Former Kentucky Pension CIO Charges He Was Fired for Uncovering Fraud

Steven Herbert says his employment was terminated after he discovered that a property company, allegedly, stole money from a retirement system unit.


The ex-CIO of the $22 billion Kentucky Public Pensions Authority is suing his former employer, accusing the agency of allowing a real estate firm to filch money from a KPPA subsidiary, then retaliating against him for pointing it out. Steven Herbert contends in his suit that he was fired when he tried to bring the purported theft to light.

Herbert joined the retirement system in January 2021. He claims in his legal action that, had he known about the alleged theft, he would not have accepted the position.

The Kentucky pension system is known for longstanding low funding ratios within its various pension programs. All of these programs are considered to be in “critical status” due to funded levels lower than 65%. At the end of the fiscal year 2021, KERS Hazardous was the best funded among the state’s pensions, with a ratio of 60.4%. KERS Nonhazardous posted a miniscule ratio of 16.8%. CERS Nonhazardous’ funded ratio was 51.8%, while CERS Hazardous had a funded ratio of 46.7%.

When Herbert left the pension system in May 2022, he was replaced by his former deputy, Steve Willer, marking KPPA’s seventh investment head in 15 years. Herbert was fired in a May 31 termination letter from executive director David Eager, KPPA’s executive director, and the complaint states the termination was “without cause.”

The alleged fraud concerns Kentucky Retirement System’s Perimeter Park West, a real estate entity created by the pension agency to buy its Frankfort offices. Herbert initially questioned why Perimeter did not pay dividends to the retirement system and pointed out that its books did not balance. Then he concluded that money from the property unit had been “misappropriated, diverted or stolen,” according to his complaint.

Next, according to the complaint, Herbert determined that Crumbaugh Properties, a private commercial real estate company, had embezzled the money—and that the firm had the ability to write checks from Perimeter’s account. He also alleges he found a shortfall of $10 million in Perimeter’s account that appeared to be linked to the alleged Crumbaugh theft, the complaint contends. The lawsuit says that an audit from 2019 backs up his charge that Crumbaugh had checking access to Perimeter’s account.

Herbert is seeking a trial by jury and that he be awarded compensatory and punitive damages, plus legal costs. His court complaint falls under the Kentucky Whistleblower Act, which he argues should have shielded him from dismissal after he disclosed the material discrepancies to the board and Eager. Herbert claims he was wrongfully terminated because of the disclosure.

A KPPA spokesperson responded to the lawsuit by saying it “contains demonstrably false allegations.” In addition, the representative said, the agency “regrets that it will be forced to spend resources to defend against Mr. Herbert’s lawsuit, but we are confident in our defense of the claims he has asserted.”

Crumbaugh Properties did not return a request for comment on the allegations in Herbet’s complaint.

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Shiny Private Equity Loses Some of Its Luster

The go-to asset class has stumbled a bit lately, prompting second looks from allocators.


Private equity, long a popular venue for asset allocators, is getting a little less love these days amid dwindling public stock markets—which make those lush, return-generating exits less lucrative—and higher interest rates, rendering some other assets more attractive.

The once giddy mood among PE institutional investors has slumped, according to a survey by Coller Capital. Only 27% of institutional investors plan to increase PE stakes over the next year, versus 42% in the poll taken in mid-2022.

“I’m as bearish on private equity as I have ever been in my career,” Marcus Frampton, CIO of the Alaska Permanent Fund (assets: $78 billion), told his board at a recent meeting, per news reports. “We haven’t seen the correction in private equity as we have in public markets.”

He added that PE has become increasingly expensive and that many PE asset valuations were too high and needed adjusting. The fund has been overweight PE, but he plans to reassess that allocation in coming months, perhaps reducing it by four percentage points.

As of its last fiscal year report, ending June 30, PE was the Alaska fund’s second highest asset class, at just under 20%, with stocks the largest, at almost 40%. Previously strong revenue from PE is starting to ebb. For the fund’s current fiscal year to date through November, PE revenue was showing the biggest decrease of any class other than bonds.

Across the PE universe, fundraising appears to be on the verge of maxing out, with inflow in the third quarter of 2022 matching the year-prior period, but many limited partners saying they are reluctant to pour in more, PitchBook said.

First-half fundraising was down 27%, to $337 billion, according to Private Equity International data. The number of new funds closed—meaning, they finished investment gathering and started operating—was off 40%, to 622. The tally for the second half is expected to show much the same, once it is in. The newbie funds were mostly sponsored by the largest players: Advent International, Insight Partners and KKR, who collectively hold 40% of the fresh PE capital invested.

The Carlyle Group, the PE powerhouse, has asked its investors for an extension in the time it needs to raise $22 billion in fresh capital for its flagship Carlyle Partners VIII, the Financial Times reported. Carlyle could not be reached for comment.

All that said, PE still has a lot of goodwill among allocators as being able to deliver good results over time.

For instance, the board of the Employees Retirement System of Texas voted in August to up the fund’s PE allocation to 16% from 13%. PE, wrote Texas ERS CIO, David Veal, has been a “critical element” of the fund’s success; private equity posted a 28% increase in its fiscal year that ended in June.

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