KKR & Co., Blackstone Group LP and their founders must face a lawsuit alleging they failed to deliver hedge fund returns as advertised, a judge in Kentucky ruled Friday in a decision that may present new legal challenges for managers of alternative investments.
The lawsuit, filed in December 2017, claims that large asset managers misrepresented expensive and risky “black-box” bundles of hedge funds as safe ways to generate high returns. The suit was filed on behalf of the Kentucky Retirement Systems’ pension plan and state taxpayers. The plaintiffs group includes a sitting judge, a retired state trooper and a firefighter.
In rejecting the defendants’ bid to dismiss the case, Franklin County Circuit Court Judge Phillip Shepherd wrote in a 35-page opinion that “the pleadings should be liberally construed in a light most favorable to the plaintiff and all allegations taken in the complaint to be true.”
He dismissed claims against one defendant, the Government Finance Officers Association, which represents public finance officials in the U.S. and Canada, ruling that the plaintiffs failed to allege a breach of duty.
Public Scrutiny
The judge left one controversial matter pending: a plaintiffs’ request to subject hedge fund materials submitted in the case -- which they have described as “black boxes" -- to broad public scrutiny.
Managers of private equity and hedge funds have long battled to remain exempt from open-records requirements that apply to other government contractors and to keep the details of their relationships with public pensions confidential.
The disclosure matter is likely to be hotly contested in future proceedings. The judge ordered the parties to confer within 30 days on the scheduling of discovery and other pre-trial matters.
‘Very Happy’
“We’re very happy with the result,” plaintiffs’ attorney Michelle Ciccarelli Lerach said about the Friday ruling. “The plaintiffs believe we’ll now be able to prove our allegations.”