(Courier Journal) - The former chief investment officer of the Kentucky Public Pension Authority has filed a whistleblower lawsuit against the agency, alleging he was fired for bringing up concerns about improper oversight of pension funds and the possible theft of millions of dollars.
Steven Herbert, who was hired for the top-level position within KPPA in early 2020 and fired this May, filed the complaint Friday in Franklin Circuit Court, seeking compensatory and punitive damages. He says the pension authority terminated him because he disclosed waste, fraud and abuse of public funds, in violation of the Kentucky Whistleblower Act.
As the chief investment officer of KPPA — previously known as Kentucky Retirement Systems — Herbert was responsible for overseeing the $22 billion of assets invested by the pension accounts of state and county government employees and retirees, as well as state police officers.
Herbert is represented in his lawsuit by prominent Louisville attorney Thomas Clay, who stated in the complaint that his client had shared concerns about the handling of pension funds, but "efforts to disclose this issue were repeatedly thwarted by those in authority at KPPA."
"Plaintiff's efforts to clear up processes at KPPA were consistently slowed or blocked up to and including the highest level of KPPA's organization," the complaint says, adding Herbert was fired "despite his disclosure of this possible criminal diversion of pension funds."
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A KPPA spokesperson responded to Herbert's filing with a statement saying his complaint "contains demonstrably false allegations."
"KPPA 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.”
Complaints made in a lawsuit represent only one side of a case.
According to his complaint, Herbert saw immediate problems with how some of the funds were administered, specifically ones dealing with Perimeter Park West — an entity created by the pension agency to buy the Frankfort offices where its staff works, which is also in its investment portfolio.
Herbert not only believed the manager's financial statements were not supported by documentation but that it "appeared that funds may have been misappropriated, diverted or stolen."
The complaint alleges that when Herbert asked KPPA general counsel Victoria Hale about "the missing funds," she replied that Perimieter Park West's (now-former) management contractor Crumbaugh Properties had "embezzled" them.
Herbert further alleges that when he suggested legal action against Crumbaugh, he was denied because of "Crumbaugh's connection with the Court system in Franklin County."
In early 2022, the complaint says that Herbert found Perimeter Park West to have a $10 million deficit that appeared directly related to the alleged Crumbaugh "theft," which is when he received a copy of a 2019 independent internal audit that corroborated his concerns.
The complaint says the audit "noted that Crumbaugh Properties had potentially misappropriated or stolen funds over several years," adding the company also had "full access to write checks" from a Perimeter Park West account without KPPA staff oversight.
When Herbert requested all cash in Perimeter Park West's account be returned to the agency for oversight, he alleges the PPW directors refused and kept roughly $500,000 in its account.
A spokesman for Crumbaugh Properties also did not immediately comment on the lawsuit Friday afternoon.
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Another concern brought up by Herbert involved pension funds allegedly being wired out to external depository accounts without proper accountability, first expressed by the County Employee Retirement System's CEO and investment committee in September 2021.
After the CERS committee requested Herbert investigate this and he replied with a memo expressing his own concerns, he alleges KPPA Executive Director David Eager sent Herbert an email instructing him "not to inform the Trustee of this issue without clearing it with Eager."
Herbert also alleges he was instructed to allow Rebecca Adkins, KPPA's executive director of operations, to conduct an investigation and report back, despite that being his job responsibility.
After the state Finance Cabinet agreed that fall that the wire transfer law did not comply with statutes, Herbert reduced the number of people authorized to send and approve wires from 10 to two, including himself and his deputy — which allegedly drew him a reprimand from Adkins.
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Despite another independent internal audit coming to the same conclusion on wire transfers issues, the complaint alleges Adkins asked him to remove his memo from the material of an audit committee meeting in April, which he refused to do.
One week after Herbert disagreed with a KKPA attorney memo to the audit committee on asset accounting, he received a May 31 termination letter signed by Eager, firing him without cause.
The complaint says the action taken by KPPA in this matter "related to tens and tens of millions of dollars which were transferred by wirer in and out of custody on a regular basis with tens of millions of dollars sitting in external depository accounts, outside the trust, with transactions which do not balance to transactions."
By Joe Sonka - Louisville Courier Journal
December 16, 2022
