Kentucky Retirement System Accused of Illegal Money Grab

Matt Reynolds–A small San Francisco investment firm claims Kentucky is trying to unlawfully wrest control of funds the firm manages in the state’s troubled public pension system.

Bay Hills Capital, a firm from the West Coast with eight employees, some of whom are part-time, filed a lawsuitMonday asking the Delaware Chancery Court to prevent the Kentucky Retirement Systems Pension Fund from seizing four investment funds.

The firm claims Kentucky has justified moving the funds in-house by manufacturing claims of breaches against the investment advisors. The state wants to take control of the four funds so it can save $20 million in future management fees and benefit from investment returns, according to the complaint.

Lead attorneys Thompson Bayliss and David Seal of the Wilmington firm Abrams & Bayliss filed the lawsuit on Bay Hill’s behalf. It seeks a declaration that Bay Hills has not breached its agreements to manage the funds and that a Feb. 8 notice of removal does not pass legal muster.

Seal said Tuesday he could not comment on the lawsuit. Kentucky Retirement Systems did not immediately respond to a request for comment.

Kentucky’s $16 billion public pension fund is in bad shape. Two decades ago, the plans were fully funded but have since been beset by mismanagement and scandals. The pension system now has an actuarial deficit of $27 billion and is “teetering on the edge of insolvency,” according to the lawsuit.

Bay Hills says the four funds it manages rose from nothing to become “massively profitable” for the pension fund, driven by the firm’s hard work. But officials at the Kentucky Retirement Systems Pension Fund are under pressure to increase returns, according to the lawsuit, and decided to do away with investment advisors like Bay Hills to secure future investment returns.

Kentucky does not have grounds to remove Bay Hills from the funds but served a notice of removal anyway, the firm claims. The state pension fund allegedly attempted to seize control of the funds by claiming that Bay Hills had replaced an auditor without its approval, manipulated overhead expenses, and acted with gross negligence.

Bay Hills says that last allegation was down to “a simple spreadsheet error” that could have resulted in paying carried interest to certain funds earlier than it was due. It corrected the error and paid back the relevant amounts, according to the complaint.

When the accusations failed to hold water, Bay Hills says the retirement fund canceled the first notice of withdrawal. But it tried again in February, this time allegedly claiming that Bay Hills is in breach of the limited partnership agreements because the firm was “lukewarm” and did not “enthusiastically” endorse the dissolution of another fund under its control.

The complaint states that despite Bay Hills’ “extensive and good-faith efforts to resolve the parties’ disputes,” the Kentucky Retirement Systems Pension Fund “seems bent on seizing control of the funds.”

“It has refused to withdraw the second removal notice, which purports to become effective within 60 days thereof, i.e., by April 9, 2018. KRS thus has left plaintiffs with no choice but to seek relief from the court,” the filing states.

On Monday, Kentucky lawmakers passed a budget that would provide close to $3.3 billion for the pension fund, according to the Courier-Journal, which reported that the funds are weighed down by $43 billion in liabilities.

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