By Marc Lifsher, Los Angeles Times

May 6, 2010

Reporting from Sacramento —

State authorities sued former top California pension fund officials Federico Buenrostro Jr. and Alfred R. Villalobos on Wednesday for their role in an alleged scheme to get business for investment firms by giving pension officials luxury trips and other gifts.

The civil suit alleges that Buenrostro — chief executive of the powerful California Public Employees’ Retirement System from 2002 to 2008 — took tens of thousands of dollars’ worth of gifts from Villalobos, a former Los Angeles deputy mayor who now works as a go-between for investment firms.

Villalobos and his company, Arvco Capital Research, obtained more than $47 million in “undisclosed and unlawful commissions for selling approximately $4.8 billion worth of securities to CalPERS” from 2005 to 2009, according to the suit, filed by the state attorney general’s office in Los Angeles County Superior Court.

“Buenrostro … played a key role in assisting Villalobos and Arvco in their fraudulent activities,” the suit alleges.

As part of the lawsuit, the state won a court order Wednesday freezing Villalobos’ bank accounts and other assets.

The suit claims that Villalobos compromised Buenrostro and other CalPERS officials with gifts, which ultimately “compromised the integrity of CalPERS’ investment process” and violated the state corporations code.

The gifts included round-the-world trips as well as private jet flights for fund executives to attend a New York fundraiser honoring Leon Black, founder of investment firm Apollo Global Management, the lawsuit said. Apollo is Villalobos’ biggest client at CalPERS.

Neither Buenrostro nor Villalobos could immediately be reached for comment Wednesday. Executives at CalPERS, the nation’s largest public pension fund, declined to comment.

A day after leaving the top job at CalPERS, Buenrostro became a business associate of Villalobos’, the suit alleged. It also alleges that Buenrostro discussed employment opportunities with Villalobos, a friend of more than 20 years, while still serving at CalPERS.

Villalobos made a standing but undisclosed offer to Buenrostro that included a free Lake Tahoe condominium, the lawsuit said. It said Villalobos signed the title to one of his properties over to Buenrostro in December 2009. Buenrostro started working with Arvco a day after he retired from CalPERS in mid-2008.

The state’s suit also discussed actions of two other CalPERS officials, Charles Valdes and Leon Shahanian, who were not named as defendants.

Valdes, a retired Caltrans attorney who left the CalPERS board in January, received $22,400 in campaign contributions in 2005 from a company controlled by Villalobos and from three of Villalobos’ employees.

Villalobos directed the employees to give the money and later reimbursed them, the complaint alleged. Valdes also accompanied Villalobos and Buenrostro on a 10-day trip to Dubai and other world capitals that was valued at more than $20,000.

Shahanian, a senior CalPERS investment officer overseeing a $44-billion private equity portfolio, was one employee who flew on a private jet in 2007 to New York and stayed at a luxury hotel to attend the $2,000 fundraising event at the Museum of Modern Art honoring Black. Also attending were New York Mayor Michael Bloomberg, Caroline Kennedy and director Martin Scorsese.

The lawsuit described the gift as an attempt to influence Shahanian. Shahanian was placed on leave from CalPERS after the suit was filed and could not immediately be reached for comment.

Black’s Apollo, which is not accused of any wrongdoing in the lawsuit, later reimbursed Villalobos $63,000 for the New York trip.

The next morning, Villalobos had Shahanian driven in a limousine to the airport for a flight to Boca Raton, Fla., to attend an annual meeting of another private equity firm, BlackRock Inc.

Most of Shahanian’s expenses were paid by Villalobos. After Shahanian returned to his home in the Sacramento suburbs, he received three bottles of champagne, including one worth $200, from Villalobos, the suit alleged.

A month later, on June 18, 2007, Shahanian recommended in a closed session that the CalPERS board approve a proposed $700 million investment in Apollo.

“Shahanian did not disclose to the CalPERS board that he had just returned from an all-expenses-paid trip with Villalobos to New York to attend the MoMA event,” the lawsuit said.

In its request to freeze Villalobos’ assets, the attorney general’s office alleged that after its investigation “became visible to Villalobos, he engaged in a number of suspicious real estate transfers and continued to engage in frequent, high-stakes gambling.”

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