In a scathing report, a former chief executive of the California public employee pension fund was accused of pressuring subordinates to invest billions of dollars of pension money with politically connected firms.
A 17-month investigation also found that Federico Buenrostro Jr. — along with former pension fund board members Charles Valdes and Kurato Shimada — strong-armed a benefits firm to pay more than $4 million in fees to consultant Alfred J.R. Villalobos, who later hired Buenrostro.
The report, prepared for the California Public Employees' Retirement System by Washington law firm Steptoe & Johnson, comes amid widening attacks on public employee pension funds in California, Wisconsin, Iowa and other states for providing lavish benefits that cash-strapped governments can no longer afford.
The findings of insider dealings at CalPERS could provide fresh ammunition to Republican lawmakers here who want Democratic Gov. Jerry Brown to convert traditional pensions with guaranteed payments for life into 401(k)-type plans that rely heavily on employees' own contributions.
"Fixing California's pension problem is difficult enough without the stench of corruption and collusion that saps public confidence and gives taxpayers a reason to withhold support," said Dan Pellissier, president of Californians for Pension Reform, a group that is pushing a 2012 ballot initiative that would diminish state employee pension benefits.
Shimada, Buenrostro, Valdes and Villalobos either declined to comment or did not return calls.
Buenrostro served as CalPERS chief executive for six years, leaving in August 2008. The day after quitting, he went to work for Villalobos — a former CalPERS board member and deputy Los Angeles mayor who acted as an agent for investment firms seeking CalPERS money. The report said Villalobos hired Buenrostro with a $300,000 annual salary and gave him a Lake Tahoe condominium.
While at CalPERS, Buenrostro repeatedly "inserted himself in the investment process in a manner inconsistent with prior practice at CalPERS, pressing its investment staff to pursue particular investments without evident regard for their financial merits," the report said.
It said Buenrostro intervened with staff on behalf of Aurora Capital Group of Los Angeles to obtain investment money. Buenrostro told subordinates that Aurora was politically powerful, and that Aurora principal Gerald Parsky served on a state commission dealing with public employee benefits, the report said.
Aurora was a Villalobos client, and Buenrostro told CalPERS staffers that he would represent it once he went to work with Villalobos, the report said.
The report also noted that Buenrostro often intervened on behalf of favored private equity funds that staff called "friends of Fred."
Staffers ultimately complained about Buenrostro to the board, and those complaints "became a basis for the board's efforts to replace him as CEO," the report said.
CalPERS is the nation's largest public pension fund, with $228 billion in assets, providing benefits to about 1.6 million state and local government employees, retirees, spouses, children and other beneficiaries.
In May 2010, the California attorney general sued Villalobos and Buenrostro, accusing them of scheming to enrich themselves through self-dealing and other misconduct in seeking CalPERS investment money on behalf of clients.
According to the report, one of those investment funds — Apollo Global Management — asked Buenrostro to sign documents acknowledging that CalPERS was aware of so-called placement agent fees it was paying to Villalobos.
Several CalPERS investment officers refused to sign the disclosures, the report said — but Buenrostro did, using pasted-on letterhead to make them look more official.
Buenrostro made "representations regarding placement agent fees and related deal documents that are either demonstrably false or sufficiently suspect," the report said.
The report, citing Buenrostro's ex-wife and an unnamed girlfriend, described Buenrostro as "a puppet" of Villalobos, who the report said earned more than $50million in placement agent fees.
During his six years as head of CalPERS, Buenrostro received many valuable gifts from people and firms with financial interests in doing business with CalPERS, the report said.
When he was married in 2004, he allowed Villalobos to host the wedding at his Zephyr Cove, Nev., home. Buenrostro also traveled with Villalobos and Valdes to the Middle East and Asia — with Villalobos picking up much of the costs, the report said.
"Buenrostro does not appear to have ever disclosed these gifts or recused himself from any CalPERS matters based on any of these apparent relationships," the report said.
Valdes also pressured CalPERS investment staff to do business with Villalobos' firm, Arvco Capital Research, the report said.
In September 2000, Valdes was close to being ruled out of order for raising his voice in support of a Los Angeles real estate investment firm, CIM Group, the report said. CalPERS staff had recommended a smaller investment than originally proposed. Arvco and Villalobos received a $9-million commission on the investment transaction.
CIM also provided Academy Awards tickets to Valdes and other CalPERS people, the report said. Valdes attended in 2005 and 2006 but did not report the gifts on state financial disclosure documents.
The report also provided new details about CalPERS dealings with Medco Health Solutions Inc. before the firm was awarded a $26-million contract to provide drug benefits to members.
In May 2004, Villalobos hosted a meeting at his Lake Tahoe home with Medco CEO David Snow. Buenrostro attended.
"Soon after the May 2004 meeting at the Villalobos home, Medco agreed to retain Villalobos as a consultant and pay him $4 million," the report said.
Villalobos received a final check for $1 million immediately after the CalPERS board approved the contract, according to the report, and also received a $20,000-a-month retainer until sometime in 2009.
Last year Villalobos filed for personal bankruptcy protection, citing nearly $5million in debts to Nevada casinos. It was his second personal bankruptcy.
The report recommended that CalPERS improve accountability and reduce the risk of future abuses, including providing additional training to board members so that board business is not conducted in clandestine meetings with managers, and prohibiting the release of sensitive CalPERS information outside the organization.
This is a perfect example of serious governance gaps leaving a fund vulnerable to fraud. There is absolutely no accountability when this type of abuse goes on at the highest level. And trust me, it's not hard for a couple of guys at the top to collude and award sweet contracts to some consultant, hedge fund manager or private equity manager in return for "future favors". When you're in charge of billions, power gets to your head and you start thinking you're invincible.
This type of fraud makes me sick to my stomach. It's not common but it's going on a lot more often than people want to admit. How do I know? Let's just say I've seen things that made my skin crawl. It doesn't matter whether the investment officer has a CFA, FRM, PhD, etc., if they're crooked, they're crooked and they'll do whatever it takes to profit by abusing the power they have within a pension fund. And it's not just the large funds; in fact, some of the worst abuses happen in dinky city pension plans where corruption is rampant.
That's why I believe you have to properly compensate senior pension officers to deter this type of corruption. But that's not enough because some people are so sleazy, so greedy, they'll look to game the system and will stop at nothing to profit by abusing their power. One of the best ways to root out corruption is simply to segregate duties and implement iron clad whistleblower policies where employees can anonymously inform board members or better yet, the FBI or RCMP. That should make these idiots think twice before they abuse their power at a public pension fund.
Finally, this is a particular case that in no way reflects what's going on at CalPERS now. I think it's disgusting that some would use this report as "ammunition" to break up CalPERS or to dissolve other public pension funds. Get the governance right and you can root out corruption at most public and private pension funds.
Chris Nicholson of DealB%k reports, CalPERS Report Takes Aim at Private Equity Middlemen.