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March 18, 2011
Criminal Charges Likely in Probe of Former CalPERS CEO
    by Robert Kropp

A report commissioned by the California Public Employees' Retirement System details evidence of corruption in the relationship between its former CEO and a placement agent.

In the fall of 2009, California Public Employees' Retirement System (CalPERS), the nation's largest pension fund, commissioned the law firm of Steptoe & Johnson to prepare a report on the relationship between the fund's management and placement agents, who act as middlemen between external money managers and institutional investors. The repor t was issued this week.

According to the report, CalPERS requested the investigation after the relationship between former CEO Federico Buenrostro and placement agent Alfred Villalobos led to investigations by state prosecutors and federal regulators into "private equity firms and their use of placement agents to arrange deals with public pension funds." Buenrostro was replaced as CEO by the CalPERS Board in May 2008. One day after being removed from the CalPERS payroll, Buenrostro went to work for Villalobos, for an annual salary of $300,000.

The report details a number of meetings involving Buenrostro and Villalobos, as well as several former CalPERS Board members, which led to the awarding of the pension fund's health benefits package to Medco. Medco Chairman and CEO David Snow also attended the meeting, which was held at Villalobos's Nevada home. After the first meeting, Medco hired Villalobos as its placement agent, paying him $4 million.

The report details further that Apollo Global Management, a New York-based private equity firm, paid Villalobos over $20 million dollars in placement agent fees. Investor disclosure forms signed by Buenrostro—"purportedly acknowledging on behalf of CalPERS substantial placement agent fee payments by Apollo Global Management," according to the report—led to a civil lawsuit filed in May 2010 against Buenrostro and Villalobos by the Attorney General of California, seeking the return of $47 million in unlawful commissions.

According to an article in today's Pensions and Investments, Philip Khinda, a partner at Steptoe & Johnson, told the CalPERS Board that criminal charges are expected.

The report provided several recommendations for CalPERS, many of which have been implemented already by the pension fund. They include creating an Enterprise Risk Management Office and the position of Chief Risk Officer, and prohibiting placement agents from being paid fees based on whether CalPERS invests with their clients.

In a pr ess release, Khinda stated, "While the report speaks for itself, the courage and commitment of the institution in seeing this through and safeguarding its beneficiaries was remarkable."

Anne Stausboll, CEO of CalPERS, stated, "I believe this is a turning point for our organization, and a pledge to our members, employers and stakeholders, that misconduct and serious ethical breaches have no place at CalPERS."


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