KKR, Blackstone Targeted in New Kentucky Suit (Audio)

Retirement Systems pension plans. It alleges at the big asset managers misrepresented expensive and risky black box bundles of hedge funds as safe ways to generate high returns, but those investments contributed to the pension systems virtual insolvency while the managers pocketed excessive fees, according to the plaintiffs. My guest is Peter Handing, a professor at Wayne State University Law School.

Peter tell us about the allegations that the fund managers were negligent and breached their fiduciary duties, Well, what the what the case is really focusing on here with regard to the hedge fund managers, and of course these are some of the biggest names out there. Kkr UM Blackstone is that what they sold to the Kentucky Pension Fund was in fact a terribly underperforming asset, or this was

a fund of funds. So they invested in other hedge funds that they sold one that was badly underperforming, and by charging excessive fees that they essentially misled. They took advantage of the Kentucky Pension Fund and the trustees by promising that they could help make up for some shortfalls that appeared in this fund and frankly and just about every other pension fund after the financial crisis in two

thousand eight and two thousand nine. So it's a shot at them saying that you promised us the moon if you will stable value appreciating fund that in fact has badly underperformed the market. They said they promised them absolute returns. The complaint focuses on a one point two billion dollar investment on one day in August where three hedge fund sellers sold three different black spot black box hedge fund vehicles had which the plaintiffs claim, we're risky, toxic investments.

What do the plaintiffs have to prove here, Well, this is going to be a difficult case for them, because, uh, they're going to first have to prove that there were misstatements or at least that the Kentucky trustees were misled

um and them that the investment didn't perform as promised. Now, these are very sophisticated hedge funds, and when you look into the fine print here, the six point type, Uh, they put in lots of disclaimers there that say that, you know, the standard one that we hear all the time that we hear on ads on Bloomberg, past performance is no guarantee of future returns, and so it's going to be hard to establish that level of negligence or even and that's also there's this claim here of breach

of a fiduciary duty, and that's really going to be what's necessary to establish have any hope of establishing liability. There are lots of procedural hurdles that are going to make this a difficult case to win. The defendants have said that the allegations are baseless. What's interesting is that a spokesman for Blackstone said the black Stone Fund reference in the complaint delivered to the Kentucky Employees Retirement System

positive returns out performing relevant benchmarks. Are they going to try to prove that in emotion to dismiss well, Um, yeah, I actually an emotion dismissed. I suspect it will focus more on UH not not the underlying performance of the fund. That's something that you would usually fight out at a later stage, but more what is the underlying claim here? That this is filed in the Kentucky State Court in Franklin County, UH, and the claim in the complaint is

that this is only alleging violations of Kentucky law. But this sounds an awful lot like a federal UH securities fraud case under Rule ten B five, that we were misled breach of a fiduciary duty. That the standard claims that are made in the securities case. And if that is in fact the case, this could be shifted over to the federal court and then, unfortunately for the state, rather quickly dismissed, at least with regard to the hedge

fund manager. So I think that first hurdle is not so much the that we performed well, but you're in the wrong court and you're trying to drag us into the wrong place. We deserve to be in federal court. Or is that because Kentucky state law provides more latitude than federal securities law to hold people in control personally liable for the actions of the entities they supervise. So the plaintiffs wanted to sue in state court. Certainly that's

why they want to be in state court. And also too, there's you know that litigators understand that there's a little bit of a home court advantage um that the judges in Kentucky are participants in this pension fund, but they also have the benefit of being able to bring a negligence claim, which is usually not permitted There are some narrow exceptions there, but usually not permitted for a claim

under federal law. So the state wants this or the plaintiffs want this in state court so that they can at least preserve their negligence claim and perhaps also the breach of a doucier duty claim under state law, so that they want to stay as far out of federal court as possible because there's a real risk that their

claim will be dismissed. Peter. Critics of hedge funds have questioned whether the fiduciary duty under federal pension law is being met in the case of funds of funds which charge investors fees in addition to those collected by the underlying funds and provide limited disclosure. According to the critics, what's your take on that, Well, this is interesting that again you know that they, the plaintiffs here, have avoided

the federal uh fiduciary duty rule for pension investments. But it's the same basic thrust here that any type of investment adviser must put the client's interests first. And one way to show that the client's interests have not been put first is establishing that there are excessive fees. And of course we know in the hedge fund universe, um, you know that the standard was two and the assets plus of the profits were being taken um and a fund of funds that could even be multiplied. So this

will be interesting if the case can advance. It will be interesting as far as whether it might require the hedge funds to start limiting what they do when they deal with pension funds, or perhaps that they will ignore them and drop them and go with other types of investors, saying we don't want to run. We don't want to run the risk of running a foul of the fiduciary

duty rule. About thirty seconds here, Peter, is it likely that this lawsuit will lead to others or is this more of a stand alone Certainly I could see if they can survive the preliminary efforts to throw it out, it could become a template in other states, the key being focused on your state law rather than federal laws. Thank you, Peter for being one of our other guests all year. That's Professor Peter Henning of Wayne State University Law School. Doug Jones is now officially the first Alabama

Democrat elected to the Senate in a quarter century. Republican Roy Moore refused to concede his laws to Jones and filed the last ditch lawsuit hours before the certification of the election, claiming voter fraud. A judge denied his request to stop the election certification, and Alabama Secretary of State John Merrill said he's confident it was a free and fair election. We take each in every incident seriously. We investigate them if it's warranted. We want to see those

people indicted. We want to see them prosecuted to the fullest extent of the law. Jones will be sworn in on January three, joining me as Richard Brafald, professor at Columbia Law School and an expert on election law. Rich tell us about the substance of Moore's lawsuit, Well, I think he had anything that. Uh, there were predictions were that he was going to win, and he didn't win, so there must be something wrong. Um, that's what sort

of one that sounds very legal. And the other argument, which comes a little closer, U where there were a series of that unusually high African American voter turnout in certain areas and the presence of of organizers, some of whom might have been out of state, Uh, somehow indicated or that the election was painter or that or tainted the election in some sense. He was saying there was much higher turnout among African Americans and that must mean

there was fraud. And on what basis did the judge dismiss? Morris complained that it was outrageous. Well, actually, the Alabama law provides actually very tightly limits the ability to actually

challenge election results. So the judge basis that he had no jurisdiction under the Alabama code, which basically says that there's no jurisdiction to hear election challenges unless there's specific authorization, and there isn't one for us a seed, so he didn't so much refute the challenges as saying there's nothing

here for me to do. So the Secretary of State in Alabama said that there could be an election contest by a recount, that more could find for a recount if he chose to do that, he has to do that within forty eight hours of the confirmation. So what are the chances of that doing any good? It was aye split, So sorry for the two possibilities. One is there is Alabama, like many other states, has provisions for an automatic recount if the margin of victory is relatively narrow.

This marginal victory was much bigger than that, so the automatic recount option did not exist. There is provision in Alabama law for a recount if the Canada that's going to pay for it. It's not clear that provision actually applies to federal election as opposed to state elections. Although the Secretary of State has been saying this uh, many people read the statute is saying that even that option

is not available in this context. So if he were to secre recount, it's not even clear he would able to get it. But if you worry, you'd have to pay for it, have to do it right away. So it looks like this is a done deal. Then I mean, I think we're okay. Let's turn to another state. The tide race for Virginia's House of Delegates is turning into a mini bush Figore. Are there some kinds of systemic problems with our election systems that we're having these kinds

of of problems. Well, I have to say yes and no. Yes, there are serious systemic problems in voting technology or or vulnerability to hacking old fashioned systems. On the other hand, sometimes you just get really with really really really really close elections. Even very good systems may have trouble getting to finality when you actually get down to the stage of certain ballots which are unclear, and as I understand it, Uh, they're basically down to fighting about one ballot in Virginia.

If it goes one way, there's a clear winner. If it goes the other way, the races tied. Uh. And having looked at the pictures of the ballot or having you know, I've seen it described. You can understand why in trying to part the intent of the voter, who we cannot ask because we don't know who the voter is. UM, and we wouldn't ask anyway, UM if unclear, But no hanging Chad's no hang chat. This is not a case

where technology failed. I mean you could say technology failed in that it created the possibility of a ballot that could be read, uh, either of two ways. This was a voter who clearly at some point marked both of the candidates and then put a line on one of them, and it's not clear what the alignemant, cross out or emphasis. So rich. There has been so much talk this past year batt election fraudet President Trump talking about it before

the election. You have American intelligence and law enforcement officials concluding that Russia did attempt to disrupt the campaign. What does this due to the public's belief in the integrity of their vote. Well, I think the public, you know, it's rightfully nervous. But it's worth separating out the two kinds of issues that you just put together. One is this notion of fraud, which most people think of as

people who aren't entitled to vote. Voting or maybe voting more than once, the so called in person voter fraud that hasn't studied a lot, and there's all this next to no evidence of it. There might be tiny, tiny amounts relatives to the millions of votes their cast that's gotten a lot of the law enforcement attention, the Trump

administration's attention. The other is the kind of problem of potential hacking, of potential unseen disruption of ballots or the ballot counting process, especially as we move more to automatic ballot counting, that is harder to know that it's happening, and it's it's harder to protect against. So I think

it's sort of worth keeping that. If we are going to start focusing on ballot security, and we should, I think it's going to be more about both misconduct by election officials, which sometimes happens, and especially the integrity of the balloting system, the way in which ballots our votes are tabulated and stored, especially as they had more increasingly stored electronically, rather than the so called voting front problem of unqualified people showing up or showing up more than once.

So we have about thirty seconds here, So very quickly do you see more challenges to election results after the elections. It depends on how close the outcomes are. If we have a lot of close races and the results matter, we may very well see more often. I mean, the thing about the Virginia one is the control of the Virginia legislature turns on it um, and so that one really matters. The More race was a close race. He

lost by a pretty wide enough Martina. But we will We'll have to leave it there, but we will have picked up with this next year, I'm sure. Rich that's Professor Richard Rafault of Columbia Law School. Thanks for listening to the Bloomberg Law Podcast. You can subscribe and listen to the show on Apple podcast, SoundCloud, and on Bloomberg dot com slash podcast. I'm June. Also, this is Bloomberg. M m hm