WEBVTT - KKR, Blackstone Targeted in New Kentucky Suit (Audio)

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<v Speaker 1>Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every

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<v Speaker 1>day we bring you insight and analysis into the most

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<v Speaker 1>important legal news of the day. You can find more

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<v Speaker 1>episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud

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<v Speaker 1>and on Bloomberg dot com. Slash Podcasts is a lawsuit

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<v Speaker 1>against KKR, Blackstone Group and their founders a preview of

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<v Speaker 1>new legal challenges for managers of alternative investments. The lawsuit

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<v Speaker 1>was filed on behalf of state taxpayers and the Kentucky

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<v Speaker 1>Retirement Systems pension plans. It alleges at the big asset

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<v Speaker 1>managers misrepresented expensive and risky black box bundles of hedge

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<v Speaker 1>funds as safe ways to generate high returns, but those

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<v Speaker 1>investments contributed to the pension systems virtual insolvency while the

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<v Speaker 1>managers pocketed excessive fees, according to the plaintiffs. My guest

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<v Speaker 1>is Peter Handing, a professor at Wayne State University Law School.

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<v Speaker 1>Peter tell us about the allegations that the fund managers

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<v Speaker 1>were negligent and breached their fiduciary duties, Well, what the

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<v Speaker 1>what the case is really focusing on here with regard

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<v Speaker 1>to the hedge fund managers, and of course these are

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<v Speaker 1>some of the biggest names out there. Kkr UM Blackstone

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<v Speaker 1>is that what they sold to the Kentucky Pension Fund

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<v Speaker 1>was in fact a terribly underperforming asset, or this was

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<v Speaker 1>a fund of funds. So they invested in other hedge

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<v Speaker 1>funds that they sold one that was badly underperforming, and

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<v Speaker 1>by charging excessive fees that they essentially misled. They took

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<v Speaker 1>advantage of the Kentucky Pension Fund and the trustees by

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<v Speaker 1>promising that they could help make up for some shortfalls

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<v Speaker 1>that appeared in this fund and frankly and just about

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<v Speaker 1>every other pension fund after the financial crisis in two

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<v Speaker 1>thousand eight and two thousand nine. So it's a shot

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<v Speaker 1>at them saying that you promised us the moon if

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<v Speaker 1>you will stable value appreciating fund that in fact has

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<v Speaker 1>badly underperformed the market. They said they promised them absolute returns.

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<v Speaker 1>The complaint focuses on a one point two billion dollar

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<v Speaker 1>investment on one day in August where three hedge fund

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<v Speaker 1>sellers sold three different black spot black box hedge fund

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

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<v Speaker 1>What do the plaintiffs have to prove here, Well, this

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<v Speaker 1>is going to be a difficult case for them, because, uh,

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<v Speaker 1>they're going to first have to prove that there were

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<v Speaker 1>misstatements or at least that the Kentucky trustees were misled

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

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<v Speaker 1>these are very sophisticated hedge funds, and when you look

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<v Speaker 1>into the fine print here, the six point type, Uh,

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<v Speaker 1>they put in lots of disclaimers there that say that,

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<v Speaker 1>you know, the standard one that we hear all the

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<v Speaker 1>time that we hear on ads on Bloomberg, past performance

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<v Speaker 1>is no guarantee of future returns, and so it's going

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<v Speaker 1>to be hard to establish that level of negligence or

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<v Speaker 1>even and that's also there's this claim here of breach

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<v Speaker 1>of a fiduciary duty, and that's really going to be

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<v Speaker 1>what's necessary to establish have any hope of establishing liability.

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<v Speaker 1>There are lots of procedural hurdles that are going to

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<v Speaker 1>make this a difficult case to win. The defendants have

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<v Speaker 1>said that the allegations are baseless. What's interesting is that

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<v Speaker 1>a spokesman for Blackstone said the black Stone Fund reference

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<v Speaker 1>in the complaint delivered to the Kentucky Employees Retirement System

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<v Speaker 1>positive returns out performing relevant benchmarks. Are they going to

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<v Speaker 1>try to prove that in emotion to dismiss well, Um, yeah,

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<v Speaker 1>I actually an emotion dismissed. I suspect it will focus

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<v Speaker 1>more on UH not not the underlying performance of the fund.

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<v Speaker 1>That's something that you would usually fight out at a

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<v Speaker 1>later stage, but more what is the underlying claim here?

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<v Speaker 1>That this is filed in the Kentucky State Court in

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<v Speaker 1>Franklin County, UH, and the claim in the complaint is

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<v Speaker 1>that this is only alleging violations of Kentucky law. But

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<v Speaker 1>this sounds an awful lot like a federal UH securities

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<v Speaker 1>fraud case under Rule ten B five, that we were

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<v Speaker 1>misled breach of a fiduciary duty. That the standard claims

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<v Speaker 1>that are made in the securities case. And if that

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<v Speaker 1>is in fact the case, this could be shifted over

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<v Speaker 1>to the federal court and then, unfortunately for the state,

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<v Speaker 1>rather quickly dismissed, at least with regard to the hedge

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<v Speaker 1>fund manager. So I think that first hurdle is not

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<v Speaker 1>so much the that we performed well, but you're in

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<v Speaker 1>the wrong court and you're trying to drag us into

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<v Speaker 1>the wrong place. We deserve to be in federal court.

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<v Speaker 1>Or is that because Kentucky state law provides more latitude

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<v Speaker 1>than federal securities law to hold people in control personally

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<v Speaker 1>liable for the actions of the entities they supervise. So

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<v Speaker 1>the plaintiffs wanted to sue in state court. Certainly that's

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<v Speaker 1>why they want to be in state court. And also too,

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<v Speaker 1>there's you know that litigators understand that there's a little

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<v Speaker 1>bit of a home court advantage um that the judges

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<v Speaker 1>in Kentucky are participants in this pension fund, but they

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<v Speaker 1>also have the benefit of being able to bring a

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<v Speaker 1>negligence claim, which is usually not permitted There are some

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<v Speaker 1>narrow exceptions there, but usually not permitted for a claim

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<v Speaker 1>under federal law. So the state wants this or the

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<v Speaker 1>plaintiffs want this in state court so that they can

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<v Speaker 1>at least preserve their negligence claim and perhaps also the

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<v Speaker 1>breach of a doucier duty claim under state law, so

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<v Speaker 1>that they want to stay as far out of federal

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<v Speaker 1>court as possible because there's a real risk that their

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<v Speaker 1>claim will be dismissed. Peter. Critics of hedge funds have

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<v Speaker 1>questioned whether the fiduciary duty under federal pension law is

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<v Speaker 1>being met in the case of funds of funds which

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<v Speaker 1>charge investors fees in addition to those collected by the

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<v Speaker 1>underlying funds and provide limited disclosure. According to the critics,

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<v Speaker 1>what's your take on that, Well, this is interesting that

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<v Speaker 1>again you know that they, the plaintiffs here, have avoided

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<v Speaker 1>the federal uh fiduciary duty rule for pension investments. But

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<v Speaker 1>it's the same basic thrust here that any type of

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<v Speaker 1>investment adviser must put the client's interests first. And one

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<v Speaker 1>way to show that the client's interests have not been

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<v Speaker 1>put first is establishing that there are excessive fees. And

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<v Speaker 1>of course we know in the hedge fund universe, um,

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<v Speaker 1>you know that the standard was two and the assets

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<v Speaker 1>plus of the profits were being taken um and a

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<v Speaker 1>fund of funds that could even be multiplied. So this

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<v Speaker 1>will be interesting if the case can advance. It will

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<v Speaker 1>be interesting as far as whether it might require the

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<v Speaker 1>hedge funds to start limiting what they do when they

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<v Speaker 1>deal with pension funds, or perhaps that they will ignore

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<v Speaker 1>them and drop them and go with other types of investors,

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<v Speaker 1>saying we don't want to run. We don't want to

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<v Speaker 1>run the risk of running a foul of the fiduciary

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<v Speaker 1>duty rule. About thirty seconds here, Peter, is it likely

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<v Speaker 1>that this lawsuit will lead to others or is this

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<v Speaker 1>more of a stand alone Certainly I could see if

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<v Speaker 1>they can survive the preliminary efforts to throw it out,

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<v Speaker 1>it could become a template in other states, the key

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<v Speaker 1>being focused on your state law rather than federal laws.

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<v Speaker 1>Thank you, Peter for being one of our other guests

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<v Speaker 1>all year. That's Professor Peter Henning of Wayne State University

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<v Speaker 1>Law School. Doug Jones is now officially the first Alabama

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<v Speaker 1>Democrat elected to the Senate in a quarter century. Republican

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<v Speaker 1>Roy Moore refused to concede his laws to Jones and

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<v Speaker 1>filed the last ditch lawsuit hours before the certification of

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<v Speaker 1>the election, claiming voter fraud. A judge denied his request

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<v Speaker 1>to stop the election certification, and Alabama Secretary of State

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<v Speaker 1>John Merrill said he's confident it was a free and

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<v Speaker 1>fair election. We take each in every incident seriously. We

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<v Speaker 1>investigate them if it's warranted. We want to see those

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<v Speaker 1>people indicted. We want to see them prosecuted to the

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<v Speaker 1>fullest extent of the law. Jones will be sworn in

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<v Speaker 1>on January three, joining me as Richard Brafald, professor at

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<v Speaker 1>Columbia Law School and an expert on election law. Rich

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<v Speaker 1>tell us about the substance of Moore's lawsuit, Well, I

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<v Speaker 1>think he had anything that. Uh, there were predictions were

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<v Speaker 1>that he was going to win, and he didn't win,

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

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<v Speaker 1>of one that sounds very legal. And the other argument,

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<v Speaker 1>which comes a little closer, U where there were a

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<v Speaker 1>series of that unusually high African American voter turnout in

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<v Speaker 1>certain areas and the presence of of organizers, some of

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<v Speaker 1>whom might have been out of state, Uh, somehow indicated

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<v Speaker 1>or that the election was painter or that or tainted

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<v Speaker 1>the election in some sense. He was saying there was

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<v Speaker 1>much higher turnout among African Americans and that must mean

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<v Speaker 1>there was fraud. And on what basis did the judge dismiss?

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<v Speaker 1>Morris complained that it was outrageous. Well, actually, the Alabama

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<v Speaker 1>law provides actually very tightly limits the ability to actually

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<v Speaker 1>challenge election results. So the judge basis that he had

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<v Speaker 1>no jurisdiction under the Alabama code, which basically says that

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<v Speaker 1>there's no jurisdiction to hear election challenges unless there's specific authorization,

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<v Speaker 1>and there isn't one for us a seed, so he

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<v Speaker 1>didn't so much refute the challenges as saying there's nothing

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<v Speaker 1>here for me to do. So the Secretary of State

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<v Speaker 1>in Alabama said that there could be an election contest

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<v Speaker 1>by a recount, that more could find for a recount

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<v Speaker 1>if he chose to do that, he has to do

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<v Speaker 1>that within forty eight hours of the confirmation. So what

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<v Speaker 1>are the chances of that doing any good? It was

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<v Speaker 1>aye split, So sorry for the two possibilities. One is

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<v Speaker 1>there is Alabama, like many other states, has provisions for

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<v Speaker 1>an automatic recount if the margin of victory is relatively narrow.

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<v Speaker 1>This marginal victory was much bigger than that, so the

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<v Speaker 1>automatic recount option did not exist. There is provision in

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<v Speaker 1>Alabama law for a recount if the Canada that's going

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<v Speaker 1>to pay for it. It's not clear that provision actually

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<v Speaker 1>applies to federal election as opposed to state elections. Although

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<v Speaker 1>the Secretary of State has been saying this uh, many

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<v Speaker 1>people read the statute is saying that even that option

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<v Speaker 1>is not available in this context. So if he were

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<v Speaker 1>to secre recount, it's not even clear he would able

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<v Speaker 1>to get it. But if you worry, you'd have to

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<v Speaker 1>pay for it, have to do it right away. So

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<v Speaker 1>it looks like this is a done deal. Then I mean,

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

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<v Speaker 1>tide race for Virginia's House of Delegates is turning into

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<v Speaker 1>a mini bush Figore. Are there some kinds of systemic

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<v Speaker 1>problems with our election systems that we're having these kinds

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<v Speaker 1>of of problems. Well, I have to say yes and no. Yes,

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<v Speaker 1>there are serious systemic problems in voting technology or or

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<v Speaker 1>vulnerability to hacking old fashioned systems. On the other hand,

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<v Speaker 1>sometimes you just get really with really really really really

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<v Speaker 1>close elections. Even very good systems may have trouble getting

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<v Speaker 1>to finality when you actually get down to the stage

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<v Speaker 1>of certain ballots which are unclear, and as I understand it, Uh,

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<v Speaker 1>they're basically down to fighting about one ballot in Virginia.

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<v Speaker 1>If it goes one way, there's a clear winner. If

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<v Speaker 1>it goes the other way, the races tied. Uh. And

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<v Speaker 1>having looked at the pictures of the ballot or having

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

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<v Speaker 1>in trying to part the intent of the voter, who

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

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<v Speaker 1>and we wouldn't ask anyway, UM if unclear, But no

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<v Speaker 1>hanging Chad's no hang chat. This is not a case

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<v Speaker 1>where technology failed. I mean you could say technology failed

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<v Speaker 1>in that it created the possibility of a ballot that

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<v Speaker 1>could be read, uh, either of two ways. This was

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<v Speaker 1>a voter who clearly at some point marked both of

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<v Speaker 1>the candidates and then put a line on one of them,

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

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<v Speaker 1>So rich. There has been so much talk this past

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<v Speaker 1>year batt election fraudet President Trump talking about it before

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<v Speaker 1>the election. You have American intelligence and law enforcement officials

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<v Speaker 1>concluding that Russia did attempt to disrupt the campaign. What

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<v Speaker 1>does this due to the public's belief in the integrity

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<v Speaker 1>of their vote. Well, I think the public, you know,

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<v Speaker 1>it's rightfully nervous. But it's worth separating out the two

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<v Speaker 1>kinds of issues that you just put together. One is

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<v Speaker 1>this notion of fraud, which most people think of as

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<v Speaker 1>people who aren't entitled to vote. Voting or maybe voting

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<v Speaker 1>more than once, the so called in person voter fraud

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

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<v Speaker 1>to no evidence of it. There might be tiny, tiny

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<v Speaker 1>amounts relatives to the millions of votes their cast that's

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<v Speaker 1>gotten a lot of the law enforcement attention, the Trump

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<v Speaker 1>administration's attention. The other is the kind of problem of

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<v Speaker 1>potential hacking, of potential unseen disruption of ballots or the

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<v Speaker 1>ballot counting process, especially as we move more to automatic

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<v Speaker 1>ballot counting, that is harder to know that it's happening,

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<v Speaker 1>and it's it's harder to protect against. So I think

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<v Speaker 1>it's sort of worth keeping that. If we are going

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<v Speaker 1>to start focusing on ballot security, and we should, I

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<v Speaker 1>think it's going to be more about both misconduct by

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<v Speaker 1>election officials, which sometimes happens, and especially the integrity of

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<v Speaker 1>the balloting system, the way in which ballots our votes

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<v Speaker 1>are tabulated and stored, especially as they had more increasingly

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<v Speaker 1>stored electronically, rather than the so called voting front problem

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<v Speaker 1>of unqualified people showing up or showing up more than once.

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<v Speaker 1>So we have about thirty seconds here, So very quickly

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<v Speaker 1>do you see more challenges to election results after the elections.

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<v Speaker 1>It depends on how close the outcomes are. If we

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<v Speaker 1>have a lot of close races and the results matter,

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<v Speaker 1>we may very well see more often. I mean, the

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<v Speaker 1>thing about the Virginia one is the control of the

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<v Speaker 1>Virginia legislature turns on it um, and so that one

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<v Speaker 1>really matters. The More race was a close race. He

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<v Speaker 1>lost by a pretty wide enough Martina. But we will

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<v Speaker 1>We'll have to leave it there, but we will have

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

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<v Speaker 1>Professor Richard Rafault of Columbia Law School. Thanks for listening

0:14:50.440 --> 0:14:53.720
<v Speaker 1>to the Bloomberg Law Podcast. You can subscribe and listen

0:14:53.760 --> 0:14:57.280
<v Speaker 1>to the show on Apple podcast, SoundCloud, and on Bloomberg

0:14:57.400 --> 0:15:02.120
<v Speaker 1>dot com slash podcast. I'm June. Also, this is Bloomberg.

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<v Speaker 1>M m hm