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Our Investment Management Litigation Group helps the full spectrum of investment management clients safely navigate high-stakes disputes and regulatory investigations. Representing alternative asset managers across the investment spectrum, including private equity funds, credit funds, hedge funds, venture capital funds, real estate funds, hybrid funds, mutual funds and family offices, we bring to each engagement a nuanced understanding of the industry, investment products and emerging priorities of key regulators.

Blackstone Wins Unanimous Appellate Victory in $50 Billion Action Brought by Kentucky Attorney General

Paul, Weiss secured a significant appellate win on behalf of The Blackstone Group and Blackstone Alternative Asset Management (BAAM), when a panel of the Kentucky Court of Appeals unanimously held that the Kentucky attorney general should never have been permitted to intervene in and revive a $50 billion derivative action in which the original plaintiffs were found to lack constitutional standing. The decision marks Paul, Weiss’s second victory in the Kentucky Court of Appeals in connection with this lawsuit, which is seen as a critical test case for the exposure of investment managers to liability relating to underfunded state public pensions, and which has been the subject of substantial media scrutiny.

A group of eight individual Kentucky public pension members purportedly suing derivatively on behalf of the Kentucky Retirement Systems (now KPPA) and Kentucky taxpayers first brought the action in December 2017 in Franklin Circuit Court, Kentucky. The suit alleged that BAAM and two other alternative asset managers, Prisma and PAAMCO, breached their fiduciary duties by unlawfully selling unsuitably risky and expensive custom funds of hedge funds to KPPA in August 2011. It also alleged a civil conspiracy among the investment managers and a number of KPPA trustees, officers and advisors to hide the inappropriate nature of the funds of funds from the Kentucky public. The plaintiffs sought $50 billion in damages, an amount equivalent to the entire KPPA funding deficit accrued over more than two decades, as well as disgorgement of fees. Before filing this complaint, the plaintiffs contacted the then-attorney general of Kentucky, who declined to join the suit.

In 2019, after the trial court allowed the case to proceed, the Kentucky Court of Appeals granted rare writs of prohibition filed by Blackstone and certain other defendants, and held that the trial court was acting outside its jurisdiction to hear the case because the derivative plaintiffs lacked standing under the Kentucky constitution. The plaintiffs appealed to the Kentucky Supreme Court which, in July 2020, agreed with BAAM’s position on the plaintiffs’ lack of standing, and remanded the case to the circuit court with direction to dismiss the complaint.

However, in December 2020, the trial court allowed newly-elected Kentucky Attorney General Daniel Cameron to intervene as a new plaintiff on behalf of the commonwealth of Kentucky while dismissing the original complaint. The original derivative plaintiffs appealed from the dismissal of their complaint, and BAAM and certain other defendants filed cross-appeals to the Kentucky Court of Appeals, arguing that the circuit court lacked authority to permit the attorney general to intervene or to do anything at all other than dismiss the case per the state supreme court’s ruling. Paul, Weiss led the briefing on the cross-appeals on behalf of all defendants.

In its opinion on April 14, the Kentucky Court of Appeals unanimously adopted Blackstone’s position and reasoning on the central issue underlying the cross-appeals: whether the trial court exceeded the Kentucky Supreme Court’s specific mandate to dismiss the complaint. The panel held that “the [circuit] court’s authority is only broad enough to carry out th[e] specific direction” issued by the Kentucky Supreme Court, and efforts to circumvent that order through the filing of additional motions in the trial court were “simply impermissible.” As such, “the trial court exceeded its authority when it entertained various motions to amend and to intervene, and more specifically by permitting the [Attorney General] to intervene.” The Kentucky Court of Appeals accordingly affirmed only the trial court’s dismissal of the original complaint, and otherwise vacated the orders challenged in the cross-appeals, including the order allowing the Kentucky attorney general to intervene.

The Paul, Weiss team includes litigation partners Brad Karp, Lorin Reisner, Andrew Ehrlich and Brette Tannenbaum; and corporate partner Udi Grofman.

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