By Dale Kasler
Published: Monday, Sep. 13, 2010 – 1:15 pm
Last Modified: Monday, Sep. 13, 2010 – 3:03 pm

The state’s massive lawsuit over alleged corruption at CalPERS was essentially blocked today by a federal bankruptcy judge.

U.S. Bankruptcy Judge John Peterson refused to let California officials pursue their $95 million lawsuit against Alfred Villalobos, the Nevada businessman accused in the suit of bribing three officials at the pension fund.

The state can still go after his co-defendant, former CalPERS Chief Executive Fred Buenrostro. But the ruling is a big setback for the state, which says Villalobos has millions of dollars.

Villalobos filed for bankruptcy in June, a month after the suit was filed by Attorney General Jerry Brown. Typically a bankruptcy filing shields the debtor against litigation, and the judge indicated at a recent hearing that he would keep the shield intact in this case.

The state had said in court that although the bankruptcy would prevent it from collecting any money from Villalobos for the time being, it wanted the right to seek a court judgment to keep him from harming CalPERS any more. But the judge noted that his main company, Arvco Capital, has been closed for two years and that “CalPERS presently has no active business with Mr. Villalobos.”

Villalobos was a placement agent seeking investments from the pension fund for his Wall Street clients. The lawsuit accused him of showering three pension fund officials with gifts, including his co-defendant Fred Buenrostro, the former CalPERS chief executive.

Both have denied any wrongdoing, and the judge took issue with some of the state’s allegations. Peterson cited testimony from various CalPERS officials saying “nothing Mr. Villalobos is alleged to have done affected CalPERS’ investment decisions or caused them damages of any kind.”

The judge added that “the investments at issue are universally regarded as good and appropriate deals for CalPERS.”

Legal experts say the state could pursue a claim against Villalobos in bankruptcy court, but that venue tends to be more friendly towards debtors.

Officials with CalPERS and the attorney general’s office weren’t immediately available for comment. Villalobos’ lawyer couldn’t be reached either.

Jim Finefrock, a spokesman for the attorney general, said Brown’s office is considering an appeal of the ruling. In the meantime, his office will continue to investigate the CalPERS case no matter what happens with the Villalobos lawsuit.

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