Key Takeaways
- • Kentucky Retirement Systems' $1.6 billion hedge fund portfolio was allegedly placed under improper control by KKR Prisma in 2015 through undisclosed conflicts of interest, including an embedded KKR Prisma executive at KRS offices and a KKR Prisma retiree appointed to the KRS Board of Trustees.
- • A $300 million investment in KKR Prisma's Daniel Boone Fund lost 2.3 percent over two years while the S&P Total Return Index gained 30 percent, demonstrating significant underperformance attributable to the alleged scheme.
- • The lawsuit, filed in late 2017 by eight public employees, alleges that multiple major investment firms sold KRS hedge funds characterized as "extremely high-risk, secretive, opaque, high-fee and illiquid vehicles" starting in 2011, with inadequate risk disclosure.
- • Attorney Michelle Ciccarelli Lerach's recent court filing asserts that investments were made to benefit KKR Prisma and disadvantage competitors rather than serving KRS members and beneficiaries as required by Kentucky pension law.
- • The badly under-funded pension agency lost opportunity costs on alternative investments that could have generated substantially higher returns, with the self-dealing scheme involving current and former KRS trustees and officials.
Summary
Kentucky Retirement Systems faces allegations of a coordinated conspiracy involving KKR Prisma to improperly control the pension agency's $1.6 billion hedge fund portfolio in 2015. According to a court filing from attorney Michelle Ciccarelli Lerach submitted to Franklin Circuit Court, insiders at KRS facilitated this arrangement through undisclosed conflicts of interest without adequate disclosure to beneficiaries or compliance with fiduciary duties under Kentucky pension law.
The alleged scheme involved two primary mechanisms: placement of a KKR Prisma executive as an embedded adviser within KRS offices, and appointment of a KKR Prisma retiree with ongoing financial interests in the company to the KRS Board of Trustees. These arrangements allegedly gave KKR Prisma effective control over decision-making regarding the pension fund's hedge fund allocations. The filing contends that "these investments were not made solely in the interests of the members and the beneficiaries of KRS—as required by Kentucky pension law—but to benefit KKR Prisma and disadvantage its competitors."
Performance data presented in the lawsuit underscores the financial impact of the alleged misconduct. A $300 million investment in KKR Prisma's Daniel Boone Fund declined 2.3 percent over a two-year period, while the S&P Total Return Index achieved a 30 percent gain during the same timeframe. This performance gap represents substantial opportunity costs for the already under-funded pension system and its beneficiaries.
The underlying lawsuit was initiated in late 2017 by eight public employees holding pensions through KRS. The broader complaint alleges that multiple major investment firms sold KRS hedge funds described as "extremely high-risk, secretive, opaque, high-fee and illiquid vehicles" beginning in 2011. Plaintiffs contend that these firms failed to adequately disclose risks to KRS, and that KRS leadership did not transparently communicate the extent of losses to plan members. The suit names several current and former KRS trustees and officials as co-defendants, asserting their roles in facilitating these transactions.
The alleged scheme involved two primary mechanisms: placement of a KKR Prisma executive as an embedded adviser within KRS offices, and appointment of a KKR Prisma retiree with ongoing financial interests in the company to the KRS Board of Trustees. These arrangements allegedly gave KKR Prisma effective control over decision-making regarding the pension fund's hedge fund allocations. The filing contends that "these investments were not made solely in the interests of the members and the beneficiaries of KRS—as required by Kentucky pension law—but to benefit KKR Prisma and disadvantage its competitors."
Performance data presented in the lawsuit underscores the financial impact of the alleged misconduct. A $300 million investment in KKR Prisma's Daniel Boone Fund declined 2.3 percent over a two-year period, while the S&P Total Return Index achieved a 30 percent gain during the same timeframe. This performance gap represents substantial opportunity costs for the already under-funded pension system and its beneficiaries.
The underlying lawsuit was initiated in late 2017 by eight public employees holding pensions through KRS. The broader complaint alleges that multiple major investment firms sold KRS hedge funds described as "extremely high-risk, secretive, opaque, high-fee and illiquid vehicles" beginning in 2011. Plaintiffs contend that these firms failed to adequately disclose risks to KRS, and that KRS leadership did not transparently communicate the extent of losses to plan members. The suit names several current and former KRS trustees and officials as co-defendants, asserting their roles in facilitating these transactions.
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