Calpers Says Middlemen Were Paid $180 Million to Win Investment Business

The California Public Employees’ Retirement System’s outside money-managers paid $180 million over the past decade to middlemen they hired to win business from the largest U.S. public pension, according to a report examining the use of so-called placement agents.

The report faults those money-managers for failing to properly oversee the use of middlemen to help private-equity and real-estate firms win contracts to investment money for the $228.2 billion fund.

“There was, in our view, at least some obligation on the part of the external managers hiring placement agents to monitor whether the millions of dollars they were paying were, in turn, corrupting internal practices at Calpers,” according to the report whose lead author was Philip Khinda, a Washington, D.C.- based lawyer with Steptoe & Johnson LLC.

Calpers commissioned the report amid federal and state inquiries into influence-peddling for access to the $2 trillion in U.S. public retirement funds. Its findings add detail to investigations into the conduct of Alfred Villalobos, who served on the board from 1993 to 1995 and later became a placement agent.

“As a former Villalobos associate said, ‘Do you think we just did this in California? We took the show on the road,’” according to the report, which didn’t name the associate.

The California attorney general’s office has accused Villalobos of trying to improperly influence investment decisions with favors such as travel and use of a Lake Tahoe mansion. Villalobos has denied any wrongdoing.

Calpers Relationships

Khinda and others interviewed more than 140 people and scoured about 70 million pages of documents in unraveling the relationships among Villalobos, former Calpers Chief Executive Officer Federico Buenrostro Jr. and former board members, according to the report.

“I believe this is a turning point for our organization, and a pledge to our members, employers and stakeholders, that misconduct and serious ethical breaches have no place at Calpers,” Chief Executive Officer Anne Stausboll said in a statement yesterday.

Villalobos and Buenrostro, who also has denied wrongdoing, declined to cooperate with the review and weren’t legally obliged to, according to the report. Calls to Villalobos’s office after regular business hours, and to William Barnes and Seth Rafkin, lawyers for the men, weren’t immediately returned yesterday. Buenrostro’s telephone number in Sacramento has been disconnected.

Apollo, Medco

Villalobos represented New York private-equity firm Apollo Global Management and New Jersey-based Medco Health Solutions Inc. (MHS), the largest U.S. prescription-benefits manager. In a letter to Calpers in April, Apollo said it would no longer use placement agents to secure business from the pension fund. Medco, in a regulatory filing Feb. 22, said it’s cooperating with investigations.

Khinda’s report said the middleman exercised undue influence over Buenrostro and hosted former board members at his Lake Tahoe retreat, after which the board members voted in favor of Medco’s $26 million contract to manage pharmaceutical benefits for more than 300,000 members of Calpers’ preferred- provider organization health plan.

Then-Attorney General Jerry Brown, now governor, sued Villalobos and Buenrostro in May 2010 for fraud involving more than $47 million in “undisclosed and unlawful” commissions for selling $4.8 billion worth of securities to Calpers.

No Experience

Khinda’s report said Villalobos, who had no experience in pharmaceutical-benefits contracts, was retained as a consultant by Medco for $4 million after company CEO David Snow and Buenrostro were hosted at Villalobos’ Lake Tahoe home in May 2004. Calls after business hours yesterday to Lowell Weiner and Jennifer Luddy, spokesmen for Medco, weren’t returned.

Villalobos later played host to Snow and three Calpers board members -- Charles Valdes, Kurato Shimada and Robert Carlson -- in September 2004, according to the report. As members of a Calpers committee, Valdes and Carlson later voted to award the contract to Medco, while Shimada injected himself into discussions on the contract although he didn’t sit on the committee, the report said.

Valdes, Shimada and Carlson, who are no longer on the board, weren’t accused of wrongdoing. A call to Valdes after regular business hours wasn’t immediately returned yesterday. Carlson died in September, according to a statement by CSEA Retirement Inc., an organization for California state government retirees.

‘Not True’

“There’s a lot of things that have been written by Mr. Khinda that are not true,” Shimada said in a telephone interview yesterday. “There are a lot of assumptions.”

While the events in 2004 and 2005 surrounding the award of the pharmaceutical benefits management “contract provide a striking example of the manner in which certain business was apparently conducted while Buenrostro was CEO of Calpers, those events would not come to light until much later,” according to the report.

Calpers has adopted changes intended to keep situations such as those described in the report from being repeated, state Treasurer Bill Lockyer, a member of fund’s board, said in a statement.

Among other measures, Calpers said it has opened an ethics hotline to collect tips about possible corruption. The fund said it also requires additional disclosures from board members and has established new rules of communication involving investment contracts.

“Swindlers have used PERS to line their pockets, and if they have committed criminal acts, they should be prosecuted and put behind bars,” Lockyer said, referring to Calpers. “At a minimum, former officials have committed despicable breaches of the public trust.”

To contact the reporter on this story: James Nash in Sacramento at jnash24@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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