Documents show Alfred J.R. Villalobos was helping private equity firms win deals with the California pension fund while also working for a firm hired by CalPERS to give it investment advice.

By Evan Halper and Marc Lifsher

December 21, 2009

Reporting from Sacramento – A Nevada businessman was paid $17 million by two private equity firms to help them win business from California’s giant pension fund at the same time he was working for a La Jolla company that was advising the fund on those investments.

The board of the California Public Employees’ Retirement System had been informed about the arrangement during a closed-door meeting.Its legal staff determined there was no conflict of interest, and the board approved $1 billion in investments with private equity funds Apollo Global Management and Aurora Capital Group.

Now, two years later, those deals and the role played in them by Stateline, Nev., businessman Alfred J.R. Villalobos are among the matters that CalPERS officials say they and their outside lawyer are investigating.

Villalobos’ lucrative work for Apollo and Aurora in 2007 was disclosed in October by CalPERS. But only recently has CalPERS revealed the Villalobos ties to Pacific Corporate Group, the La Jolla firm that recommended the Apollo and Aurora investments and has been under contract with the pension fund to provide independent advice on its investments for two decades.

In addition to its consulting work, the company has an investment division that actively seeks business from pension funds. The company has maintained that the divisions operate independently and that as a result, the relationship does not pose a conflict of interest.

California’s public pension fund, its staff and lawyers have been reviewing the role of so-called placement agents, or financial intermediaries such as Villalobos, in helping their clients win a piece of CalPERS’ $200-billion portfolio.

The review began after New York Atty. Gen. Andrew Cuomo issued subpoenas to a number of public officials and businesspeople involved with pension investments, including some people with ties to California, and in some cases brought corruption charges.

Villalobos has been under a spotlight since CalPERS revealed he had been paid at least $70 million in fees over the last decade to help private firms pitch their investment products. He has declined interview requests from The Times.

Pacific Corporate Group Chief Executive Christopher J. Bower declined to answer questions about the 2007 arrangement. But in a letter sent to CalPERS before its decision to invest the $1 billion, Bower disclosed the firm’s relationship with Villalobos and his company.

“They [Villalobos and his company] are not involved in our consulting relationship with you and do not share in or benefit from any fees earned by us for any services we provide to CalPERS,” Bower wrote in a June 8, 2007, letter released by CalPERS this month.

Although CalPERS’ legal staff saw no conflict at the time, some independent ethics experts point out that Pacific Corporate Group’s advice to the pension fund helped create a financial windfall for Villalobos, who was positioned to help return the favor for the firm.

“It is an extreme conflict,” said Mercer Bullard, a securities law professor at the University of Mississippi and a former U.S. Securities and Exchange Commission attorney. Pacific Corporate Group is “evaluating the company Villalobos is working for and Villalobos is doing something for them that has a major impact on their bottom line.”

He said CalPERS’ hiring of a consulting firm with such a conflict is “essentially giving up on true due diligence before the process even starts.”

In a statement, Pacific Corporate Group, which offers both investment consulting and fund management, said it had established a firewall between its two divisions. The company said it had helped guide CalPERS toward billions of dollars in profits over 20 years.

CalPERS spokesman Brad Pacheco said in a statement that the pension fund’s legal staff had determined that Pacific Corporate Group’s relationship with Villalobos did not compromise the value of the consultant’s advice because Villalobos played no direct role in its consulting business.

Pacheco’s statement said that CalPERS’ staff and other independent consulting firms backed Pacific Corporate Group’s recommendation to invest in Apollo and Aurora.

Even so, he noted that “placement agent matters — including this one — are part of the special review” that CalPERS is conducting of the activities of pitchmen such as Villalobos and the commissions they are paid for helping investment managers land business with the pension fund, the nation’s largest.

Remarks by the CalPERS spokesman came after several days of refusal by CalPERS to discuss the matter or reveal any details of the way the fund handled it. Along with the statement, CalPERS, for the first time, publicly released the disclosure letter Pacific Corporate Group had sent to the pension fund informing the agency’s investment staff about the appearance of a conflict of interest.

The letter from Bower officially informed CalPERS that Villalobos had been working for the firm on four separate deals. Three of those deals involved placement agent work the letter did not specify. Additionally, Villalobos was advising Pacific Corporate Group on structuring a private equity investment fund managed by the La Jolla firm in which CalPERS committed $500 million.

Shortly after the Apollo deal was completed, Villalobos also was a placement agent for Pacific Corporate Group in its unsuccessful bid to try to sell a $100-million stake in the firm to the pension fund.

Since the Apollo and Aurora deals were closed in 2007, investment results have been mixed. The $600-million Apollo investment has suffered substantial losses. Only a small fraction of the $400-million commitment to Aurora has been carried out, and it has shown a profit.

Representatives of both Apollo and Aurora declined to comment.

Meanwhile, Pacific Corporate Group has drawn the attention of Cuomo in an unrelated investment.

New York prosecutors alleged that a partner at Pacific Corporate Group knowingly entered the company into an investment deal in which kickbacks were paid to a state official. The partner acted on his own, without the knowledge of other company officials, according to legal filings by prosecutors.

As part of a settlement with New York prosecutors in July, the company did not admit any wrongdoing but agreed to return $2.1 million to the New York State Common Retirement Fund, cooperate with investigators and restrict its lobbying activities.

More than a decade earlier, the company’s dealings with CalPERS raised concerns about possible conflicts of interest.

In 1994, Pacific Corporate Group recommended that CalPERS invest with the Dallas financial firm Hicks Muse. Bower later sold a yacht to Thomas Hicks, the chief executive of Hicks Muse, for $300,000 — $45,000 more than Bower paid for it two years earlier.

Staff members at the pension system brought the sale to the attention of CalPERS attorneys, who determined there was no conflict under the law. CalPERS asked Bower to amend his financial disclosure statement to the pension system to reflect the sale.

Asked about the latest controversy surrounding the La Jolla firm, Kathay Feng, executive director of California Common Cause, a nonprofit citizens’ lobbying group, was critical.

Feng said she questions whether all the advice the pension fund has received from Pacific Corporate Group “was really based on a fair evaluation and not just on potential financial gain by a firm or by placement agents they were associated with.”