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Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every

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Speaker 1: day we bring you insight and analysis into the most

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Speaker 1: important legal news of the day. You can find more

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Speaker 1: episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud

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Speaker 1: and on Bloomberg dot com. Slash Podcasts is a lawsuit

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Speaker 1: against KKR, Blackstone Group and their founders a preview of

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Speaker 1: new legal challenges for managers of alternative investments. The lawsuit

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Speaker 1: was filed on behalf of state taxpayers and the Kentucky

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Speaker 1: Retirement Systems pension plans. It alleges at the big asset

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Speaker 1: managers misrepresented expensive and risky black box bundles of hedge

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Speaker 1: funds as safe ways to generate high returns, but those

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Speaker 1: investments contributed to the pension systems virtual insolvency while the

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Speaker 1: managers pocketed excessive fees, according to the plaintiffs. My guest

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Speaker 1: is Peter Handing, a professor at Wayne State University Law School.

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Speaker 1: Peter tell us about the allegations that the fund managers

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Speaker 1: were negligent and breached their fiduciary duties, Well, what the

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Speaker 1: what the case is really focusing on here with regard

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Speaker 1: to the hedge fund managers, and of course these are

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Speaker 1: some of the biggest names out there. Kkr UM Blackstone

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Speaker 1: is that what they sold to the Kentucky Pension Fund

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Speaker 1: was in fact a terribly underperforming asset, or this was

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Speaker 1: a fund of funds. So they invested in other hedge

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Speaker 1: funds that they sold one that was badly underperforming, and

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Speaker 1: by charging excessive fees that they essentially misled. They took

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Speaker 1: advantage of the Kentucky Pension Fund and the trustees by

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Speaker 1: promising that they could help make up for some shortfalls

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Speaker 1: that appeared in this fund and frankly and just about

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Speaker 1: every other pension fund after the financial crisis in two

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Speaker 1: thousand eight and two thousand nine. So it's a shot

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Speaker 1: at them saying that you promised us the moon if

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Speaker 1: you will stable value appreciating fund that in fact has

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Speaker 1: badly underperformed the market. They said they promised them absolute returns.

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Speaker 1: The complaint focuses on a one point two billion dollar

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Speaker 1: investment on one day in August where three hedge fund

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Speaker 1: sellers sold three different black spot black box hedge fund

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Speaker 1: vehicles had which the plaintiffs claim, we're risky, toxic investments.

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Speaker 1: What do the plaintiffs have to prove here, Well, this

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Speaker 1: is going to be a difficult case for them, because, uh,

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Speaker 1: they're going to first have to prove that there were

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Speaker 1: misstatements or at least that the Kentucky trustees were misled

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Speaker 1: um and them that the investment didn't perform as promised. Now,

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Speaker 1: these are very sophisticated hedge funds, and when you look

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Speaker 1: into the fine print here, the six point type, Uh,

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Speaker 1: they put in lots of disclaimers there that say that,

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Speaker 1: you know, the standard one that we hear all the

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Speaker 1: time that we hear on ads on Bloomberg, past performance

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Speaker 1: is no guarantee of future returns, and so it's going

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Speaker 1: to be hard to establish that level of negligence or

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Speaker 1: even and that's also there's this claim here of breach

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Speaker 1: of a fiduciary duty, and that's really going to be

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Speaker 1: what's necessary to establish have any hope of establishing liability.

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Speaker 1: There are lots of procedural hurdles that are going to

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Speaker 1: make this a difficult case to win. The defendants have

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Speaker 1: said that the allegations are baseless. What's interesting is that

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Speaker 1: a spokesman for Blackstone said the black Stone Fund reference

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Speaker 1: in the complaint delivered to the Kentucky Employees Retirement System

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Speaker 1: positive returns out performing relevant benchmarks. Are they going to

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Speaker 1: try to prove that in emotion to dismiss well, Um, yeah,

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Speaker 1: I actually an emotion dismissed. I suspect it will focus

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Speaker 1: more on UH not not the underlying performance of the fund.

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Speaker 1: That's something that you would usually fight out at a

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Speaker 1: later stage, but more what is the underlying claim here?

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Speaker 1: That this is filed in the Kentucky State Court in

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Speaker 1: Franklin County, UH, and the claim in the complaint is

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Speaker 1: that this is only alleging violations of Kentucky law. But

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Speaker 1: this sounds an awful lot like a federal UH securities

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Speaker 1: fraud case under Rule ten B five, that we were

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Speaker 1: misled breach of a fiduciary duty. That the standard claims

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Speaker 1: that are made in the securities case. And if that

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Speaker 1: is in fact the case, this could be shifted over

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Speaker 1: to the federal court and then, unfortunately for the state,

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Speaker 1: rather quickly dismissed, at least with regard to the hedge

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Speaker 1: fund manager. So I think that first hurdle is not

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Speaker 1: so much the that we performed well, but you're in

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Speaker 1: the wrong court and you're trying to drag us into

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Speaker 1: the wrong place. We deserve to be in federal court.

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Speaker 1: Or is that because Kentucky state law provides more latitude

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Speaker 1: than federal securities law to hold people in control personally

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Speaker 1: liable for the actions of the entities they supervise. So

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Speaker 1: the plaintiffs wanted to sue in state court. Certainly that's

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Speaker 1: why they want to be in state court. And also too,

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Speaker 1: there's you know that litigators understand that there's a little

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Speaker 1: bit of a home court advantage um that the judges

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Speaker 1: in Kentucky are participants in this pension fund, but they

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Speaker 1: also have the benefit of being able to bring a

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Speaker 1: negligence claim, which is usually not permitted There are some

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Speaker 1: narrow exceptions there, but usually not permitted for a claim

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Speaker 1: under federal law. So the state wants this or the

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Speaker 1: plaintiffs want this in state court so that they can

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Speaker 1: at least preserve their negligence claim and perhaps also the

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Speaker 1: breach of a doucier duty claim under state law, so

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Speaker 1: that they want to stay as far out of federal

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Speaker 1: court as possible because there's a real risk that their

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Speaker 1: claim will be dismissed. Peter. Critics of hedge funds have

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Speaker 1: questioned whether the fiduciary duty under federal pension law is

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Speaker 1: being met in the case of funds of funds which

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Speaker 1: charge investors fees in addition to those collected by the

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Speaker 1: underlying funds and provide limited disclosure. According to the critics,

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Speaker 1: what's your take on that, Well, this is interesting that

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Speaker 1: again you know that they, the plaintiffs here, have avoided

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Speaker 1: the federal uh fiduciary duty rule for pension investments. But

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Speaker 1: it's the same basic thrust here that any type of

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Speaker 1: investment adviser must put the client's interests first. And one

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Speaker 1: way to show that the client's interests have not been

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Speaker 1: put first is establishing that there are excessive fees. And

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Speaker 1: of course we know in the hedge fund universe, um,

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Speaker 1: you know that the standard was two and the assets

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Speaker 1: plus of the profits were being taken um and a

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Speaker 1: fund of funds that could even be multiplied. So this

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Speaker 1: will be interesting if the case can advance. It will

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Speaker 1: be interesting as far as whether it might require the

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Speaker 1: hedge funds to start limiting what they do when they

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Speaker 1: deal with pension funds, or perhaps that they will ignore

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Speaker 1: them and drop them and go with other types of investors,

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Speaker 1: saying we don't want to run. We don't want to

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Speaker 1: run the risk of running a foul of the fiduciary

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Speaker 1: duty rule. About thirty seconds here, Peter, is it likely

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Speaker 1: that this lawsuit will lead to others or is this

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Speaker 1: more of a stand alone Certainly I could see if

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Speaker 1: they can survive the preliminary efforts to throw it out,

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Speaker 1: it could become a template in other states, the key

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Speaker 1: being focused on your state law rather than federal laws.

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Speaker 1: Thank you, Peter for being one of our other guests

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Speaker 1: all year. That's Professor Peter Henning of Wayne State University

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Speaker 1: Law School. Doug Jones is now officially the first Alabama

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Speaker 1: Democrat elected to the Senate in a quarter century. Republican

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Speaker 1: Roy Moore refused to concede his laws to Jones and

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Speaker 1: filed the last ditch lawsuit hours before the certification of

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Speaker 1: the election, claiming voter fraud. A judge denied his request

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Speaker 1: to stop the election certification, and Alabama Secretary of State

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Speaker 1: John Merrill said he's confident it was a free and

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Speaker 1: fair election. We take each in every incident seriously. We

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Speaker 1: investigate them if it's warranted. We want to see those

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Speaker 1: people indicted. We want to see them prosecuted to the

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Speaker 1: fullest extent of the law. Jones will be sworn in

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Speaker 1: on January three, joining me as Richard Brafald, professor at

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Speaker 1: Columbia Law School and an expert on election law. Rich

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Speaker 1: tell us about the substance of Moore's lawsuit, Well, I

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Speaker 1: think he had anything that. Uh, there were predictions were

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Speaker 1: that he was going to win, and he didn't win,

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Speaker 1: so there must be something wrong. Um, that's what sort

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Speaker 1: of one that sounds very legal. And the other argument,

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Speaker 1: which comes a little closer, U where there were a

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Speaker 1: series of that unusually high African American voter turnout in

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Speaker 1: certain areas and the presence of of organizers, some of

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Speaker 1: whom might have been out of state, Uh, somehow indicated

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Speaker 1: or that the election was painter or that or tainted

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Speaker 1: the election in some sense. He was saying there was

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Speaker 1: much higher turnout among African Americans and that must mean

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Speaker 1: there was fraud. And on what basis did the judge dismiss?

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Speaker 1: Morris complained that it was outrageous. Well, actually, the Alabama

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Speaker 1: law provides actually very tightly limits the ability to actually

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Speaker 1: challenge election results. So the judge basis that he had

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Speaker 1: no jurisdiction under the Alabama code, which basically says that

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Speaker 1: there's no jurisdiction to hear election challenges unless there's specific authorization,

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Speaker 1: and there isn't one for us a seed, so he

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Speaker 1: didn't so much refute the challenges as saying there's nothing

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Speaker 1: here for me to do. So the Secretary of State

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Speaker 1: in Alabama said that there could be an election contest

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Speaker 1: by a recount, that more could find for a recount

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Speaker 1: if he chose to do that, he has to do

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Speaker 1: that within forty eight hours of the confirmation. So what

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Speaker 1: are the chances of that doing any good? It was

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Speaker 1: aye split, So sorry for the two possibilities. One is

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Speaker 1: there is Alabama, like many other states, has provisions for

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Speaker 1: an automatic recount if the margin of victory is relatively narrow.

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Speaker 1: This marginal victory was much bigger than that, so the

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Speaker 1: automatic recount option did not exist. There is provision in

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Speaker 1: Alabama law for a recount if the Canada that's going

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Speaker 1: to pay for it. It's not clear that provision actually

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Speaker 1: applies to federal election as opposed to state elections. Although

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Speaker 1: the Secretary of State has been saying this uh, many

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Speaker 1: people read the statute is saying that even that option

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Speaker 1: is not available in this context. So if he were

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Speaker 1: to secre recount, it's not even clear he would able

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Speaker 1: to get it. But if you worry, you'd have to

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Speaker 1: pay for it, have to do it right away. So

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Speaker 1: it looks like this is a done deal. Then I mean,

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Speaker 1: I think we're okay. Let's turn to another state. The

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Speaker 1: tide race for Virginia's House of Delegates is turning into

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Speaker 1: a mini bush Figore. Are there some kinds of systemic

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Speaker 1: problems with our election systems that we're having these kinds

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Speaker 1: of of problems. Well, I have to say yes and no. Yes,

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Speaker 1: there are serious systemic problems in voting technology or or

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Speaker 1: vulnerability to hacking old fashioned systems. On the other hand,

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Speaker 1: sometimes you just get really with really really really really

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Speaker 1: close elections. Even very good systems may have trouble getting

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Speaker 1: to finality when you actually get down to the stage

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Speaker 1: of certain ballots which are unclear, and as I understand it, Uh,

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Speaker 1: they're basically down to fighting about one ballot in Virginia.

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Speaker 1: If it goes one way, there's a clear winner. If

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Speaker 1: it goes the other way, the races tied. Uh. And

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Speaker 1: having looked at the pictures of the ballot or having

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Speaker 1: you know, I've seen it described. You can understand why

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Speaker 1: in trying to part the intent of the voter, who

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Speaker 1: we cannot ask because we don't know who the voter is. UM,

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Speaker 1: and we wouldn't ask anyway, UM if unclear, But no

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Speaker 1: hanging Chad's no hang chat. This is not a case

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Speaker 1: where technology failed. I mean you could say technology failed

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Speaker 1: in that it created the possibility of a ballot that

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Speaker 1: could be read, uh, either of two ways. This was

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Speaker 1: a voter who clearly at some point marked both of

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Speaker 1: the candidates and then put a line on one of them,

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Speaker 1: and it's not clear what the alignemant, cross out or emphasis.

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Speaker 1: So rich. There has been so much talk this past

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Speaker 1: year batt election fraudet President Trump talking about it before

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Speaker 1: the election. You have American intelligence and law enforcement officials

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Speaker 1: concluding that Russia did attempt to disrupt the campaign. What

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Speaker 1: does this due to the public's belief in the integrity

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Speaker 1: of their vote. Well, I think the public, you know,

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Speaker 1: it's rightfully nervous. But it's worth separating out the two

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Speaker 1: kinds of issues that you just put together. One is

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Speaker 1: this notion of fraud, which most people think of as

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Speaker 1: people who aren't entitled to vote. Voting or maybe voting

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Speaker 1: more than once, the so called in person voter fraud

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Speaker 1: that hasn't studied a lot, and there's all this next

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Speaker 1: to no evidence of it. There might be tiny, tiny

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Speaker 1: amounts relatives to the millions of votes their cast that's

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Speaker 1: gotten a lot of the law enforcement attention, the Trump

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Speaker 1: administration's attention. The other is the kind of problem of

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Speaker 1: potential hacking, of potential unseen disruption of ballots or the

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Speaker 1: ballot counting process, especially as we move more to automatic

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Speaker 1: ballot counting, that is harder to know that it's happening,

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Speaker 1: and it's it's harder to protect against. So I think

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Speaker 1: it's sort of worth keeping that. If we are going

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Speaker 1: to start focusing on ballot security, and we should, I

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Speaker 1: think it's going to be more about both misconduct by

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Speaker 1: election officials, which sometimes happens, and especially the integrity of

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Speaker 1: the balloting system, the way in which ballots our votes

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Speaker 1: are tabulated and stored, especially as they had more increasingly

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Speaker 1: stored electronically, rather than the so called voting front problem

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Speaker 1: of unqualified people showing up or showing up more than once.

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Speaker 1: So we have about thirty seconds here, So very quickly

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Speaker 1: do you see more challenges to election results after the elections.

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Speaker 1: It depends on how close the outcomes are. If we

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Speaker 1: have a lot of close races and the results matter,

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Speaker 1: we may very well see more often. I mean, the

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Speaker 1: thing about the Virginia one is the control of the

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Speaker 1: Virginia legislature turns on it um, and so that one

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Speaker 1: really matters. The More race was a close race. He

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Speaker 1: lost by a pretty wide enough Martina. But we will

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Speaker 1: We'll have to leave it there, but we will have

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Speaker 1: picked up with this next year, I'm sure. Rich that's

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Speaker 1: Professor Richard Rafault of Columbia Law School. Thanks for listening

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Speaker 1: to the Bloomberg Law Podcast. You can subscribe and listen

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Speaker 1: to the show on Apple podcast, SoundCloud, and on Bloomberg

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Speaker 1: dot com slash podcast. I'm June. Also, this is Bloomberg.

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Speaker 1: M m hm