KY state pension system’s former investment chief claims embezzlement in lawsuit

Steven Herbert, the former chief investment officer for Kentucky’s state pension system, filed a whistle-blower lawsuit against the agency Friday, alleging he was fired for drawing attention to the embezzlement of millions of dollars.

“They hired him to come up here and look and see if they were making proper investments with the pension money, and that’s what he did,” said Thomas E. Clay, the former CIO’s attorney.

The $22 billion Kentucky Public Pensions Authority contests Herbert’s claims, filed in Franklin Circuit Court.

The suit “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,” KPPA executive director David Eager said.

Herbert worked for KPPA from January 2021 until last May 31. He previously was chief operating officer for Florida-based Augustine Asset Management.

After Herbert started at KPPA, according to the suit, he immediately had concerns about a subsidiary, Perimeter Park West, which owns the pension system’s office complex on Louisville Road in Frankfort. Perimeter Park West failed to pay millions of dollars in dividends it owed to the pension system over a period of years, according to the suit.

“When plaintiff inquired about the missing funds, he was told by (KPPA general counsel) Victoria Hale that Crumbaugh Properties had embezzled the funds,” according to the suit.

Crumbaugh Properties of Frankfort at that time had a contract with Perimeter Park West to clean and maintain KPPA’s offices, Clay said. Under the terms of its contract, Crumbaugh Properties was supposed to return an unspent portion of its money as “dividends,” Clay said.

Crumbaugh Properties did not immediately return a call seeking comment on Friday.

“When plaintiff suggested legal action against Crumbaugh Properties, his suggestion was denied because of ‘Crumbaugh’s connection with the Court system in Franklin County,’” according to the suit. The suit offers no further explanation for that comment.

Herbert continued to ask why Perimeter Park West’s books didn’t balance, encouraged in part by an inquiry from a trustee for the County Employees Retirement System who “expressed concerns about funds being wired out of the retirement trust to external depository accounts without proper accountability,” according to the suit.

Early this year, Herbert discovered that Perimeter Park West’s “financial statements reported an ‘accumulated deficit,’ which, when combined with other accounting irregularities, caused the need for a balancing entry (e.g., plug) of over $10 million. This appears to be directly linked to the theft perpetrated by Crumbaugh Properties,” according to the suit.

An internal KPPA audit from 2019 corroborated Herbert’s concerns “that Crumbaugh Properties had potentially misappropriated or stolen funds over several years,” according to the suit. A more recent audit by Blue and Co. LLC “confirmed that there were irregularities in the handling of pension funds,” according to the suit.

On Oct. 5, 2021, according to the suit, Herbert wrote a memo expressing concerns about money that was leaving retirement trust fund accounts for external bank accounts without the oversight of the KPPA Board of Trustees. Eager, the KPPA executive director, then sent him an email instructing him to not discuss the matter further with trustees unless Eager approved such communication, according to the suit.

“Plaintiff received what appeared to be a termination letter on May 31, 2022, signed by executive director Eager, stating the action was being taken ‘without cause,’” according to the suit.

“The action taken by KPPA executives related to tens and tens of millions of dollars which were transferred by wire 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,” according to the suit.

Herbert has since returned to Florida, his lawyer said.

Perimeter Park West has made headlines before.

In 2015, the state auditor issued a report accusing the state pension system of improperly using $700,000 of its medical insurance money on an “ill-advised” real-estate deal, one that involved improper mingling of funds, a lack of basic investment research and internal conflicts of interest.

The pension system in 2006 bought a 1.9-acre property next to its Frankfort offices for $752,000, three months after a local veterinarian paid $450,000 for it. KRS later sold the land to the Kentucky State Police for $325,000.

To buy the property, the pension system listed the money on its books as an unsecured loan to Perimeter Park West. Most of the loan was forgiven four months later, although Perimeter Park West had the assets to repay the loan.

Several top state pension officials resigned or retired shortly after the land deal was made public.