counter-narrative asserts that nothing untoward occurred, that they did nothing wrong, that nobody was harmed, that they are immune from suit and that all claims are time-barred. Defendants even claim that there is neither subject-matter jurisdiction (constitutional standing) over the action, nor personal jurisdiction over the Calcaterra Firm. According to Defendants, the Tier 3 Plaintiffs’ claims are derivative and only the Kentucky Attorney General can bring these claims.
In truth, the Complaint is filled with specific factual allegations of recent and continuing wrongful conduct involving the performance of a contract involving the Commonwealth’s employee surplus pension systems governed by Kentucky law, requiring “consent to Kentucky jurisdiction” and “registration to do business in Kentucky” asserting common law and statutory claims, many of which were previously upheld by this Court in its November 30, 2018 Opinion and Order (the “Nov. 30, 2018 Order”; attached as Appendix B) in Mayberry v. KKR & Co., LP, Case No. 17-CI-00645 (the “Mayberry 5 Action”).
Plaintiffs are Tier 3 members of KRS hired after 2014. They are beneficiaries of the KRS Trusts which hold their retirement accounts and savings, and are the sole source from which their benefits will be paid. They have constitutional standing to sue. None of their benefits are guaranteed by the Commonwealth. Their individual pension accounts and ultimate benefits depend, and vary, based on Trust investment returns and expense levels. Bad investments, excessive expense or wasted assets injure them. Their accounts and benefits have been reduced due to the damages, unjustified expenses and waste of Trust assets complained of. They will benefit if the alleged wrongdoing is remedied and any monies are paid into the Trusts of which they are beneficiaries, and ultimately credited to the trust beneficiaries’ accounts as with other incoming funds. ¶¶ 2, 40(a)–(d), 63–66. See Section IV.B., infra.
The core claim is that the sole Trustee of the KRS Trusts committed a breach of trust and that Defendants knowingly participated in or assisted the Trustee’s breach.
Even though this is a skirmish in a much larger legal battle, it is instructive to see a card-carrying member of the Professional Managerial Class, through counsel, get positively screechy at the prospect of being held to account. Keep your fingers crossed that this case moves on to discovery.
00 (2023-01-05) As-Filed Omnibus Opposition (Without Appendice)