In a determined effort to cleanse its damaged reputation, CalPERS released a scathingly detailed 56-page report investigating charges that former senior officials at the California Public Employees’ Retirement System 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 six year period.
The investigation and report, which took 18 months to produce, was formally released at a CalPERS board meeting on March 15 in Sacramento. CalPERS is the nation’s largest pension fund with $230 billion in assets.
Rob Feckner, the president of CalPERS’s board, responded to the report in a written statement, saying: “We condemn in the strongest possible way the apparent misconduct described in this report.” He said CalPERS’s stewardship “is a sacred trust, one that should never be allowed to be compromised for personal gain or outside interests.” He added, “Let this episode in our history never be forgotten.”
Relying on interviews with more than 140 people and information from more than 70 million pages of documents, the report revealed fresh details into the alleged abuses. It also recommended new safeguards, some of which CalPERS has already adopted in an effort to reassure its 1.6 million represented employees and pensioners that these 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.
The report includes fascinating revelations, including:
• Wedding expenses involving the 2004 nuptials of then-CalPERS chief executive Federico Buenrostro were paid by Villalobos, who then had business before CalPERS.
• 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.
• Buenrostro apparently intervened on behalf of certain connected private equity and real estate firms, firms that CalPERS staff came to call “Friends of Fred.”
Villalobos and Buenrostro declined to be interviewed by the Khinda team. They have previously denied any wrongdoing.
The report follows ongoing investigations at the federal level by the Securities and Exchange Commission and the U.S. Justice Department. In addition, former California attorney general (and current governor) Jerry Brown launched a civil suit in May 2010 against Villalobos and Buenrostro for misconduct. That case, which calls for $95 million in restitution from Villalobos, has yet to go to trial.
The Khinda report builds on claims from the state-level case, including details of luxury travel to Dubai, China and various European cities by Buenrostro and other CalPERS employees that was paid for by Villalobos. Those charges include paid travel to a high-profile event in New York honoring Leon Black, a founder of Apollo Global Management. Apollo was a primary client of Villalobos, and had investments from CalPERS that amounted to $4.8 billion.
Other state-level charges include the allegation that Buenrostro, while CalPERS’s chief executive, had a second job as a Squaw Valley ski instructor, where, the report says, he gave lessons to a number of Villalobos employees, even on weekdays “when he normally would have been expected to be engaged in the discharge of his CEO duties at CalPERS.”
None of the investment management firms have been accused of any wrongdoing in the report or in the state-level case. However, as part of an effort to recoup fees paid to Villalobos, CalPERS sought and received more than $215 million in fee concessions, including $150 million from Apollo.