By Dale Kasler
dkasler@sacbee.com
Published: Wednesday, Mar. 16, 2011 – 12:00 am | Page 3A

With CalPERS wrapping up the in-house investigation into its bribery scandal, the pension fund began bracing Tuesday for the next phase: criminal prosecutions.

“It is time for law enforcement to do what it sees fit to do,” Philip Khinda, the Washington lawyer hired by CalPERS to investigate, told the pension fund’s board.

CalPERS documents show that federal prosecutors are investigating. Former board member Alfred Villalobos has already been accused in a lawsuit by the state attorney general of bribing former CalPERS Chief Executive Fred Buenrostro and two others to steer pension investments to his Wall Street clients. All deny any wrongdoing.

Khinda on Tuesday formally delivered a stinging 56-page summary of his findings to the board. The report was released to the public the night before.

Though Khinda’s 18-month investigation is over, other fallout could emerge. CalPERS must decide what to do about Medco Health Solutions Inc., the New Jersey pharmaceutical-benefits company caught up in the scandal.

Medco paid Villalobos a $4 million fee to help win a contract in 2006 to administer drug benefits to CalPERS members, according to Khinda’s report. CalPERS earlier this month said the Medco-Villalobos tie is being investigated by the California attorney general and the Securities and Exchange Commission.

Medco’s $8 million-a-year contract with CalPERS expires at year’s end, and the company is a finalist for a three-year renewal.

“We’re still in negotiations,” CalPERS President Rob Feckner said. “We have not signed a contract.”

Asked whether the contract renewal is in jeopardy, Medco spokeswoman Jennifer Leone Luddy said, “That’s something that CalPERS is going to have to answer.”

In his report, Khinda said Medco CEO David Snow met Villalobos and Buenrostro at Villalobos’ Lake Tahoe mansion in early 2004. The company then hired Villalobos even though he had no experience in the drug industry and Medco had a consultant to help win the CalPERS contract.

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