Key Takeaways
- • Franklin Circuit Judge Phillip Shepherd ordered Kentucky's Public Pensions Authority to release a $1.2 million investigative report within 10 days, ruling that taxpayers have a right to know the contents of a document they funded.
- • The suppressed report, commissioned in 2020 from New York law firm Calcaterra Pollack, investigated potential improper or illegal activities in billions of dollars in hedge fund investments made between 2011 and 2017.
- • Lawsuits allege hedge fund dealers cheated the KPPA on $1.5 billion in risky, poorly disclosed, high-fee investments with aid from some KPPA trustees and employees; the hedge fund defendants deny the claims.
- • The pension agency's claims of attorney-client privilege and work product doctrine protections were rejected by the judge, who determined that privilege was waived when the KPPA shared the report with the Office of the Attorney General in 2021.
- • A separate settlement framework indicates hedge funds have agreed to pay $227.5 million, with approximately $145 million distributed to the KPPA, though litigation over the disputed investments remains ongoing.
Summary
A Kentucky state court has forced disclosure of a lengthy investigation into potential fraud and misconduct at the Kentucky Public Pensions Authority's hedge fund investment program. On August 25, 2022, Franklin Circuit Judge Phillip Shepherd issued rulings requiring the KPPA to publicly release the Calcaterra Pollack report within 10 days, ending the pension agency's 18-month effort to keep the document confidential under various legal exemptions.
The underlying dispute centers on the KPPA's hedge fund allocation strategy spanning 2011 to 2017. Public employees and later the state attorney general filed lawsuits alleging that hedge fund managers cheated the pension system on $1.5 billion in investments characterized as risky, poorly disclosed, and laden with excessive fees. The allegations include claims that certain KPPA trustees and employees facilitated or failed to prevent the conduct. The hedge fund defendants have denied all wrongdoing.
To investigate these claims, the KPPA engaged Calcaterra Pollack at a cost of $1.2 million to examine "any improper or illegal activities" within the hedge fund program. However, after initially suggesting public release, the KPPA reversed course and denied multiple requests—including from the Lexington Herald-Leader—to disclose the report under Kentucky's Open Records Act. The agency invoked attorney-client privilege and the work product doctrine, arguing that investigative materials prepared in anticipation of litigation warranted confidentiality.
Judge Shepherd rejected both defenses. He determined that the KPPA had waived attorney-client privilege when it voluntarily shared the report with the Office of the Attorney General in 2021, since that office was not the pension agency's own legal counsel. Shepherd emphasized that taxpayers, having funded the $1.2 million investigation, possess a legitimate right to review its findings and assess whether value was received. The judge's two separate opinions provided the KPPA with a 10-day compliance window.
Settlement negotiations have advanced separately, with hedge fund defendants signaling willingness to pay $227.5 million to resolve claims, allocating approximately $145 million to the KPPA. These parallel tracks—mandatory disclosure coupled with ongoing settlement discussions—suggest the full scope of the investigation's findings will soon enter the public record, enabling stakeholders and regulators to evaluate the conduct and governance failures alleged within Kentucky's largest public pension system.
The underlying dispute centers on the KPPA's hedge fund allocation strategy spanning 2011 to 2017. Public employees and later the state attorney general filed lawsuits alleging that hedge fund managers cheated the pension system on $1.5 billion in investments characterized as risky, poorly disclosed, and laden with excessive fees. The allegations include claims that certain KPPA trustees and employees facilitated or failed to prevent the conduct. The hedge fund defendants have denied all wrongdoing.
To investigate these claims, the KPPA engaged Calcaterra Pollack at a cost of $1.2 million to examine "any improper or illegal activities" within the hedge fund program. However, after initially suggesting public release, the KPPA reversed course and denied multiple requests—including from the Lexington Herald-Leader—to disclose the report under Kentucky's Open Records Act. The agency invoked attorney-client privilege and the work product doctrine, arguing that investigative materials prepared in anticipation of litigation warranted confidentiality.
Judge Shepherd rejected both defenses. He determined that the KPPA had waived attorney-client privilege when it voluntarily shared the report with the Office of the Attorney General in 2021, since that office was not the pension agency's own legal counsel. Shepherd emphasized that taxpayers, having funded the $1.2 million investigation, possess a legitimate right to review its findings and assess whether value was received. The judge's two separate opinions provided the KPPA with a 10-day compliance window.
Settlement negotiations have advanced separately, with hedge fund defendants signaling willingness to pay $227.5 million to resolve claims, allocating approximately $145 million to the KPPA. These parallel tracks—mandatory disclosure coupled with ongoing settlement discussions—suggest the full scope of the investigation's findings will soon enter the public record, enabling stakeholders and regulators to evaluate the conduct and governance failures alleged within Kentucky's largest public pension system.
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