COMMONWEALTH OF KENTUCKYKENTON CIRCUIT COURT

DIVISIONCASE NO.

CITY OF FORT WRIGHT, KENTUCKYOn behalf of itself and ali other Participantsin tale County Employees Retirement System

vs.

BOARD OF TRUSTEES OF THEKENTUCKY 12ETIREM~NT SYSTEM

Serve: Randy OverstreetChairman &Managing Agentc/o Kentucky Retirement Systems1260 Louisville RoadFraiilcfort, KY 40601

CLASS ACTION COMPLAINT AND JURY DEMAND

L INTRODUCTION

PLAINTIFF

DEFENDANT

1. The Plaintiff is the City of Fort Wright, Kentucky (the "Plaintiff'}. This case is

filed by the Plaintiff on behalf of a class of similarly situated entities. Tlie Plaintiff and the

members of the class are all beneficiaries of a fidtitciary relationship. The fiduciary is the

Defendant, the Board of Trustees of the KentLicky Retirement System (the ̀ Board"}

2. Among the Board's duties is the duty to invest funds contribttteci to the Cotmty

Employees Retirement System ("CERS"}. Z~`he Plaintiff and the members of the class are all

participants in the CERS who contribute ful~ds to the CERS. The Board invests those funds anc~

uses those funds to pay retiremetzt benefits to the i-eCired employees of tl7e Plaintiff at~d the

members of the class.

3. In this ease, the Plai~ltiff alleges that the Board has invested funds of the CERS

("CERS assets"} in investments that are nat permitted by statutes in the Commonwealth of

Kentucky. Additionally, the Plaintiff, an behalf of the class, alleges that the Baard invested an

Lmreasonably large percentage of CERS assets in high risk investments which are not appropriate

investments for fiduciaries ul~der tl~e eomzlion law of Kentucky.

4. The Plaintiff also alleges that the Board has paid. substantial management feed in

order to invest CERS assets in investments which: (1) are not permitted by statute; and (2) are

otherwise improper fiduciary investments. Therefore, the Plaintiff, on behalf of the class, seeks

the equitable relief of restitution. Specifically, the Plaintiff, on behalf of the class, seeks an

Order from this Colu`t requiring that tlZe Board provide restitution in the amount of the

management fees paid by the Board for such investments. The Plaintiff seeks a Court Order

requiring the Board to repay such management fees by depositing those fees in the appropriate

CERS accotmt, far the benefit of all class members. It is the Plaintiff's knowledge and belief

that the management fees paid by the Board, with CERS assets, over the preceding five year

period,. exceeds $50 million.

IL PARTIES

5. The City of Fort Wright, Kentucky (hereafter the "Plaintiff '} is a city of the fourth

class located in Kenton Cotit~ity, Kentucky. It is a participant in the CERS and regularly

contributes substantial stems of money to the CERS oi~ behalf of its employees and retired

employees. Many other ~overnmen~al ar~d quasi-governmental entities wllo are participants in

the CERS are also located in Kenton County, Kentucky. Kenton. County rs an appropriate venue

for this action.

~ Tl1e term "management fees" includes fnder's fees, placeitlent went fees and other expenditures, either

direct o~~ indirect, of CERS ~sseCs paid for the purpose of providing the Boacd with access to alternative asset

investments.

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6. The members of tl~e Class are all citizens of Kentucky and also participants in t11e

CERS. They consist of counties, cities, non-profit organizations, urban-county governments,

other• agencies of local government and other organizations and/or corporations determined to be

eligible to participate in t11e CERS. Tl1e members of the Ciass regularly contribute substantial

sums of money to the CERS on betlalf of tllei~• employees and retired einp~oyees.

7. The Board is established pursLiant to the provisions of Section F~ 1.510, et s~c~. of

the Kentucky Revised Statutes (hereafter the "KY Stattrtes"}. The Board holds and invests the

funds that are contributed to the CERS by Plaintiff and the members of the class. Those fiords

are referred to herein as "CERS assets." The Board, and each member thereof, is a fiduciary and

owes fidl~eiary obligations Co the Plaintiff and the members of the class.

8. The Board Ilas all. of the powers and privileges of a corporation, including, but riot

liinitecl to the capacity to stye and be sued in its corporate Name and the ability to purchase

fiduciary liability insural~ee. Section 61.645 of t1~e KY Statutes so provides.

9. All parties in t11is case are entities that are citizens of the Commonwealth of

Kentucky. This case does not raise any issues of federal law. There are no federal causes of

action asserted. Therefore, there is no federal jurisdiction and this matter is properly filed in the

Kenton Circuit Court.

III. THE 130ARD'S OBLIGATION WITH RESPECT TO CERS FUNDS

10. Pursuant to Section 78.790 of the KY Statutes the Board is given limited powers

to bold, to invest and to reinvest CERS assets. The investments that fiduciaries are permitted to

snake under Ke~~tucky law is governed by anti limited by the provisions of Section 386.020 of the

KY Statutes. Additionally, by statLrte, the Board is permitted to invest in common stock issued

by corporations that do not have a retorts of paying dividends to their stockholders.

1 1. In selecting the type of investments that are permitted for CERS assets, the Board,

as a fiduciary, must also use the care, skill, and caution a prudent person wotiild use in light of the

circumstances. Thus, the Board, in investing CERS assets is limited by KY Stattrtes and is also

limited by the eoinnlon law standards applicable to fidLiciaries in Kentucky.

IV. THE BOARD'S INVESTMENT HISTORY

12. In addition to the CERS assets held by the Board, it also holds and invests the

assets of the Kentucky Employees Reti~•ement System ("KERB").' The KERB is one of the most

underfunded state pension plans in America.3 The CERS, while as not as underfunded as the

KERB, is also significantly underfunded. The Board commingles the assets of the CERS and

KERB for investment purposes.

13. One of the principal reasons for the underfunding of the plans operated by the

Board is the poor performance of the illegal and imprLident investments that have been selected

by the Board over approximately the last decade.

14. Within the past decade, the Board decided tls~t it would be appropriate to start

investing CERS assets in venture capital fiords, hedge fiends, private equity fiends, private

placements, leveraged buyout funds, limited partnerships, etc. These types of investnlen~s are

frequently referred to by the Board as "alternative asset investments."

15. Some of the alternative asset investments selected by the Board were start-up

funds with virtually no track record. These investments, which are not publicly traded, are not

approved for the investment of CERS assets pursuant to the provisions of flee KY Stahrtes,

specifically Section 78.790 and Section 386.020. They are funds that are not registered pursuant

65-70% of the assets that the Board invests are assets of the CERS.

' This is a reference to under-funding on a percentage basis, nat in gross dollars.

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to the Investment Company Act of 1940, a risk factor which is normally prominently disclosed to

prospective investors ii1 sliclz uiuegistered funds.

16. Separate and apart from the statutes which limit the investment of CERS assets,

the Board is obligated to fallow common law fiduciary standards with respect to the investment

of those assets. The investment of an unreasonably large percentage of CERS assets in

a~teruative asset investments violates common law fiduciary standards because of the risk

involved in those ii7vestments.

17. Alternative asset investments, such as private equity fitnds, are notorious for

charging excessive and, indeed, outrageous management fees. (See Exhibit 1 attached) The

Board cleterinined that it would be appropriate to pay slicll izlanagenlent fees to invest CERS

assets in alternative asset inves~mei~ts. The Board made this decision despite the fact that those

investi~le~zts were prohibited by Statute and contrary to fiduciary standards. The Board paid such

excessive management fees in addition to fees that it regularly pays to money managers to invest

other CERS assets in traditional low risk investments that are authorized by statute.

18. A prime example of the Board's illegal and imprudent investments is revealed in

recent news stories in which it is described that the Board invested more than $24 million in a

private equity fund kizown as the Camelot Group.4 According to news accounts, the manager of

that fund used the fund as his personal piggy bank_ Importantly, the Board's commitment of $24

million or more to be invested with Camelot was seed money, which Camelot used to start its

illicit operations. Other state pension fltnds had promised to invest money with Camelot on the

condition that Camelot first got its seed money from Kentucky. (See Exhibit 2 attached.}

`' Tf~e Ca~llelot Group is also know~l and refez-red to as Camelot Opportunities and Camelot

Acq~iisitions Secondary Opportunities LF. It wi]1 be re~feri~ed to herein simply as Camelot.

19. Another example is the Board's investment in a start-up fund known as the

Anowhawk Durable Alpha Fund. In 2009 the Board decided to invest $200 million as "seed

money" in that start-up fund. By 2012 the Fund was ozit of business (see Exhibit 3 attached).

20. Based upon Plaintiff's knowledge and belief, since 2009 the Board has paid aver

$50 million in management fees in order to invest CERS assets its alternative asset investments,

which are prohibited by KY Statutes, az~e high risk a~zd are contrary to comn~or~ law fiduciary

standards. The Plaintiff, on behalf of the class, brings this action seeking an accounting and

seeking the equitable relief of restitution, requiritzg that the Board refund to the appropriate

CERS account the amount of management fees it paid to invest CERS assets in alternative asset

investments.

V. CLASS ACTION ALLEGATIONS

21. Plaintiff files this action pursuant to the provisions of Rule 23.01, et sect. of the

Kentucky Rules of Civil Procedure. Plaintiff and alI Class Members are entities that are citizens

of the Comznonweal~h of Kentucky. Defendant, the Board, is an entity that is a citizen of the

Commonwealth of Kentucky. This matter is governed by Kentucky law and the Kentucky Rules

aF Civil Procedure, including Rule 23.01, et sect.

22. Plaintiff seeks certification of a Class defined as follows:

ALL PERSONS OR rNTITIES WHO ARE KENTUCKYCITIZENS AND WHO PARTICIPATE IN THE CERS BYCONTRIBUTING FUNDS TO THE CERS.'

' To be excluded frorl~ the class are the Jude of this Court, Kenton County, Kentucky and the KentonCounty, Kentt~eky Fiscal Court. Also excluded from the class are any ~nerl~bers of Che KRS Board.

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23. Carlsistng of many counties, cities, non-profit organizations, urban-caunty

governments and other agencies of local governizlent, organizations and/or- corporations who

have been determined to be eligible to participate in the CERS, the proposed Class is therefore so

numerous that joinder of all members rs impracticable. It is t11e Plaintiff's knowledge anc~ belief

t11at there are approximately 500 entities that contribute funds to the CERS and such fiends are

held and invested by the Board.

24. There are questions of law or fact common to the Class. Amoi7g these common

questions of law and fact are:

(a} Whether the Board violated its statutory obligations under Section 7$.790

and Section 386.020 of the KY Statutes by investing CERS assets in alternative

asset investments;

(b} If the Boai-d violated its statutory obligations, what equitable remedies are

available to the Plaintiff and the members of the class;

(c) Whether the Board violated its conlinon law fiduciary obligations by

investing. an unreasonably large percentage of CERS assets in alternative asset

investlneilts; and

(d) If the Board violated its common law fiduciary obligations, what equitable

remedies are available to the members of the class.

25. plaintiff's claims agail~st t1~e Board are typical of the Class claims. Similar to

Plaintiff, Class Members also contribute to the CERS and would benefit from an accounting

relating to the investment ~f CERS assets. Class members would likewise benefit from the

equitable relief being sotitght, should the Court determine the Board violated its statutory and/or

fiduciary obligations by making investments not permitted by fiduciaries under Kentucky law.

26. Because the intet-ests of Class Members ire coincident with and not antagonistic

to Plaintiff s interests, Plaintiff, as the representative ~~arty, will fairly aizd adequately protect the

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interests of the Class. As participants in the CERS plan, all class members will benefit by the

restitution and other et~tilitable relief that is sought in this action by the Plaintiff.

27. Plaintiff's counsel has expe~-ienee in handling class actions ar~d complex litigation

and has perforated adequate work in identifying anti investigating the claims asserted in this

action. Counsel has knowledge of Kentucky law and will fairly and adequately represent the

interests of the Class. Counsel therefore satisfies the requirements of Rule 23.07 of the Kentucky

Rules of Civil Procedure.

28. In accordance with Role 23.02(b} of the Kentucky Rules of Civil Procedure,

etas action should be permitted because the Board invested CERS assets in a inamler generally

applicable to the Class, (hereby making appropriate the equitable remedies of an accounting,

restitution and injunctive relief.

29. The Court therefore may appropriately determine that the Board violates the KY

Statutes and its fiduciary duty when it pays substantial management fees to invest CERS assets

in investments not permitted by statute and the Court may enter ail C}rcler requiring both an

accounting and ~•estitution.

30. There are no difficulties to be encountered in the management of this case as a

class action. Instead, class action treatment will promote an orderly and expeditious adjudicatioz~i

of the Class claims, economies of time effort and resources will be fostered, and uniformity of

decisions will be ensured. The rnanagemet~t of this case as a class action will involve little

additional dine on the part of tl~e Court. By deciding the issues raised by Plaintiff, t11e Count will

necessarily be conclzrrently deciding the same issues on behalf of all Class Members.

FIRST CAUSE OF ACTION(Declaratory and Injunctive Relief)

31. Plaintiff il7corporates by reference all other allegations captained in this

Complaint.

32. Pursuant to Section 418.040 of the KY Statutes, the Plaintiff is peY•mitted to obtain

a declaratory judgment if it appears that an actual controversy exists between the parties. Rule

57 of the Kentucky Rules of Civil Procedlu-e also authorizes the Court to grant cleclaratiory

judgment.

33. The Plaintiff, on behalf of the Class, states that there is an actual controversy

between the parties. The controversy is that the KRS has never acknowledged that it has

different statutory obligations with respect to the investment of fui7ds of tl~e KERS versus the

investillent of the fiends of t11e CERS. Plaintiff states that the KRS has always adopted the view

that it is permitted to invest both KERS and CERS assets in high risk, low return "alternative

asset investments" and to pay huge, and in many situations undisclosed, management fees for

making those investments. Stated otherwise, the KRS has always commingled assets of t11e

KERS and the CERS for investment purposes.

34. The KRS has never- acknowledged that it is prohibited from investing CERS

assets in fili~cls that are not registered under the Investment Company Act of 1940. In fact, as

stated above, the Board has repeatedly invested CERS assets in hedge fiords and mutual fiords

that specifically declare that they are not registered under the Investment Company Act of 1940.

35. The Plaintiff, on behalf of the Class, respectfully requests fl~a~~ the Court enter a

declaratory judgment declaring, ordering and adjudging as follows:

• That Chapter 78 of the KY Statutes governs the Board's investment of

CERS assets and specifically provides that those assets may only be

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invested in the types of investments that fiduciaries are permitted to ~7~akeunder Kentucky law.

Kentucky law, specifically Section 286.020 of the KY Statutes prohibitsfiduciaries from investing assets in hedge funds and/or private equityfiends that are not registered under the Investment Company Act of 1940.

• That the Board thus violates the KY Statutes when it invests CERS assetsin alternative asset investments, such as hedge fiends and mutual funds.

36. Plaintiff respectfiilly requests, on behalf of the Class, that the Court enter an

inju~lction which would permanently stop the Board from investing CERS assets in investment

fiends that are not registel•ed under the Investment Company Act of 1940.

SECOND CAUSE OF ACTION(Accounting}

~7. Plaintiff incorporates by reference all other allegations contained in this

Complaint.

38. At all relevant times, the Board was a fiduciary wit11 respect to the assets of the

CERS. As a f duciary, the Board was required to use the care, skill and caution a prudent person

would use when investing the assets of the CERS, which assets were held by the Board for- the

benefit of Plaintiff and members of the Class. The Board's duty included, but was not limited to,

the duty to comply with the provisions of the KY Statutes when making investments. The Boat-d

also had a fidtiiciary obligation antler the common law to limit the percentage of CERS assets that

were il~vested in hibl~ risk alternative asset i~ivestments.

39. The Board, as a fiduciary to Plaintiff and members of the Class, should be ordered

to provide an accounting in this action. The Board should be rec~tured to account for the

investment of CERS assets in violation of KY Statutes and/or in violation of its common law

fiduciary obligations. The Board sho~ild further be required to account for all management fees

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paid, either directly or indirectly, with CERS assets, in connection with t17e investment in

alternative asset investments.

THIRD CAUSE OF ACTION(Restitution for Statutory Violation)

40. Plaintiff incorporates by reference all other allegations contained in this

Complaint.

41. The Board's discretion in investing CERS assets is limited by the provisions of

Section 78.790 and Section 386.020 of the KY Statutes.

42. It is Plaintiffs knowledge and belief that many of the alternative asset

investments iiz which the Board invested CERS assets were not permitted as fidtiiciary

investmetlts under KY Statutes. The Board, thus, invested CERS assets in a manner directly

contrary to KY Statutes.

43. The Board also violated its fiduciary obligations by investing art unreasonably

large percentage of CERS assets in high risk alternative asset investments which required the

payment of Mtge management fees.

44. By paying substantial management fees for investing in such impermissible

investments the Board, as fiduciary, improperly expended funds entrusted. to it. T11e Defendant,

therefore, must make restitution of those management fees and cause those management fees and

interest thereon to be re-deposited into the appropriate CERS accounts}.

FOURTH CAUSE OF ACTION(Restitution for Breach of Fiduciary Duty)

45. Plaintiff incorporates by reference all other allegations contained in this

Complaint.

46. In addition to the Baard's statutory obligations with respect to the investment of

CERS assets, the Board also had common law fiduciary obligations with respect to the CERS

assets. The Board was required to use care, skill and caution as a prudent person would use

under the circumstances in a similar fiduciary situation.

47. The Board violated its fiduciary dirties by, among other things, paying substantial

management fees to invest an unreasonably large percentage of CERS assets in high risk

alternative asset investments not suitable for fiduciaries and/or not peri~litted Under KY Statutes.

48. By paying substantial management fees for investing in such impermissible

investments the Board, as fiduciary, improperly expended fiends entrusted to it. The Defendant,

therefore, must make restitution of thaw management fees and cause those rnanagenlent fees and

interest thereon to be re-deposited into the CERS retirement account(s).

WHEREFORE, Plaintiff demands:

A. Z'hat tl~e Court enter declaratory judgment declaring the rights of tl~e

parties and resolving the controversy between. them.

B. That the Court further enter an order enjoining the Defendant, the Board,

from investing CERS assets in investn7ent funds that are not registered under the Investment

Company pct of 1940 end further enjoining the Board from usinb CERS asses to pay

managei77ent fees for such investments.

C. I'he Court grant the Plaintiff and the members of the class an accounting

to be provided for by the Defendant. The Defendant should account far all investments made

duri~lg the preceding five (5} years in alteY-n~tive asset investments and all inanageinent fees paid

in connection therewith; that, as part of the accounting, the Defendant be required to disclose all

12

contracts entered into by the Board relating to alternative asset investments and the management

fees paid in connection with such alternative asset investments.

D. That the Plaintiff and the members of the class be granted restitution. The

Board should be required to repay to the appropriate CERS accaunt(s} all management fees paid

by the Board in connection with its investments in alternative asset investments. This is an

amount in excess of $50 million and in tar excess of the jurisdictional minimum required in this

Court.

E. That the Plaintiff be permitted to recover such attorneys' fees and costs as

are permitted by law in the Commonwealth of Kentucky.

JURY DEMAND

Plaintiff requests that a jury be impaneled to try all factual issues.

Dated: June 2, 2014 Respectfu~.ly submitted,

Ronald R. Parry (KY Bar Na. 53750Robert R. Sparks (KY Bar No. 8 $D. Kris Brandenburg (KY Bar o 4635)STRAUSS TROY150 East Fourth StreetCincinnati, OH 45202-4018(513) 621-2120 —Telephone(5 r 3) 629-9426 —FacsimileE-mail: rrparry@strausstroy. comL-mail: rrspaYks@strausstroy.comE-mail: dkbrandenburg@strausstroy.com

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3574438_l.doc

c;~ C

Todd V. McMurtry (KY Bar No. ) 'Elisabeth A. McCord (KY Bar No. 8909Q)UERNER & KEARNS CO., L.P.A.809 Wright's Summit ParkwaySuite 200Fort Wright, KY 41011(513) 241-7722 —Telephone(513) 241-9644 —FacsimileE-mail• tmmcmurtry@gerner~law.comE-mail: emccord@gernerlaw. com

Counsel for Plaintiff City of Fort Wright, Kentucky

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