March 22, 2011
By Ed Mendel

Could CalPERS have avoided the current corruption scandal if, like CalSTRS, it had adopted a staff recommendation in 2007 requiring private equity firms to disclose fees paid to “placement agents” like Alfred Villalobos?

A member of a small group that formed lasting relationships while serving with Villalobos on the CalPERS board during the 1990s, Kurato Shimada, chaired a committee that bottled up the staff recommendation, never bringing it up for a vote.

The incident is mentioned in a report issued last week by CalPERS, an 18-month special review by a national law firm commissioned in the fall of 2009 after a survey of private equity firms found Villalobos received more than $50 million in fees.

The review describes how former CalPERS board member Fred Buenrostro, described as a Villalobos “puppet” by an ex-wife and girlfriend, used his later position as CalPERS chief executive to try to steer CalPERS investments to Villalobos clients.

A 25-year board member, Charles Valdes, who declared personal bankruptcy twice while chairing the CalPERS investment committee, is said to have had a reputation for liking travel and gifts from money managers seeking CalPERS investments.

A 37-year board member, the late Robert Carlson, met with the other four at the Lake Tahoe home of Villalobos in 2004 to discuss a CalPERS contract with Medco, now under state and federal investigation for paying Villalobos $4 million.

The CalPERS auditorium is named in honor of Carlson, with his name emblazoned over the entrance. The review said Buenrostro was hired as CalPERS chief executive in 2002 with the support of Shimada, Valdes and Carlson.

Was Buenrostro made California Public Employees Retirement System chief executive with the understanding that he would be an inside man for Villalobos, or was he recruited later?

There are a number of unanswered questions in the report by lead author Phillip Khinda of Steptoe and Johnson in Washington, D.C. Some of the key players would not talk to him. State and federal investigators asked that some information be withheld.

Alfred Villalobos

Villalobos was in well-publicized CalPERS investment controversies before Buenrostro became chief executive. He helped a Texas firm, Hicks Muse Tate & Furst, get board approval in 1997 of a $100 million investment, despite staff opposition.

Several years later, Villalobos’s aid in helping a Los Angeles real estate firm, CIM, get a $125 million CalPERS investment reportedly earned him a fee of more than $9 million.

The special review by Khinda said Shimada, who took a break after serving on the CalPERS board from 1987 to 1999, worked for Villalobos on the CIM project in 2000 before rejoining the board again in 2002.

Valdes was “threatened with being ruled out of order” during an Investment Committee meeting when he accused the CalPERS staff and an outside consultant of “dishonesty” for recommending a reduced and restructured CIM investment.

A Sacramento Bee investigation last year said the flap over the CIM investment and reports of investment-related campaign contributions to board members may have helped Villalobos by encouraging a crucial change in CalPERS policy.

The CalPERS board in 2000, following a consultant’s argument for more nimble action to take advantage of investment opportunities, took its first steps toward a policy of letting staff rather than the board make most investment decisions.

“Delegation kept these things under the radar screen,” former Assemblyman Dave Elder, D-Long Beach, a former chairman of the Assembly retirement committee, told the Bee.

By 2006 the activities of Villalobos prompted Los Angeles Times reporters to make a Public Records Act request for CalPERS internal documents dating back to 2001 on Villalobos and former state Sen. Richard Polanco, D-Los Angeles.

CalPERS denied the request, arguing that disclosing the documents might harm the pension fund’s fiduciary duty to “maximize” the value of investments and “continue to invest with top-tier private equity funds.”

The token CalPERS response to the Times included a story from “The Deal” about one of Leon Black’s Apollo private equity funds, which would pay Villalobos more than $40 million in fees for aid in obtaining CalPERS investments.

The new review said Buenrostro urged staff approval of an investment for another high-profile Villalobos client, the Aurora fund of Gerald Parsky, a former UC Regent chairman who chaired Schwarzenegger commissions on pension and tax reform.

An Aurora fund received $400 million from CalPERS, and Parsky agreed to pay Villalobos a $4 million fee. The new review said CalPERS staff appeared to have evaluated Aurora and Apollo proposals on their merits, unswayed by Buenrostro.

Fred Buenrostro

But the review said complaints to CalPERS board chairman Rob Feckner from two chief investment officers and the top private equity manager about pressure on behalf of what the staff called “friends of Fred” led to Buenrostro’s ouster in 2008.

Nonetheless, Feckner issued a news release on April 28, 2008, denying “erroneous speculation” in the press that Buenrostro was being forced out because of friction with the CalPERS board.

“Our silence should not send the wrong signal,” Feckner said. “I speak for the entire board when I say that Mr. Buenrostro has served with distinction and has worked effectively over the last six years as our CEO.”

Feckner said that like many other CalPERS executives “who have given up lucrative private sector opportunities to serve the public,” Buenrostro had talked about wanting “to pursue exciting opportunities in the private sector.”

Immediately after leaving CalPERS Buenrostro went to work for Villalobos, reportedly receiving $300,000 year. Buenrostro’s ex-wife told investigators that a job and a Tahoe condo were a standing Villalobos offer while Buenrostro worked at CalPERS.

After a pay-to-play pension scandal erupted in New York in early 2009, state Treasurer Bill Lockyer asked CalPERS and CalSTRS for a list of placement agent fees paid by their investment funds.

Carlson auditorium

The California State Teachers Retirement System was able to respond because of a fee disclosure policy adopted three years earlier. CalPERS had to survey its private equity funds, revealing in the fall of 2009 the large fees paid to Villalobos and others.

“It is very possible that if, in 2007, the CalPERS Benefits and Program Administration Committee had acted on the placement agent disclosure recommendations made by the staff, the matters giving rise to the special review may have been minimized,” Khinda wrote in his report.

Buenrostro may now wish CalPERS had indeed adopted a fee disclosure then. The state attorney general filed a bribery-related civil lawsuit last year against Buenrostro and Villalobos containing some of the information in special review.

The lawsuit and the special review both said Buenrostro filed “bogus” disclosure forms telling Black’s Apollo fund that CalPERS knew of the fees paid to Villalobos.

The special review said a new Apollo attorney demanded the disclosure forms before paying Villalobos a $20 million fee. CalPERS investment staff had refused to sign the disclosure forms.

Asked to speculate about punishment if Buenrostro is charged with a crime and found guilty, Khinda gave the CalPERS board a hypothetical example based on whether the disclosure forms are combined or charged separately: five to 55 years in prison.

The special review suggests that investment firms, with existing relations with CalPERS, paid large placement fees for no apparent services as a kind of “insurance” against having the placement agents use their influence to undermine them.

The review puts Villalobos and his ARVCO firm in a category of placement agents that are hired primarily because of their close connections to CalPERS board members and staff.

“Of the approximately $180 million that appears to have been paid to placement agent firms by external managers in connection with CalPERS investments, over $120 million was paid to placement agents of this type,” said the review.

Among others, the review mentions Darius Anderson, who paid a $500,000 fine for his involvement in the New York scandal, and Dan Weinstein’s DAV/Wetherly Financial, also mentioned in the New York probe.

CalPERS backed legislation urged by Lockyer that requires placement agents to register as lobbyists and prohibits “contingency” fees based on a percentage of the pension fund investment.

The special review helped CalPERS negotiate a $300 million reduction in management fees private equity and real estate firms will charge on future investments. A number of recommendations to curb abuses have been adopted.

Shimada resigned from the CalPERS board last year after repeatedly amending his testimony when called as a witness by Villalobos, who declared bankruptcy after the attorney general’s lawsuit. Valdes chose not to run for re-election.

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