National Probe on Public Pensions?

Martin Z. Braun and Erik Schatzker of Bloomberg report that Former SEC Chairman Levitt Calls for Probe of Public Pensions:
The former head of the U.S. Securities and Exchange Commission said President Barack Obama should empower a “blue ribbon” panel to investigate pay-to- play at public pension funds that oversee more than $2 trillion.

Arthur Levitt called for the panel after California’s $200 billion pension fund disclosed that a former board member was paid $50 million by private equity firms for successfully marketing investments to the fund. The California Public Employees’ Retirement System, or Calpers, called for a special review of fees paid to middlemen to win state business.

“It’s a national disgrace,” Levitt said in an interview on Bloomberg Television. “It’s pervasive. It’s in pension funds all around America, and people are being badly hurt by this.”

State and federal prosecutors in New York and New Mexico are investigating whether money managers illegally paid politically connected placement agents and made political contributions for access to the retirement funds. Carlyle Group, where Levitt is employed as a senior adviser, paid $20 million to resolve a corruption probe by New York Attorney General Andrew Cuomo. The firm wasn’t charged.

The SEC already has proposed a plan that would prohibit firms from managing assets for the $2.2 trillion in U.S. public retirement funds for two years if executives gave money to an elected official that could influence contract awards. The agency also wants to ban money managers from hiring middlemen to solicit pension investments.

Proposed Rules

The SEC recommendations resemble rules proposed by the agency in 1999, when Levitt was chairman. The rules were never adopted.

“We had a lot of pressure against it, threats to take us to court,” Levitt said in a follow-up interview. The pressure came from Congress, Levitt said. “When you talk about campaign contributions, Congress gets very sensitive,” he said. “They feel that’s one step away from their own activities.”

At the time, the SEC was also in the midst of bruising fights with lawmakers on auditor independence.

The proposed panel, to be chaired by SEC Chairman Mary Schapiro, should go beyond the agency’s current proposal and investigate the public officials who sit on boards of state pension funds, Levitt said. It should both highlight conflicts and recommend “best practices.”

Public pension fund boards shouldn’t make investment decisions, Levitt said. That should be left up to professional staff. Instead, boards should focus on setting asset allocation policy, he said.

John Nester, an SEC spokesman, didn’t immediately respond to an e-mail seeking comment about Levitt’s proposal.

Calpers Investigation

Calpers said it began a review of fees that investment managers pay to middlemen after disclosures from investment managers that former board member Alfred Villalobos was paid $50 million over five years.

Private-equity funds run by Apollo Management LP, Ares Management LLC and Aurora Capital Group paid fees to Villalobos’s company, Arvco Financial Ventures, which he runs with his daughter Carissa, according to more than 200 pages of documents obtained through a public records request.

Villalobos, a one-time Los Angeles deputy mayor, was a Calpers board member from 1992 to 1995. Villalobos said he is cooperating with the Calpers review and is confident that staff, advisers and board members of Calpers acted properly.

Political Adviser

In March, New York Attorney General Cuomo charged New York’s former chief investment officer with illegally steering investments to firms that paid millions in fees to Henry “Hank” Morris, a political adviser to former state comptroller Alan Hevesi, a Democrat.

Four others, including the former head of New York’s Liberal Party and a Dallas-based adviser to the New York fund, have pleaded guilty to fraud. Morris and David Loglisci, the former chief financial officer, have denied wrongdoing. Hevesi hasn’t been charged.

According to Cuomo, Washington-based Carlyle, the second- biggest private equity firm after New York-based Blackstone Group LP, had “limited success” obtaining investments from the New York pension funds until it retained Morris in 2003. Afterward, Carlyle got about $730 million in total investment commitments for private equity, real estate and infrastructure funds.

In exchange, Carlyle paid about $13 million to Greenwich, Connecticut-based Searle & Co., the broker-dealer with whom Morris was registered. Searle paid most of the fees to a shell company Morris established. Carlyle didn’t know that that Searle paid most of the placement fees to PB Placement LLC, Morris’s shell company.

Pleading Guilty

Cuomo said Carlyle also didn’t know that Morris split the fees with Barrett Wissman, a Dallas fund manager who has pleaded guilty to paying and receiving kickbacks.

Members of Carlyle, including co-founder David Rubenstein, donated at least $118,000 to Hevesi, according to New York campaign finance records.

Levitt said he was “distressed” to learn of Cuomo’s investigation. He said he helped Carlyle develop an ethics code with Cuomo.

As part of its settlement, Carlyle signed a “code of conduct” with Cuomo, which bans the firm from using middlemen to obtain investments from public pension funds. The code also prohibits firms from doing business with a fund for two years after the firm or its employees make a contribution to a public official who can influence investment decisions.

Marc Lifsher of the LA Times reports that CalPERS targets a former L.A. deputy mayor in probe of investment agent fees. I quote the following:

The fund, known as CalPERS, is looking at $50 million in fees paid in recent years to Arvco Financial Ventures, headed by Alfred Villalobos, 66, who was deputy mayor of Los Angeles for five months in 1993.

Villalobos, who was also a member of the CalPERS board from 1993 to 1995, is a so-called placement agent, or intermediary. His company has helped direct hundreds of millions of dollars in CalPERS money into private investment funds with vast holdings.

In a statement Wednesday, Villalobos denied any wrongdoing and pledged to assist CalPERS, the nation's largest public pension fund, in its investigation.

Placement agents generally are paid a fee of 1% to 2% of the value of deals by the private-equity investment firms. The agents rely on their sometimes long-term relationships with CalPERS and other pension systems to persuade officials to do business with their investment fund clients.

In the last year, placement agents have come under investigation as part of wide-ranging probes into alleged bribery and kickbacks in the awarding of pension fund investment contracts that include California and New York state.

CalPERS said it would share its findings with the Securities and Exchange Commission and the California attorney general's office.


CalPERS said it opted to look at the fees paid to Arvco and other placement agents by private funds run by Apollo Management of New York, Ares Management of Los Angeles and Aurora Capital Group of Los Angeles.

An Apollo spokeswoman said her company "is comfortable with its prior consulting engagements." Ares said in a statement that it did only one deal with Arvco in 2003, paying it $1 million, which represents 1% of the original CalPERS investment. "Ares has not used any placement agents in any subsequent fundraising activities in front of CalPERS," the firm said.

Aurora, which lists as a partner Gerald Parsky, an influential Republican businessman who is chairman of a state tax reform commission, did not return calls.

In May, CalPERS instituted a new disclosure policy requiring investment funds to detail the activities of their placement agents. City government pension funds in Los Angeles have adopted similar policies, and Gov. Arnold Schwarzenegger recently signed legislation requiring all public pension funds to disclose such information, beginning Jan. 1.

"The placement agent industry has been a focus of state authorities and the Securities and Exchange Commission over the last year, and we believe it prudent to conduct a full review of the matters related to these recent disclosures to us," said Anne Stausboll, CalPERS' CEO.

All U.S., Canadian and global public pension plans should disclose dealings with placement agents on their websites. Moreover, regulators should ban firms from using middlemen. For every one good placement agent, there are a hundred corrupt fools looking to line their pockets.

And investigators should look beyond the board of directors and conduct a thorough investigation to see if the investment staff are on the take. It's not hard to have collusion among senior staff members to get an investment pass through some investment committee. Considering the enormous sums these public pension funds dole out every year to private funds, there needs to be a lot more checks and balances.