Pay-to-Play Investigation Hits CalPERS

Has the private equity pay-to-play phenomenon achieved its manifest destiny, stretching its corrupt arm all the way to Sacramento?

At issue is Charles “Chuck” Valdes, a CalPERS board member who currently is under investigation for accepting campaign contributions from businesses that later secured investment business from the pension system (which happens to be the nation’s largest).

“There was an audit of Mr. Valdes’ campaign committee, as required by law,” explains Roman Porter, executive director of the California Fair Political Practices Commission. “Theresults of that audit then caused our enforcement division to open up an investigation. That investigation is ongoing at this point, and I cannot provide further comment on it.”

Pension & Investments reported earlier this week that Valdes’ benefactors included Alfred Villalobos, a former CalPERS board member and Los Angeles deputy mayor. Upon leaving the CalPERS board in 1995, Villalobos formed a fund placement group called ARVCO, which regularly seems to find itself in the headlines for backroom political dealings.

In May, it was revealed that ARVCO used former Bronx borough president Fernando Ferrer to help secure a commitment from a New York state pension system, without publicly disclosing Ferrer’s involvement. Closer to home, Villalobos has a particular aptitude for securing investments from CalPERS. There was the time in 1996, for example, when ARVCO secured a $100 million commitment from CalPERS for Hicks Muse Tate & Furst, even though the CalPERS private equity staff had been publicly opposed (CalPERS later sold the fund position in a secondary sale).

In fact, retaining ARVCO has been close to a slam dunk for securing fund commitments from CalPERS. The system has invested in seven of the eight six of the seven opportunities presented by ARVCO between 2002 and 2008, according to documents obtained by peHUB. The wins include commitments for three funds from Apollo Management totaling $2.45 billion, plus CalPERS’ purchase of a 10% stake in Apollo itself (originally valued at around $600 million). Other successful ARVCO clients included an affiliate of Aurora Capital ($400m from CalPERS) and Pacific Corporate Group ($500m).

[Update: CalPERS says it made a mistake in the list it sent over, in that Pacific Corporate Group did not use ARVCO]

To be clear: There has been no finding that Valdes violated any laws, and the California Fair Political Practices Commission is not investigating Villalobos or ARVCO. CalPERS has declined comment.

A few other notes:

  • We have not been able to independently confirm that Valdes received campaign contributions from Alfred Villalobos, but have received documents from the CA Secretary of State showing contributions by Carissa Villalobos, who serves as ARVCO’s general counsel. Read them here.
  • The California Fair Political Practices Commission is a government organization, but not one with the ability to impose anything beyond a $5,000 fine per violation. State prosecutors do sometimes use these violations as bases for criminal prosecutions, although the violations are only treated as misdemeanors. This is not to say, however, that other criminal investigations can’t – and don’t – occur independently.
  • Sources familiar with the situation tell me that there is more to this story than what has come out so far. And considering that these same sources first told me about ARVCO and the CalPERS board more than a year ago, I believe them.