LP Briefs, April 2011

Report Details CalPERS Bribery Scandal

In a determined effort to cleanse its damaged reputation, the California Public Employees’ Retirement System recently released a detailed 56-page report investigating charges that former senior officials at the state public pension were bribed with luxury gifts and travel from a prominent placement agent, Alfred Villalobos, in an effort to steer billions of dollars in investment funds toward select asset managers.

Attorney Philip Khinda and his law firm, Steptoe & Johnson, produced the report, which was financed by CalPERS as part of an internal investigation into the alleged abuses. The report says efforts by Villalobos and his agency, Arvco Capital Research, helped garner about $60 million in fees for investments placed with CalPERS during a 6-year period.

The investigation and report, which took 18 months to produce, was formally released at a CalPERS board meeting last month in Sacramento, Calif. CalPERS is the nation’s largest state pension fund with $230 billion in assets.

Rob Feckner, president of CalPERS’ board, responded in a written statement, saying: “We condemn in the strongest possible way the apparent misconduct described in this report.”

The report recommended new safeguards, some of which CalPERS has already adopted, to reassure its 1.6 million represented employees and pensioners that the alleged abuses will not happen again. Prominent among the new rules is that placement agents now must register as lobbyists and can no longer charge contingency fees.

Among the report’s revelations:

• Wedding expenses involving the 2004 nuptials of then-CalPERS CEO Federico Buenrostro were paid by Villalobos.

• Buenrostro apparently intervened on behalf of certain connected private equity and real estate firms, firms that CalPERS staff came to call “Friends of Fred.”

• CalPERS likely spent several million dollars in placement fees “that bore little or no relationship to the services provided.” Moreover, the fees investment firms charged CalPERS were likely to have been increased to reflect the amounts Villalobos charged the investment firms.

Villalobos and Buenrostro previously denied any wrongdoing. —Gregory RothNew Mexico Passes Law to Remove Governor from Investment Council

After an embarrassing federal investigation into corruption charges at the New Mexico State Investment Council, legislators voted to remove the governor from chairing the board that approves decisions on where to invest the state’s pension money.

Current Gov. Susana Martinez, is expected to sign the bill. She has sided with critics of the current system and has said that neither she nor any other politician should manage the state’s investments. If signed into law, the changes could be put into place by 2013.

The drive to lessen the role of politics in investment decisions stems from a federal investigation into the role played by previous New Mexico Gov. Bill Richardson. He was alleged to have channeled funds into projects that he favored. No charges have yet been announced.

New Mexico’s Investment Council manages $15 billion in pension funds, including $1.3 billion in private equity investments. —Gregory RothMorris Gets Sentenced for Pay-to-Play ScandalHenry “Hank” Morris, who was called the mastermind behind the pay-to-play pension fund scandal, was sentenced to the maximum term of up to 4 years in state prison.

Morris is the former adviser to ex-New York Comptroller Alan Hevesi. In November, he pleaded guilty to a single felony in the state’s long running corruption investigation.

As part of a plea agreement, Morris has been permanently banned from the securities industry in New York state and also forfeited $19 million.

“Today, justice was served on Hank Morris, who will be appropriately punished for his role in one of the largest pay-to-play schemes in New York State history,” New York Attorney General Eric T. Schneiderman said in a statement.

The New York AG’s office, under Andrew Cuomo, who is now New York governor, investigated the pay to play practices at the New York State Common Retirement Fund for the past three years. Hevesi was sole trustee of the fund, which is valued at $124.8 billion. Cuomo has charged that the fund became “a piggy bank” for Morris, who reaped millions of dollars in fees from individuals and firms seeking to invest the state’s money.

Hevesi was awaiting sentencing as of the VCJ deadline. The ex-comptroller pleaded guilty to a single charge of felony corruption in October. He faces up to four years in prison. —Luisa BeltranOmaha School Employees has Top Returns

A total of 150 public pension funds from North America, Europe and the United Kingdom were examined. Alternative asset investments were the focus. And the winner for the best 5-year portfolio return is: Omaha School Employees’ Retirement System with a 5.6% payback.

This is according to Preqin Ltd., which released a report in February comparing returns and naming the five most popular private equity fund managers.

Second on the list for best returns was El Paso Firemen & Policemen’s Pension, with a 4.95% payback and third was the State of Delaware Board Of Pension Trustees, with 4.3 percent.

What’s particularly interesting is the board range of private equity portfolio allocations. Washington State Investment Board allocates 24.9% of its portfolio to private equity, while El Paso, only 0.03%. Omaha School Employees set aside 17.9%. —Mark Boslet