Blackstone & Others Sued for Faulty Investment Advice to KRS

KKR & Co. L.P. KKR, The Blackstone Group L.P. BX and PAAMCO along with their founders have been accused of violating their fiduciary duty to the Kentucky Retirement Systems pension fund by giving the fund wrong investment advice.

Recently, a few Kentucky state workers filed a lawsuit against the three investment groups in Franklin Circuit Court. The lawsuit seeks monetary damages from these firms for losses incurred by KRS in investments recommended by them. The defendants also include some former or current KRS board members, and, other officials and consulting firms that gave KRS investment advice.

Notably, in 2011, these groups recommended KRS to invest nearly $1.2 billion in three “black box” hedge funds. The funds were complex and high-risk hedge funds that carried high fees. KRS was not informed about the high risk involved in the investment and hence was unaware of how its money was being managed.

The lawsuit claims that the hedge funds had promised high rates of returns to KRS, which they ultimately failed to deliver. As a result, KRS had to suffer huge losses.

In 2001, the Kentucky pension fund, which provides health and retirement benefits to almost 360,000 state workers was fully funded.

However, due to a few of these poor investment decisions, the pension fund is now regarded as one of the worst-funded in the nation. The fund’s largest pension plan now has only 13.6% of the money it needs to pay future benefits to its workers.

According to a summary of the lawsuit, if the trustees of KRS had avoided such high-risk investments and instead invested the money in simpler index funds with low risk, the Kentucky pension fund would have been a lot better off.

The lawsuit claims that even the board members of the pension fund breached their fiduciary duty. They were faulty while calculating the assumed rate of return on the investments that they were making.

However, according to Blackstone and KKR, the accusations are “baseless”.

Matt Anderson, a spokesman for Blackstone, said, "The Blackstone fund referenced in the complaint delivered to the Kentucky Employees Retirement System positive returns outperforming relevant benchmarks."

Additionally, KKR said in a statement, "We take our fiduciary duty very seriously and believe that the allegations about our firm are meritless, misplaced and misleading."

However, PAAMCO did not make any comments regarding the same and officials of KRS could not be reached for any comment.

Currently, KKR and Blackstone carry a Zacks Rank #3 (Hold).

A couple of better-ranked stocks from the finance space are Legg Mason, Inc. LM and SVB Financial Group SIVB.

Legg Mason’s earnings estimates for the current fiscal year have been revised 3.6% upward over the last 60 days. Also, its shares have gained 40.9% in a year’s time. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SVB Financial’s earnings estimates for the current year have been revised 1.2% upward over the last 60 days. Also, its shares have gained 37.8% in a year’s time. It has a Zacks Rank #2 (Buy).

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