A Huge Wall Street Scandal Just Exploded In Kentucky

GOP law enforcement officials are targeting Stephen Schwarzman, the billionaire who bankrolls Mitch McConnell and Donald Trump’s political machine. The lawsuit breaks open a major financial scandal that threatens the world’s largest private equity firms — with global implications.

President Donald Trump at a policy forum in 2017 with business leaders chaired by Blackstone CEO Stephen Schwarzman. (Chip Somodevilla / Getty Images)

In a landmark case with potentially global implications, Kentucky’s newly elected Republican attorney general is targeting some of the world’s largest financial firms in a new lawsuit alleging that teachers, firefighters, and other government workers have been systematically bilked by Wall Street’s rampant fraud and self-dealing, which has created a massive financial crisis in the state.

The new suit from Republican Attorney General Daniel Cameron’s office also specifically targets Stephen Schwarzman — a Republican billionaire who is one of the largest financial supporters of Mitch McConnell and Donald Trump’s political machine. Schwarzman has donated $10 million to the Senate Leadership Fund, a super PAC affiliated with McConnell, and $3 million to America First Action, a super PAC backing Trump, this election cycle.

As TMI previously reported, the US Supreme Court recently blocked workers and retirees from suing these kind of firms because the high court said they did not have legal standing. A Kentucky court then quickly cited that ruling to short-circuit retirees’ case against Wall Street giants Blackstone and KKR, which said the firms’ investment schemes had fleeced the state pension system.

But in an extraordinary move on Monday, Kentucky’s GOP Attorney General Daniel Cameron intervened to sue on behalf of the state government — a maneuver that likely renders the standing issue moot. The suit alleges that the firms misled the state into funneling retirees’ money into investments that were “secretive, opaque, illiquid, impossible to properly monitor or accurately value, high-fee, high-risk gambles with no historical record of performance.” The suit asserts that these were “absolutely unsuitable investments for a pension fund in the particular situation [Kentucky] was in, and violated the applicable laws, codes and standards.”

“It’s surprising the Attorney General’s office would pursue a case that has already been dismissed by the Kentucky Supreme Court,” said Blackstone spokesperson Matthew Anderson in an emailed statement. “As we’ve demonstrated repeatedly, these claims have absolutely no merit. We delivered more than $150 million in net profits to Kentucky pensioners – and exceeded by nearly three times the benchmark set by KRS itself.”

If the case moves forward, it could tear open the veil of secrecy surrounding the private equity and hedge fund industries, which control hundreds of billions of dollars of retirement funds across the world.

Adding to the precedent-setting nature of the case is the fact that the suit is now coming from a law enforcement office controlled by a Republican Party traditionally considered friendly to Wall Street.

Cameron’s complaint echoes the earlier case’s allegations that Blackstone and KKR unduly profited off a scheme to bilk the state pension system. The attorney general’s suit additionally alleges that Schwarzman and KKR principals Henry Kravis and George Roberts have personally enriched themselves through the schemes.

The attorney general’s office alleges:

Privately owned jet planes of Kravis and Roberts in the case of KKR/Prisma and Schwarzman in the case of Blackstone were used by their respective companies to fly their agents to Kentucky, for which the companies were charged and for which Kravis, Roberts and Schwarzman were reimbursed, in amounts, on information and belief, often in excess of $5 million per year. Thus each of Kravis, Roberts and Schwarzman personally profited from Kentucky business….

Kravis and Roberts were the responsible corporate officers for the selection, oversight, supervision and training of the top officers and personnel of KKR who were involved in the day-to-day dealings with [the Kentucky Retirement System] during the relevant time period. They use their control of KKR to require it rent corporate jets they own, which provides them millions of dollars each year and special tax breaks….

Schwarzman was the responsible corporate officer for the selection, oversight, supervision and training of the top officers and personnel of Blackstone other than himself who were involved in the day-to-day dealings with KRS during the relevant time period. Schwarzman uses his control of Blackstone to require it to rent corporate jets he owns and pay him millions of dollars each year providing him tax benefits. Blackstone is in truth and fact the personally controlled instrumentally and alter ego of Schwarzman.

Read the entire complaint from the Kentucky attorney general here.

This story has been updated to include a statement from Blackstone. The story originally said the corporate jet allegations were new, but those allegations were also included in an amended version of the original Kentucky case brought by retirees.

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David Sirota is editor-at-large at Jacobin. He edits the Too Much Information newsletter and previously served as a senior adviser and speechwriter on Bernie Sanders's 2020 presidential campaign.

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