By Dale Kasler
dkasler@sacbee.com
Published: Tuesday, Dec. 14, 2010 – 12:00 am | Page 6B

The lawyer hired by CalPERS to investigate its bribery scandal urged the pension fund Monday to police itself and its investment partners far more vigorously.

The recommendations by Washington, D.C. attorney Philip Khinda, who has been investigating CalPERS for more than a year, amount to a broad array of reforms for the nation’s largest public pension fund. Khinda’s proposals range from a ban on gifts to board members to a restructuring of how CalPERS doles out the millions of dollars in fees it pays its investment partners.

His nine pages of proposals followed a series of allegations that have damaged the reputation of the $220 billion California Public Employees’ Retirement System.

Attorney General Jerry Brown charged in a lawsuit in May that so-called placement agent Alfred Villalobos bribed then-CalPERS Chief Executive Fred Buenrostro and two other officials to influence their investment decisions. All deny any wrongdoing.

Villalobos, a one-time board member, collected more than $50 million in fees representing investment clients before CalPERS.

Board members won’t vote on Khinda’s proposals until next year, but generally accepted his plan as a kind of harsh medicine.

“I endorse in concept the need for change,” said President Rob Feckner. “It’s our job to look in the mirror.”

Anne Stausboll, the current CEO, said the reforms are designed so “never again will CalPERS’ credibility be called into question.”

Khinda, of the law firm Steptoe & Johnson, said he believes CalPERS is “extraordinarily committed” to his proposals.

CalPERS has already undertaken some reforms on its own, including a ban on gifts to staff members. The pension fund also sponsored successful legislation that forbids private equity firms to pay placement agents contingency fees for obtaining pension fund investments; the theory is that contingency fees invite corruption.

CalPERS should go further, Khinda said.

He said board members, not just staffers, should be prohibited from accepting gifts from placement agents or their clients. The state’s lawsuit alleges that Villalobos took former board member Charles Valdes on an all-expenses-paid round-the-world trip in 2006 and gave him other gifts.

Valdes has denied any wrongdoing but, like Villalobos and Buenrostro, has invoked his Fifth Amendment right against self-incrimination while being questioned by investigators.

Khinda also recommended a “cooling-off period,” similar to federal law, that would require CalPERS employees who leave the fund to wait two years before going to work for an investment partner or placement agent. Current state law lets those former employees work right away for the outside party as long as they don’t immediately lobby CalPERS on behalf of their new employers.

The state’s lawsuit charges that Villalobos made a standing job offer to Buenrostro – and made good on the promise just a day after Buenrostro quit as CalPERS CEO in 2008.

Khinda also wants Cal-PERS to punish its wrongdoers more swiftly.

The Legislature, he wrote, should alter civil service rules so CalPERS can streamline its disciplinary procedures when someone is suspected of wrongdoing – and slash the pay of top investment staffers “during the discipline and termination process.”

That recommendation could be aimed at the case of Leon Shahinian, a senior investment officer who was identified in Brown’s lawsuit as having taken bribes from Villalobos. Shahinian, a $348,000-a-year employee, stayed on at full pay for four months after the lawsuit was filed before leaving in August.

Shahinian isn’t a defendant in the lawsuit and has said through his lawyer that he did nothing wrong.

Some of Khinda’s recommendations go to the heart of the private equity industry and how it’s funded. He said CalPERS should forbid its investment partners to use any of the pension fund’s dollars to pay placement agents.

What’s more, he urged CalPERS to stop paying its partners a fee based on the size of the original investment, regardless of how it performed. In the future, “CalPERS should insist that nearly all of the fees it pays be in the form of incentive fees paid based on the success of the investments,” he wrote.

He said the generous fees paid by CalPERS have been “an apparent excess” that made it easier for the partners to pay commissions to placement agents.

“Over the years, CalPERS often simply accepted what it believed were market terms or conditions, rather than using its size and reputation to secure the best possible terms on fees it pays to have its money managed,” Khinda wrote.

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