Key Takeaways
- • Kentucky's Attorney General Russell Coleman announced a $227.5 million settlement with hedge funds on January 8, but a group of state workers (Tier 3 Plaintiffs) challenges the deal as delivering only $82.5 million in "fresh money," with $145 million representing a return of previously held reserve funds from the Prisma-managed investment fund.
- • Contingency fee lawyers retained by the Attorney General stand to receive approximately $45.5 million (20% of the settlement), prompting the Tier 3 Plaintiffs to characterize the agreement as enriching private counsel while delivering a "pittance" to Kentucky's pension system.
- • The underlying lawsuit stems from allegations that beginning in 2011, hedge funds and Kentucky Retirement Systems officials invested $1.2 billion in secretive, high-risk hedge fund investments that subsequently underperformed, triggering the legal action originally filed in December 2017 by eight retired state workers.
- • The Tier 3 Plaintiffs filed a 52-page motion in Franklin Circuit Court on January 24 opposing the settlement while requesting that their separate 2021 lawsuit against the hedge funds be permitted to proceed independently, arguing the court can approve the current settlement while allowing their case to advance.
Summary
On January 8, 2025, Kentucky's Attorney General Russell Coleman announced a $227.5 million settlement resolving a protracted litigation against hedge funds over their management of the state's pension assets. However, the agreement has drawn sharp criticism from a group of state workers known as the Tier 3 Plaintiffs, who filed a 52-page motion in Franklin Circuit Court challenging the settlement's substantive value and its fee structure.
The underlying dispute traces to December 2017, when eight retired state workers initiated litigation alleging that beginning in 2011, hedge funds and officials within the Kentucky Retirement Systems invested approximately $1.2 billion of system funds into opaque, high-risk hedge fund strategies. These investments subsequently underperformed, prompting legal action to recover losses. The Tier 3 Plaintiffs filed their own separate lawsuit in 2021 and now contend the proposed settlement inadequately compensates the pension system while disproportionately benefiting private counsel.
The Tier 3 Plaintiffs' central objection concerns the composition of the $227.5 million figure. According to their motion, only $82.5 million represents new capital recovery. The remaining $145 million consists of assets previously held in reserve by the Prisma-managed investment fund—funds that technically already belonged to Kentucky's pension program. This distinction materially affects the settlement's actual economic impact on the pension system's recovery.
Equally contentious is the fee arrangement. Private attorneys retained by the Attorney General's office are positioned to receive 20% of the settlement amount, potentially yielding $45.5 million in contingency fees. The Tier 3 Plaintiffs characterized this arrangement as a "multi-million dollar bonanza" for private counsel relative to pension fund recovery, describing the overall settlement as producing a "pittance" for the retirement system despite the Attorney General's public claims of a substantial recovery.
The Tier 3 Plaintiffs' motion requests that the court permit their independent lawsuit to proceed concurrent with or following approval of the state's settlement, preserving their ability to pursue additional claims against the hedge funds. They explicitly acknowledge the court's authority to approve the proposed settlement while allowing their case to advance separately, framing the procedural request as compatible with settlement approval.
The underlying dispute traces to December 2017, when eight retired state workers initiated litigation alleging that beginning in 2011, hedge funds and officials within the Kentucky Retirement Systems invested approximately $1.2 billion of system funds into opaque, high-risk hedge fund strategies. These investments subsequently underperformed, prompting legal action to recover losses. The Tier 3 Plaintiffs filed their own separate lawsuit in 2021 and now contend the proposed settlement inadequately compensates the pension system while disproportionately benefiting private counsel.
The Tier 3 Plaintiffs' central objection concerns the composition of the $227.5 million figure. According to their motion, only $82.5 million represents new capital recovery. The remaining $145 million consists of assets previously held in reserve by the Prisma-managed investment fund—funds that technically already belonged to Kentucky's pension program. This distinction materially affects the settlement's actual economic impact on the pension system's recovery.
Equally contentious is the fee arrangement. Private attorneys retained by the Attorney General's office are positioned to receive 20% of the settlement amount, potentially yielding $45.5 million in contingency fees. The Tier 3 Plaintiffs characterized this arrangement as a "multi-million dollar bonanza" for private counsel relative to pension fund recovery, describing the overall settlement as producing a "pittance" for the retirement system despite the Attorney General's public claims of a substantial recovery.
The Tier 3 Plaintiffs' motion requests that the court permit their independent lawsuit to proceed concurrent with or following approval of the state's settlement, preserving their ability to pursue additional claims against the hedge funds. They explicitly acknowledge the court's authority to approve the proposed settlement while allowing their case to advance separately, framing the procedural request as compatible with settlement approval.
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