Apparently Kentucky Retirement Systems, the pension fund for the Bluegrass State, is unfamiliar with Mark Twain’s saying, “Never pick a fight with people who buy ink by the barrel,” which should be updated to include, “Or generate bytes by the server-load,” particularly when the law is not on their side

Kentucky Retirement Systems sent us a nastygram that we’ve embedded at the end of this post, along with the reply from our lawyer, Jim Moody. Kentucky Retirement Systems’ in-house lawyer is threatening us with all sorts of unnamed horrors if we didn’t take down limited partnership agreements that came from them super pronto, with a drop-dead date of last Friday…now that they’ve been up nearly a full three years.

It’s a pity that we had to rouse an attorney of Moody’s caliber to deal with such a half-baked ultimatum. Moody elected to give a parsimonious reply, focusing on what ought in and of itself be enough to demonstrate to them that they haven’t thought this through. Naked Capitalism’s sources and our rights to publish these documents are protected by both New York’s tough shield laws and the First Amendment, as demonstrated by relevant precedents.

Kentucky Retirement Systems is a contender both the title of the most corrupt and the most incompetent public pension fund in the US. It’s also the most deeply underfunded, due in no small measure to its dodgy relationships with placement agents, which in turn appear to have played a role in Kentucky Retirement Systems having invested in private equity and hedge fund dogs.

More recently, it became a laughingstock among public pension funds due to a 2016 row where the new governor attempted to remove the executive director appointed by the previous governor, a move the attorney general deemed to be beyond the governor’s authority. The governor pulled his trump card by dispatching state police to the next board meeting and preventing the previous governor’s executive director from taking his seat.

One reason for the misguided missive may be lack of institutional memory compounded by an unwillingness to do basic homework. As you can see from the letterhead, Kentucky Retirement Systems now has only an “interim” executive director, who came in last August. Its Chief Investment Officer was turfed out in January and only an “interim” is minding the store. Even though Kentucky Retirement Systems announced the appointment of a Director of Legal Services effective January 1, 2017, its website lists that position as vacant, suggesting that somehow that appointment didn’t stick.

Notice also that the person who signed the letter as “General Counsel, Non-Advisory” didn’t have his own letterhead and was a staff attorney as of the end of April. An internet search failed to unearth an announcement regarding a recent appointment to the General Counsel position. Another lawyer, Robert Barnes, apparently signed Investment Committee minutes on May 16 as General Counsel. A colleague called Kentucky Retirement Systems to find out who is its General Counsel. The receptionist didn’t know and referred the call to the secretary to the interim executive director, David Eager. She didn’t provide an answer.

While Eager may have given Bowman a battlefield promotion to act as General Counsel with respect to certain activities, this isn’t typical for how state agencies operate.

And needless to say, it’s also odd for the Kentucky Retirement System to be deploying resources to this end when it is so desperately underfunded that it seems unable to keep enough fax paper in its fax machine. Bowman’s letter didn’t provide an e-mail address, leaving fax as the only option for a prompt reply (notice the mailing date meant it was likely to, and did, arrive over the weekend preceding the 4th, which may have been intended to impede getting timely legal input). Not only did the fax number emit the sort of noise that fax machines out of paper make, there was no answer on the Kentucky Retirement Systems main number on Friday even though Moody called several times.

Why Kentucky Retirement Systems Is Hurting Itself by Calling Attention to Its Limited Partnership Agreements

Kentucky Retirement Systems’ threat to Naked Capitalism only makes matters worse for KRS. First, it’s reminded general partners that Kentucky Retirement Systems’ mismanagement allowed the limited partnership agreements to get out into the wild. Second, if Kentucky Retirement Systems thinks it is somehow earning brownie points with general partners by harassing us, it has that backwards too.

We’ve published 26 limited partnership agreements, 23 of them in 2014, including ones by the biggest private equity managers, such as Apollo, Blackstone, Carlyle, KKR, and TPG. Not a single general partner has demanded that we remove them. Now why would that be the case when the same general partners insist that these documents contain trade secrets, which means that exposing them would do serious commercial damage to them?

First, they understand that we obtained them by legitimate means, and they can’t stuff the confidentiality genie back in the bottle once it has gotten out. Second, while they could have tried asserting trade secret claims, as we pointed out, and no one has disputed, trade secrecy is a high bar and nothing in these contracts seems to come close to meeting it. The last thing the general partners want is to have their legally untested claims of trade secrecy punctured.

So they’ve apparently decided that the best course of action is to call as little attention as possible to our Document Trove. Private equity insiders who know the thinking of the law firms that represent many of the top limited partners confirm that even if any client had thought about pursuing Naked Capitalism, that they would have advised them firmly against the idea.

Kentucky Retirement Systems has thus undermined the general partners’ strategy for containing the damage of the publication of these contracts.

Why Is Kentucky Retirement Systems Going After Naked Capitalism at Such a Late Date?

We have no idea why Kentucky Retirement Systems professes to have suddenly woken up to the fact that we published limited partnership agreements nearly three years ago. Given the fact that the system is in obvious disarray, it may well be true that some members of the revolving door leadership only learned about them recently. But it seems utterly implausible that Kentucky Retirement Systems as an institution hasn’t known about it for quite some time.

Some readers with public pension fund connections have theories. One is that a very critical and well reported Huffington Post article, Kentucky’s Hedge Funder Governor Keeps State Money In Secretive Hedge Funds, on June 24 got up Kentucky Retirement Systems’ dander and they decided they needed to generate some talking points in their favor. Here are the opening paragraphs of the story:

Kentucky’s public pension system is a long-running, worst-in-the-nation disaster. Even as state workers chip in their fair share, the system suffers from years of chronic underfunding by the state. Seeking higher returns, the program, formally known as Kentucky Retirement Systems, has turned to “alternative investments” such as private equity and hedge funds. But those funds also carry far more risk than traditional investments in stocks and bonds ― and much higher fees. The year before the state’s Republican governor, Matt Bevin, was elected, the pension system had 25 percent more alternative investments than its peers, 27 percent higher costs and 15 percent lower long-term returns, according to a report prepared for the pension board. As a part-owner of a hedge fund himself, Bevin said in 2015 that he didn’t have a problem with the pension system’s heavy reliance on alternative investments like hedge funds. But he campaigned on promises to improve the system and shore it up for the future. He hasn’t. Despite the Republican Party being in total control of Kentucky state government for the first time in nearly a century, the actual policy changes Bevin has implemented or overseen have mainly ended up supporting the system’s ruinous status quo. And some legislators are raising concerns that state officials ― potentially including Bevin himself ― could benefit financially from the system.

The story focuses on how Kentucky Retirement Systems has increased its allocation to hedge funds, troubling including ones which appear to close to the governor, as well as ones which are almost certainly charging inexcusably high fees:

Throughout the turmoil, Kentucky Retirement Systems didn’t just continue to invest in hedge funds ― it intensified its commitment. In May 2016, the board dumped $300 million more into four new hedge funds and increased its investment in another hedge fund, created for Kentucky by KKR Prisma, that itself invests in hedge funds. The following month, Bevin, whose spokesperson did not respond to multiple requests for comment for this article, announced that he would reorganize the entire board of trustees. By executive order, he expanded the board from 13 to 17 members and named economist John Farris as its chairman. The new structure allowed Bevin to appoint seven board members right away…. Bevin’s appointments included two hedge fund managers. One was Neil Ramsey, the owner of Louisville, Kentucky-based hedge fund RQSI Holdings. Ramsey, along with his wife, contributed $4,000 to Bevin’s gubernatorial campaign and $15,000 to his inaugural committee, state records show. He also appears to own two other investment companies, according to Securities and Exchange Commission filings: d.Quant Special Opportunities Fund, which late last year acquired a majority stake in another company called ZAIS Group Holdings. Neither of those firms is listed on the most recent version of Ramsey’s financial disclosure form, a copy of which HuffPost obtained through an open records request. Ramsey did not respond to multiple requests for comment. The other new board member was William Cook, a former director and senior portfolio manager at KKR Prisma, the company that created the fund of funds for Kentucky Retirement Systems. Cook, who retired from KKR Prisma in 2015, said he would recuse himself from any investment decisions involving his former company. This past November, as both Democratic and Republican members of the state legislature called on the pension board to divest from hedge funds, the board abruptly changed course and proposed to cut those investments in half. It would divest from 12 hedge funds altogether, and its investment in the KKR Prisma fund would return to the prior lower level. That decision was finalized in December 2016, but it’s not clear how much headway the pension board has made on the promise.

I strongly urge you to read this article in full. Among other things, it stresses that the KKR Prisma investment makes no sense for Kentucky Retirement Systems. It’s a fund of hedge funds, which means it charges an additional layer of fees on top of those levied by the underlying hedge funds. Funds of funds are widely considered to be unattractive because all the costs make it virtually impossible to earn a decent return. A hedge fund of fund makes no sense for Kentucky Retirement Systems because it is big enough to invest in hedge funds directly and avoid the extra fees.

And that’s before you get to the fact that investors, including other public pension funds like CalPERS, have abandoned hedge funds entirely or are cutting their allocations back because they are neither outperforming nor offering return profiles that are useful because they act as hedges to the rest of the portfolio.

However, the documents we published are almost entirely private equity limited partnership agreements, so it’s hard to see how an article about Kentucky Retirement Systems’ overly cozy relationship with hedgies would lead to the NC nastygram.

Another theory is that Kentucky Retirement Systems wasn’t invited into a private equity deal, and was given the excuse that the general partner didn’t like that some of Kentucky Retirement Systems’ limited partnership agreements were now public. Our private equity contacts say that if Kentucky Retirement Systems didn’t get a sales pitch, the big reason would be its upheaval. General partners don’t call investors in management disarray unless they really have to because their decision process becomes tortuous. A second reason for avoiding Kentucky Retirement Systems is its poor reputation. Right now, investors are clamoring to put money into private equity funds, so general partners can pick “better” investors.

To put it another way, even if a private equity salesman gave this excuse to Kentucky Retirement Systems, it’s highly unlikely to be the real reason, plus the leadership of the firm would almost certainly be unhappy to have Kentucky Retirement Systems revive our publication of limited partnership agreements as a story.

But since Kentucky Retirement Systems has managed to do just that, if anyone out there has a limited partnership agreement they’d like to send to us, particularly as with the past ones we’ve received, they haven’t signed a confidentiality agreement as a condition of obtaining it, please contact us at yves-at-nakedcapitalism.com.

In the meantime, we’ll provide readers with any updates.