The $288 billion California Public Employees’ Retirement System was rocked on July 10 when it was learned that former CEO Federico Buenrostro had cut a plea bargain with the Justice Department to turn “state’s evidence” regarding steering $14 million in placement fees to former board member Alfred Villalobos in exchange for cash bribes and gifts.
Buenrostro led America’s largest pension fund from 2002 to 2008. He entered a guilty plea in the Federal District Court of San Francisco on July 11 for taking bribes from Alfred Villalobos, an ex-CalPERS board member, to broker a $3 billion CalPERS investment in Apollo Global Management LLC private equity funds. Both Buenrostro and Villalobos were indicted on March 18th.
There was no law that forbids Villalobos from collecting $48 million commission from Apollo, as long as he, as placement agent, disclosed the fee to CalPERS as the customer. It was determined by prosecutors that Villalobos lied to Apollo about having disclosed the fee to CalPERS.
Villalobos actually pocketed a total of $58 million, because he also allegedly pushed CalPERS into deals on behalf of four additional clients: Relational, CIM Ares, and Aurora Capital. Buenrostro allegedly aided and abetted all of the placements by waiving the CalPERS requirement that Villalobos be a registered with the SEC as a broker-dealer.
Villalobos and Buenrostro also allegedly partnered with Charles Valdes, a CalPERS board member and chairman of the investment committee. Valdes allegedly received illegal political donations from Villalobos’ firm for agreeing to waive certain restrictions on the types and amounts of investments that CalPERS could buy from Villalobos.
The waivers for two deals were allegedly written on falsified CalPERS letterhead and dated after Buenrostro was no longer was with CalPERS. Valdes and unnamed others also allegedly received undisclosed gifts and flights on private jets.
According to the Sacramento Bee, Buenrostro apparently confessed to years of corruption, and that as chief executive of CalPERS he accepted a total of $200,000 in cash in a series of bribes for influencing billions of dollars in pension fund investment decisions.
Buenrostro stated in his plea deal that Villalobos first plied him with casino chips and a trip around the world. He then paid Buenrostro in three cash installments. “The first two payments were made in paper bags. The last installment came in a shoebox. The handoffs all came at a Sacramento hotel near the Capitol.” To avoid detection by banking authorities, “Villalobos told me to be sure to ‘shuffle’ the currency before making any deposit, as the bills were new and appeared to be in sequential order.”
Buenrostro resigned from CalPERS to take a high-paying job with Villalobos’ investment firm. He admitted that while at the firm, he created phony documents to ensure that Villalobos earned multimillion-dollar fees representing a Wall Street private equity firms seeking CalPERS investments.
The California state attorney general filed suit in 2010 and the SEC lodged a separate complaint in 2012. The Mercury News reported that Villalobos’ frozen assets included: “20 bank accounts, two Bentleys, two BMWs, a Hummer, art worth more than $2.7 million and 14 properties in California, Nevada and Hawaii.”
CalPERS latest press release states: “We condemn the misconduct and ethical breaches admitted today by Mr. Buenrostro. The violation of the sacred trust of our members, employers, and the public can’t be tolerated, and that trust must never be compromised.”
Yet questionable decision-making by California public employee pension plans suffered so many pay-to-play allegations that in 1997 the State Legislature passed a law barring such payments. Even so, CalPERS board member Kathleen Connell took the matter to court and won, because “the law made it harder for incumbents than their challengers to raise campaign money.”
The corruption charges against Buenrostro and Villalobos are similar to those filed in a nationwide pay-to-play scandal that involved public employee pensions in other states.
From July 15th to July 29th, Chriss Street will be teaching “Entrepreneurship and Capitalist Business Strategy” at Ho Chi Minh University in Vietnam
Image: Max Whittaker/Reuters