California Attorney General Jerry Brown has sued two former officials of the nation's largest public pension fund for fraud, alleging they set up a system of kickbacks to guarantee outside firms won a piece of the fund's lucrative investment portfolio.
The lawsuit against the former officials at CalPERS, announced Thursday, is the product of an investigation into the role of so-called placement agents, the middlemen hired by money-management firms to help them win business with investors.
The alleged kickback scheme raises questions about whether CalPERS board members and investment officers had the best interests of the state's pensioners at heart when they made investment decisions for the fund.
"In this case, we're talking about around-the-world trips, we're talking about limousine rides, we're talking about promises of jobs, and all of that really doesn't pass the smell test, and it doesn't pass the test of the laws of California," Brown said in a news conference.
"If you are engaged in selling investments, you owe a duty of full disclosure. That didn't happen here," Brown said.
The lawsuit says former CalPERS Chief Executive Federico Buenrostro Jr. accepted tens of thousands of dollars in gifts, a Lake Tahoe condominium and promises of a future employment from Alfred Villalobos, a former CalPERS board member turned placement agent. The two also partied together in Dubai and traveled extensively together. It accuses both men of violating securities law.
The lawsuit, which was filed Wednesday in Los Angeles County Superior Court, also says that ARVCO Capital Research LLC, the company that was founded and led by Villalobos, was acting without a securities broker-dealer license when it received at least $47 million in fees for steering CalPERS investments to its clients.
The attorney general's office obtained a court order to freeze the assets of ARVCO and Villalobos to recover more than $40 million in commissions, it said in a statement Thursday.
Brown also said the court will take control of Villalobos' 20 bank accounts and all of his assets, including two Bentleys, two BMWs, a Hummer, art worth more than $2.7 million and 14 properties in California, Nevada and Hawaii.
Telephone messages left for Buenrostro and Villalobos, who both work at ARVCO, were not immediately returned.
The California lawsuit comes after a scandal in New York involving state pension fund managers led to six people pleading guilty of engaging in pay-to-play deals.
The suit filed by Brown's office also claims that two other CalPERS officials received gifts from Villalobos — current CalPERS Senior Investment Officer Leon Shahinian and former CalPERS board member Charles Valdes.
"Villalobos cultivated, through gifts and gratuities and promises of future employment, close and long-term relationships with Buenrostro, former board member Valdes and current Senior Investment Officer Shahinian with intent to influence them to make investment decisions in favor of the private equity funds ARVCO represented," the suit read.
Brown said in the news conference that Valdes and Shahinian were not charged because the state deputies felt the activities of Villalobos and Buenrostro were so clear and egregious that those were the defendants the state should go after.
Asked whether Valdes or Shahinian would be charged with anything, Brown told reporters that he couldn't say at this time.
"This is not the end of this case or this investigation. Things could follow," Brown said, adding that other agencies that could take action.
The lawsuit says that while Buenrostro was on the CalPERS board, he had a standing job offer from Villalobos, which included the promise of a condominium.
Buenrostro later went to work for ARVCO, and in 2009 Villalobos transferred the title of one of the Lake Tahoe condominiums he owned to Buenrostro, the suit read.
Those gifts were not disclosed in the statements of economic interest that state officials are required to file, Brown said in a statement.
The lawsuit also says ARVCO, located at Lake Tahoe in Stateline, Nev., is not a registered legal entity in California and that its current legal status in Nevada, where it is incorporated, is "default."
CalPERS, which manages about $210 billion in assets, issued a statement thanking Brown and his office for filing the fraud action, and stating that the internal investment officer mentioned in the complaint has been placed on administrative leave.
"We are deeply troubled by the apparent fraud committed against CalPERS," said Ann Stausboll, CEO of CalPERS. "My No. 1 priority has been, and will continue to be, ensuring that the system and our members are protected against fraud and abuse."
Philip Khinda, the attorney handling CalPERS' internal review of its use of placement agents, said in a statement that he has been working closely with Brown's office on the investigation.
Khinda's firm, Steptoe and Johnson, recently brokered a deal between CalPERS and Apollo Global Management to stop using placement agents and to reduce its fees by $125 million over the next five years.
The lawsuit announced today says that ARVCO had entered into placement agent agreements with various firms, including Apollo.
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