Saturday, January 16, 2010

Milking the CalPERS Cash Cow?

go-betweens got $125-million-plus from investment firms for arranging CalPERS deals:
Reporting from Los Angeles and Sacramento - Private investment funds paid more than $125 million to scores of intermediaries who helped them win business with the California Public Employees' Retirement System, new documents show, prompting calls for stronger oversight of those who solicit public pension money.

The intermediaries, or placement agents, include three former CalPERS board members -- one of them William D. Crist, a longtime board president -- who lobbied the pension fund on behalf of an investment firm seeking a share of CalPERS' $205 billion in assets.

Pension experts say the disclosures are troubling, as lobbying by former board members could put pressure on CalPERS to put money with investment firms that charge excessive fees or that don't offer the best returns.

"The fact that people are being lobbied by people who have relations with current board members, even though they are former board members, is totally inappropriate," said Dave Elder, a former assemblyman from Long Beach who monitors CalPERS for public employee unions.

CalPERS made the disclosures Thursday in response to a state Public Records Act request from The Times and other news organizations. The fund, which manages retirement benefits for 1.6 million state and local government employees, retirees and their families, has also hired Washington law firm Steptoe & Johnson to investigate the use of placement agents.

"These are serious issues, and CalPERS is committed to reviewing them fully and fairly," said Philip Khinda, an attorney with Steptoe & Johnson. "Among other things, we're investigating whether the system was made to overpay or was misled."

CalPERS has invested in private funds represented by placement agents for more than 15 years, but the documents provided new details about the practice. Among the highlights:

* Former CalPERS board members Matt Fong and Crist were identified for the first time as pitchmen for investment funds. Fong served on the CalPERS board in his role as state Treasurer. Crist -- a retired economics professor at Cal State Stanislaus in Turlock -- was elected to the CalPERS board by state employees.

* Another placement agent named in the documents was Nicholas Smith, who served as an alternate to former State Controller Steve Westly on the CalPERS board. Smith, identified as an executive with Gold Bridge Capital, attended board meetings when Westly was unavailable to, according to state pension fund officials. He did not return calls for comment.

* The list of placement agents ranged from small independent firms to some of the biggest names on Wall Street, including Credit Suisse, UBS and Lazard.

* The No. 1 placement agent was Stateline, Nev.-based Arvco, led by Alfred J.R. Villalobos, another former CalPERS board member who was identified as a placement agent by CalPERS last year. Villalobos was paid $58.9 million for his work on behalf of private equity funds Apollo Group, Ares Capital and other firms, the records show.

CalPERS started reviewing payments to placement agents last year after a New York state pension fund scandal that included bribery allegations against some agents. With the release of the new documents, CalPERS Chief Executive Anne Stausboll called for reforms.

"Gathering information is not enough," Stausboll said. "We remain firmly committed to pursuing a full and fair examination that the special review will provide, and to backing legislation that would remove contingent fee arrangements and require placement agents to comply with the same rules as lobbyists."

Assemblyman Edward Hernandez (D-West Covina), who last year wrote legislation that put new restrictions on pension board members who work with private investment firms, said he would push for "tough legislation to end the shadowy involvement of placement agents and remove the greed factor from public pension fund investments."

The disclosures of payments over the last decade also heightened concerns about whether there is a revolving door at CalPERS, allowing former board members to trade their connections for big paydays.

Under California law, former CalPERS board members and staff are allowed to lobby their former employer two years after leaving the pension agency (the limit was previously one year), but some critics say the practice raises ethical concerns and has the potential for abuse.

"It really demonstrates the politicization of the investment decision-making process. It really is a way of greasing the palm of a well-connected insider," said Ted Siedle, a former Securities and Exchange Commission attorney who now works as a private pension consultant. "They're providing access, pure and simple, and there's no reason for it."

Crist was on the CalPERS board from 1987 to 2003, serving as president for 11 of those years. Since leaving the board, he has earned more than $800,000 in fees from London investment firm Governance for Owners, in which CalPERS has about $200 million invested, records show.

CalPERS declined to comment on Crist's relationship with the London firm, where he is a partner and current board chairman. But both the firm's CEO and the former CalPERS board president asserted that he was more than a mere go-between.

"I never did think of myself" as a placement agent, Crist said. "I hate the appearance of that. I don't think I was particularly central to the CalPERS investing."

Fong, who served on the board from 1994 to 1998, worked for placement-agent firm Wetherly Capital when it represented Shamrock Holdings. Wetherly received nearly $6 million for pitching Shamrock and other investment funds to CalPERS, the records showed.

Wetherly was one of several firms that came under scrutiny last year from New York Atty. Gen. Andrew Cuomo, who has secured several guilty pleas in a kickback scandal in that state's retirement system.

Fong could not be reached for comment Thursday. In an interview earlier this week, he confirmed that he'd pitched investments at CalPERS.

"I have set up meetings for people to go see CalPERS," he said. "I've actually guided people, not just at CalPERS but at other funds in other states."

Being a placement agent, he said, "is like anything else; you can abuse it or handle it appropriately."

Daniel Weinstein, a Wetherly principal, said he hired Fong because of his experience with public pension funds. "From his years as a state treasurer and being a trustee, he understands the whole notion of corporate governance -- the idea that large institutional investors wanted to be activist investors," he said.

Another placement agent identified in the new disclosures was Julio Ramirez, who represented firms including Blackstone Capital Partners and GSO Capital Partners. Ramirez, a resident of San Marino, pleaded guilty in May to criminal securities charges in connection with the New York kickback scandal.

The use of placement agents is also being probed independently by the SEC as well as by the attorneys general of California and New York state.
I can tell you from first-hand experience that the overwhelming majority of placement agents are financial parasites who serve no purpose whatsoever. I often asked myself why hedge funds and private equity funds use these placement agents, but in the U.S. it's all about politics and who you know.

It's high time regulators ban these placement agents. If not, set a five year rule for board of directors and senior pension fund managers, not allowing them to join any fund they invested with, or any placement agent they used to help them invest with, for a minimum period of five years. Lobbying rules should be equally if not more stringent.

If authorities in charge of oversight want to properly align interests of pension fund managers and board of directors with their stakeholders' interests, they need to stamp out all abuses, including the potential conflicts of interests that can arise between placement agents, pension fund consultants, private funds and the people in power at these large public pension plans.

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