The former chief executive of the $257 billion California Public Employees’ Retirement System was indicted by a federal grand jury for conspiring to defraud Apollo Global Management, a prominent private equity firm. In what was alleged to have been a decisive moment in CalPERS’s pay-to-play scandal, Federico Buenrostro, the pension’s former chief, was charged with creating and signing fake placement-agent disclosure forms to secure $20 million in placement fees from Apollo for Arvco Capital Research. Arvco was a placement agency run by Alfred Villalobos, a former CalPERS board member. He was also indicted, with three counts.
CalPERS, which is the largest pension in the United States, is also one of the largest investors in Apollo’s funds, having committed $3.9 billion overall since 1995. The pension also purchased a 9% stake in the firm for $600 million. Apollo has since gone public.
“We condemn in the strongest way possible the actions at the center of these indictments,” said Anne Stausboll, CalPERS’s current chief executive, in a statement. “We will not let the selfish and illegal actions of a few individuals define our organization, our members or our staff.”
The case against Buenrostro and Villalobos centers on the alleged forgery of investor disclosure letters required by Apollo for distributing Arvco’s finder’s fee, the Justice Department said.
The last of the disclosure letters were allegedly sent to Apollo just weeks before Buenrostro, who had been chief executive of CalPERS between 2002 and 2008, retired and joined Arvco the next day. Villalobos served on CalPERS’s board from 1992 to 1995. According to an investigation by the lawfirm, Steptoe & Johnson, Arvco was paid $60 million in fees for investments placed with CalPERS over a six year period.
The case also says that Buenrostro and Villalobos made false statements to authorities investigating the disclosure letters. Among the charges made against Buenrostro were making a false statement and obstruction of justice.
The federal indictments followed a civil suit filed by the U.S. Securities and Exchange Commission in May 2012. That case was filed to get Buenrostro and Villalobos to “disgorge any ill-gotten gains (and) pay financial penalties.” Villalobos filed for bankruptcy in 2010.
Buenrostro’s lawyer and representatives for Villalobos could not be reached for comment.
Since the pay to play scandal erupted, Apollo and CalPERS have cooperated with federal and state investigations. In response the pension has moved to change its policies, including a move to force any placement agents who deal with CalPERS to register with the state of California as lobbyists.
“We have enacted numerous reforms and policies to enhance transparency to guard against future activities of this nature and to demonstrate our commitment to the highest levels of ethics. The work we have done has made CalPERS a stronger organization,” said Rob Feckner, the president of CalPERS’s board.
Asked by Buyouts last year if he felt CalPERS had been able to put the pay-to-play scandal behind it, Joe Dear, the system’s chief investment officer, said yes. He went on to say that “there were a few placement agents that caused a great deal of trouble for us, but the vast majority of placement agents provide a legitimate function in the marketplace.”
The scandal has had many casualties, among them private equity advisory firms. One of those was PCG Asset Management and its founder Christopher Bower. PCG had been CalPERS’s private equity adviser, but the firm was ousted from that role in 2010. The firm’s association with Villalobos hurt PCG’s reputation among pensions trying to distance themselves from any hint of controversy surrounding the recent scandals at CalPERS, the New York Common Retirement Fund and the New Mexico State Investment Council.
In 2007, according to the Sacramento Bee, Bower successfully encouraged CalPERS to invest $600 million in an equity stake in Apollo. Villalobos was paid $13 million in commissions for that investment.
Last week, Bower sued Steptoe & Johnson, the law firm that CalPERS hired to investigate the scandal, saying that its report unfairly “impugned” PCG’s and Bower’s reputation. After the scandal, the bulk of PCG’s advisory business was split off from Bower and bought by Mitsubishi, and in the process, renamed itself TorreyCove Capital.