By Ed Mendel
Thursday, June 21, 2012

Middlemen who help investment funds get money from CalPERS received $1.85 million in fees during the past two years, a sharp drop from the $58 million collected by a former CalPERS board member in a pay-to-play scandal.

A report on “placement agent” fees given to the CalPERS board last week was the first required by reform legislation. Big fees received by Al Villalobos, a former CalPERS board member, prompted a long list of reforms.

A trial on bribery-related fraud charges against Villalobos and former CalPERS chief executive officer, Fred Buenrostro, is scheduled next Jan. 28 in Santa Monica in a civil lawsuit filed by the state attorney general.

Villalobos allegedly influenced CalPERS officials with a round-the-world trip for former board member Charles Valdes, a private jet trip to New York for former private equity officer Leon Shahinian and a promised $300,000 job and condo for Buenrostro.

When the suit was filed in May 2010 the attorney general at the time, Jerry Brown, seemed to suggest criminal charges were being considered. “This is not the end of this case or the end of this investigation,” he said. “Things could follow.”

There has been no word of criminal charges from the current attorney general, Kamala Harris. But last April the U.S. Securities and Exchange Commission filed fraud charges against Villalobos and Buenrostro in federal court in Nevada.

The SEC lawsuit said Villalobos received more than $70 million in placement agent fees during a period of about 10 years, at least $58 million coming from the California Public Employees Retirement System.

The narrow focus of the lawsuit is on disclosure forms, allegedly fabricated by Villalobos and Buenrostro. The phony disclosures were used to show a private equity firm, Apollo, that CalPERS knew about the fees Apollo would be paying Villalobos.

“As part of the scheme, Buenrostro signed blank sheets of (fake) CalPERS letterhead, which Villalobos and ARVCO used to generate investor disclosure letters as needed (by running the paper through a printer a second time),” said the SEC lawsuit.

“In aggregate, based on these fabricated documents, Apollo was induced to pay ARVCO more than $20 million in placement agent fees it would not otherwise have paid without the disclosure letters.”

The lawsuit charging fraud in the sale and purchase of securities, packed with detail from a lengthy investigation, cites some amateurish bumbling: an incorrect CalPERS letterhead and a disclosure form listing the wrong fund.

But like the attorney general’s lawsuit, the SEC lawsuit does not address the big question:

Why would a major private equity fund pay $20 million in fees to the firm of a man who left the CalPERS board in 1995 and was living in a big house, with two high-end luxury Bentley autos on the low-tax Nevada side of scenic Lake Tahoe?

You might suspect he was an expert at structuring profitable investment funds, a master of the winning sales pitch or, perhaps less charitably, a high-flying influence peddler believed to have connections inside CalPERS that could make or break a deal.

If Apollo was paying Villalobos simply because of his presumed CalPERS connections, the big fees could look like a bribe. But another part of the puzzle is that Apollo seemed to have CalPERS connections.

“In June 2007, CalPERS invested directly in Apollo, acquiring approximately 10 percent of Apollo’s non-voting shares for about $600 million,” said the SEC lawsuit.

Apollo adopted the disclosure policy “sometime in the first half of 2007.” In August of that year, the CalPERS investment office declined to sign the first Apollo fee disclosure requested by Villalobos.

After repeatedly asking for a fee disclosure, Apollo in early 2008 talked about going directly to CalPERS. The SEC lawsuit said that’s when Villalobos generated the phony disclosures and Apollo began paying the big fees.

Could a hard-nosed prosecutor or regulator look at this situation and charge Apollo with paying a bribe?

Someone unfamiliar with the law might think so. But apparently the more prudent course for experienced litigators is to spend a couple of years assembling the facts needed for a solid fraud case, even if it only nets the little fish.

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