Villalobos

Business

By Dale Kasler
dkasler@sacbee.com
Published: Sunday, Aug. 15, 2010 – 12:00 am | Page 1A

Alfred Villalobos, a sometimes pugnacious businessman with a troubled financial history, wasn’t an obvious candidate to charm his way into the inner circle of America’s largest public pension fund.

Though he had served three years on the CalPERS board in the 1990s, he wasn’t a universally popular figure. When he reappeared at CalPERS’ Sacramento headquarters two years after his departure, pitching investment deals, many within the organization were appalled at his heavy-handed lobbying. Amid the uproar, one of his earliest clients fired him, and his activities prompted hearings in the Legislature.

But the Stateline, Nev., businessman persisted. Over the course of a decade, he penetrated the very heart of the California Public Employees’ Retirement System, allegedly co-opting the chief executive and other top officials. His reward was more than $50 million in commissions earned on $4 billion worth of investments he pitched to the fund.

Villalobos’ work has become an influence-peddling scandal for CalPERS. State and federal officials are investigating, and CalPERS has commissioned its own examination of how one man could allegedly corrupt a $200 billion institution whose governing board includes the state treasurer and controller.

Attorney General Jerry Brown says in a lawsuit that Villalobos bribed his way to success, delivering job offers, junkets and other goodies to three top officials. Villalobos has angrily denied any wrongdoing, and no criminal charges have been filed.

A Bee investigation shows how Villalobos was able to secure billions of dollars’ worth of investments with minimal oversight. He was aided by a crucial policy shift at CalPERS – a change prompted in part by criticism over his lobbying on previous deals.

Starting a decade ago, the CalPERS board delegated much of the responsibility for investment decisions to its staff. That meant Villalobos could operate more quietly, without having to engage in the messy and sometimes public process of persuading the 13-person CalPERS board.

“Delegation kept these things under the radar screen,” said Dave Elder, a retired assemblyman who monitors CalPERS for public employee unions.

Villalobos’ work brought him wealth and stature. He lives in a $10 million mansion overlooking Lake Tahoe and has won and lost millions at Nevada casinos. He sits on the board of trustees at his alma mater, Whittier College, where a building is named after him.

But he has been crippled financially by the state’s lawsuit, which demands $95 million. He filed for bankruptcy in June, the second time he has done so in his roller-coaster career. Most of his assets have been frozen, and he testified at a bankruptcy hearing last month that he must rely on his daughters-in-law for food handouts.

“Thank God there are humans on earth who are more compassionate,” he said, glaring at two state lawyers.

Aside from court hearings, he isn’t talking. He has turned aside interview requests from The Bee. And he invoked his Fifth Amendment right against self-incrimination more than 1,000 times while being questioned in April by lawyers for the state and the Securities and Exchange Commission, according to state officials.

Villalobos assembled a blue-chip client roster, including Wall Street titan Apollo Global Management and Los Angeles’ Aurora Capital Group, run by California power broker Gerald Parsky.

His job as a “placement agent” was to help them market investment proposals to CalPERS – opening doors, making introductions, discussing the terms of deals.

Creature of CalPERS

He represented clients elsewhere, successfully pitching deals to the California State Teachers’ Retirement System, the New York state fund and others.

But mainly he was a creature of CalPERS.

“I don’t recall seeing Al anywhere but at the CalPERS board meetings,” said Dan Weinstein, a well-traveled placement agent.

The state’s civil lawsuit says Villalobos bribed three men: former CalPERS Chief Executive Fred Buenrostro, recently retired board member Charles Valdes and senior investment officer Leon Shahinian, who has been placed on leave.

Villalobos and Buenrostro, the only two men who were sued, have said they did nothing wrong. Valdes and Shahinian couldn’t be reached for comment.

Villalobos, a stocky 67-year-old with jet-black hair, has been an investment banker since 1973. He served on bank boards and ran a small economic development agency in the Nixon administration.

His connection with CalPERS began in 1992, when Gov. Pete Wilson appointed him to the five-person State Personnel Board, which oversees the civil service system.

“Al was a very prominent Latino Republican,” said former Republican State Treasurer Matt Fong. “There were very few, but he was always there, he was always there raising money.”

The Personnel Board quickly named him to fill its seat on the CalPERS board. It wasn’t considered a plum assignment.

“CalPERS wasn’t the huge – it wasn’t in the forefront that it is today,” said Lorrie Ward, who served on the Personnel Board then. “It was kind of, who was willing (to serve).”

With his finance background, Villalobos stood out on the CalPERS board, which was dominated by laypeople. Six of the 13 members are elected by current or retired public employees.

“Quite knowledgeable, did his homework,” said Bill Crist, who was president during Villalobos’ time on the board.

In 1993, Los Angeles Mayor Richard Riordan named him deputy mayor for economic development.

The appointment ended in humiliation six months later. Villalobos resigned after the Los Angeles Times reported that he had run up big casino debts and had filed for bankruptcy a decade earlier.

The paper also revealed his links to a 1991 bribery scandal in Texas, in which he loaned $20,000 to the head of a federally funded agency that paid him $100,000 for consulting work. Villalobos wasn’t charged and told the Times he did nothing wrong.

Villalobos left City Hall in late 1993 but stayed at CalPERS and the Personnel Board two more years.

Friction at CalPERS

In 1997 he returned to CalPERS as a placement agent. His company, Arvco Capital Research, was hired by Hicks Muse Tate & Furst, a Texas firm seeking $100 million from CalPERS. The work was legal because Villalobos had waited more than a year before coming back.

He got the deal, but there was friction. CalPERS’ staff opposed the investment, and normally that would have killed it. But Villalobos lobbied board members and pushed the deal through in a vote held behind closed doors.

Afterward, details leaked out and controversy erupted. Top CalPERS officials were hauled before a Senate committee to defend their practices.

Undaunted, Arvco returned in 1998 to pitch a deal for CIM Group, a Los Angeles real estate firm. The CalPERS staff resisted at first, and the deal was in limbo.

Villalobos’ efforts to revive it ran into headwinds. He got a meeting with board member Sean Harrigan at the Ontario airport, but Harrigan wasn’t impressed.

“I was very irritated with the way he did business,” Harrigan said recently. “He was trying to jam this thing through without due diligence.”

The deal was still being studied by the staff when it got a boost from board member Charles Valdes, chairman of the powerful investment committee.

At a public meeting in May 2000, Valdes accused the staff of dragging its feet on the CIM deal.

“The reason … is the association of Mr. Alfred R. Villalobos,” he said. “No investment opportunity should be sat on for 18 months just because you don’t happen to like the individual involved.”

CIM Group terminated its contract with Arvco in August 2000. It never said why. But in a later filing with CalPERS, it noted that Villalobos’ presence had been discussed by board and staff members.

A month after Villalobos’ firing, the CalPERS board voted 7-3 to invest $125 million with CIM.

Arvco got paid despite being fired. The fee grew to $9.6 million after CalPERS increased its investment.

The CIM deal marked a turning point of sorts. The drama over Villalobos’ lobbying, just three years after the Hicks Muse flap, fed a perception that CalPERS could be influenced. Stories appeared in the media, detailing investments approved after board members got campaign donations.

CalPERS was also absorbing a report by consulting firm McKinsey & Co. that said requiring board approval for every investment was too cumbersome. McKinsey warned that CalPERS could miss out on promising investments if it didn’t streamline its decision making.

So in spring 2000, as it was still wrestling with the CIM deal, the board took its first steps toward delegating investment decisions to its staff, according to CalPERS records.

Eventually the 200-person staff was making deals worth several hundred million dollars. The board was kept apprised of the deals but didn’t vote on them.

Delegation simplified Villalobos’ work.

“You didn’t need to lobby the entire board,” said Elder, who chaired the Assembly Public Employees, Retirement and Social Security Committee while in the Legislature.

Three key players

Villalobos exploited his ties to key decision makers, notably Buenrostro, Valdes and Shahinian.

All three had major roles to play.

Even though most investment decisions were now made at the staff level, Valdes – a board member – helped open doors.

Mike McCook, who worked in real estate, went to lunch with Villalobos once at Valdes’ urging.

He said he didn’t feel any pressure. But Elder said the Valdes connection surely had an effect on the staff.

“The fact that Chuck Valdes was (Villalobos’) friend would be intimidating,” Elder said.

Valdes was a Caltrans lawyer who filed for bankruptcy twice in the 1990s. In 2005, Villalobos arranged for three of his Arvco employees to donate $5,600 apiece to Valdes’ campaign to win another seat on the CalPERS board. Villalobos reimbursed the employees for the donations, the state’s lawsuit says.

In 2006, Valdes was hit with a $17,000 judgment for unpaid credit card debts; a lien was placed on his Carmichael home. Three months later, the suit says, Villalobos took Valdes and Buenrostro on a round-the-world trip that made stops in London, Dubai and Hong Kong, paying for their expenses.

Valdes and Buenrostro had befriended Villalobos a decade earlier, when all three served on the CalPERS board. After Buenrostro became the organization’s CEO in 2002, he began guiding investments in favor of Villalobos’ clients, according to the lawsuit.

“People were aware that Fred was pushing stuff,” said J.J. Jelincic, a staff member who was elected to the CalPERS board this year. He added that he hadn’t been aware of any improper behavior.

The suit says Buenrostro urged his underling Shahinian to “build a closer relationship” with Villalobos. In 2007, Villalobos took Shahinian on an all-expenses-paid junket to New York. While there, they attended a museum gala honoring Leon Black, head of Apollo Global Management, Villalobos’ most important client.

Weeks later, Shahinian persuaded the CalPERS board, in one of the few deals that still required board approval, to invest $600 million with Apollo Global Management.

The lawsuit says Buenrosto held his 2004 wedding at Villalobos’ mansion, paid for by his host. Villalobos allegedly made him a standing offer of a job at Arvco and a free condominium – and made good on those promises after Buenrostro left CalPERS.

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