Originally posted at www.calpensions.com

Middlemen who help investment funds get money from CalPERS received $1.85 million in fees during the past two years, a sharp drop from the $58 million collected by a former CalPERS board member in a pay-to-play scandal.

A report on “placement agent” fees given to the CalPERS board last week was the first required by reform legislation. Big fees received by Al Villalobos, a former CalPERS board member, prompted a long list of reforms.
A trial on bribery-related fraud charges against Villalobos and former CalPERS chief executive officer, Fred Buenrostro, is scheduled next Jan. 28 in Santa Monica in a civil lawsuit filed by the state attorney general.

Villalobos allegedly influenced CalPERS officials with a round-the-world trip for former board member Charles Valdes, a private jet trip to New York for former private equity officer Leon Shahinian and a promised $300,000 job and condo for Buenrostro.

When the suit was filed in May 2010 the attorney general at the time, Jerry Brown, seemed to suggest criminal charges were being considered. “This is not the end of this case or the end of this investigation,” he said. “Things could follow.”

There has been no word of criminal charges from the current attorney general, Kamala Harris. But last April the U.S. Securities and Exchange Commission filed fraud charges against Villalobos and Buenrostro in federal court in Nevada.

The SEC lawsuit said Villalobos received more than $70 million in placement agent fees during a period of about 10 years, at least $58 million coming from the California Public Employees Retirement System.

The narrow focus of the lawsuit is on disclosure forms, allegedly fabricated by Villalobos and Buenrostro. The phony disclosures were used to show a private equity firm, Apollo, that CalPERS knew about the fees Apollo would be paying Villalobos.

“As part of the scheme, Buenrostro signed blank sheets of (fake) CalPERS letterhead, which Villalobos and ARVCO used to generate investor disclosure letters as needed (by running the paper through a printer a second time),” said the SEC lawsuit.

“In aggregate, based on these fabricated documents, Apollo was induced to pay ARVCO more than $20 million in placement agent fees it would not otherwise have paid without the disclosure letters.”

The lawsuit charging fraud in the sale and purchase of securities, packed with detail from a lengthy investigation, cites some amateurish bumbling: an incorrect CalPERS letterhead and a disclosure form listing the wrong fund.

But like the attorney general’s lawsuit, the SEC lawsuit does not address the big question:

Why would a major private equity fund pay $20 million in fees to the firm of a man who left the CalPERS board in 1995 and was living in a big house, with two high-end luxury Bentley autos on the low-tax Nevada side of scenic Lake Tahoe?

You might suspect he was an expert at structuring profitable investment funds, a master of the winning sales pitch or, perhaps less charitably, a high-flying influence peddler believed to have connections inside CalPERS that could make or break a deal.

If Apollo was paying Villalobos simply because of his presumed CalPERS connections, the big fees could look like a bribe. But another part of the puzzle is that Apollo seemed to have CalPERS connections.

“In June 2007, CalPERS invested directly in Apollo, acquiring approximately 10 percent of Apollo’s non-voting shares for about $600 million,” said the SEC lawsuit.

Apollo adopted the disclosure policy “sometime in the first half of 2007.” In August of that year, the CalPERS investment office declined to sign the first Apollo fee disclosure requested by Villalobos.

After repeatedly asking for a fee disclosure, Apollo in early 2008 talked about going directly to CalPERS. The SEC lawsuit said that’s when Villalobos generated the phony disclosures and Apollo began paying the big fees.

Could a hard-nosed prosecutor or regulator look at this situation and charge Apollo with paying a bribe?

Someone unfamiliar with the law might think so. But apparently the more prudent course for experienced litigators is to spend a couple of years assembling the facts needed for a solid fraud case, even if it only nets the little fish.

During the boom years in private equity, particularly leveraged buyouts, investment funds were paying big placement agent fees in the scramble to get money from public pensions, a key source of financing for the lucrative business.

After a pay-to-play public pension scandal surfaced in New York early in 2009, CalPERS queried its investment partners about placement agent fees, revealing that more than $50 million had been paid to the Villalobos firm.

“CalPERS was shocked when it learned of the magnitude of those fees after they came to light,” said the attorney general’s lawsuit.

One of the big Villalobos fee agreements cited in the attorney general’s lawsuit, $4 million, was signed by a well-known Californian, Gerald Parsky, chairman of the Aurora Resurgence Fund that received $400 million from CalPERS in September 2007.

At the time, Parsky was chairman of a governor’s commission on public pensions. Although Aurora did not require a disclosure that CalPERS knew about the fee, there was a puzzling delay. Parsky did not sign the Villalobos agreement until April 2008.

In New York, pension officials and their associates, not a lone placement agent, were accused of negotiating campaign contributions, gifts and other payments from investment funds and their placement agents.

The New York scandal was aggressively prosecuted by an attorney general, Andrew Cuomo, who later became governor. Eight persons pleaded guilty to various charges, including the state comptroller, Alan Hevesi.

Going after both parties in the deals, not just the recipients, Cuomo obtained hefty financial settlements from private equity funds that made the payments, notably $20 million from the Carlyle Group.

Meanwhile, in the milder climate here, part of the reason for the relatively small total of placement agent fees in the CalPERS report last week ($1.85 million from July 1, 2010, to May 1, 2012, paid by ten funds) is a lull in new private equity investments.

A recent quarterly report to the board said “consistent with the behavior of other large private equity investors,” CalPERS has made few new private equity commitments since the boom ended in 2008.

But CalPERS still has $56 billion committed to several types of private equity funds, more than half for leveraged buyouts. And private equity is expected to provide above-market returns to help CalPERS hit its earnings target, 7.5 percent.

The report for the quarter ending March 31 said the CalPERS private equity return was 7 percent for the previous one-year period, 12.3 for three years, 7.8 percent for five years and 9.3 percent for the decade.

The two largest CalPERS private equity commitments, each about $4.6 billion, were to the Carlyle Group and Apollo Investment Managers.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 21 Jun 12