The U.S. government sued the two key figures in the CalPERS bribery scandal Monday, targeting the pension fund's former chief executive and a businessman who earned millions in finder's fees from CalPERS investment deals.
The Securities and Exchange Commission's lawsuit steps up the pressure on former CalPERS CEO Fred Buenrostro and his longtime friend, Lake Tahoe businessman Alfred Villalobos. It also contains new details about how the alleged fraud was carried out.
According to the suit, the pair cobbled together a series of phony letters bearing the pension fund's logo. The SEC said the letters were used to dupe Villalobos' top client, Wall Street powerhouse Apollo Global Management, into paying him fees totaling $20 million.
It's the latest major legal action against Buenrostro and Villalobos. State officials have already sued the two men, saying Villalobos bribed Buenrostro and others at CalPERS to influence investment decisions. Both have denied any wrongdoing.
The SEC's lawsuit was welcomed by CalPERS, even though it creates fresh momentum for a scandal that has dogged the California Public Employees' Retirement System for more than two years.
"We believe the SEC's action brings us one step closer to closing this chapter in our history," said Anne Stausboll, who replaced Buenrostro as CEO of CalPERS after he left in 2008.
Buenrostro, 62, was married at Villalobos' Lake Tahoe mansion. He joined Villalobos' firm, Arvco, the day after leaving CalPERS, and state officials said Villalobos, 68, bought him a condo at Tahoe.
Besides damaging the pension fund's image, the Villalobos affair has been costly financially. An investigator hired by CalPERS said last year that some of the pension fund's investment partners probably inflated the fees they charged CalPERS in order to pay Villalobos' commissions.
The SEC suit "is another impressive action by law enforcement authorities and I expect more from them to come," said the CalPERS investigator, Philip Khinda, a lawyer in Washington, D.C.
What comes next is unclear. CalPERS officials have said a criminal investigation into Villalobos and Buenrostro's actions has been under way for more than a year. Stausboll refused to speculate on whether any charges would be filed.
The SEC's lawsuit was filed in U.S. District Court in Nevada, where Villalobos and Buenrostro live. It demands they "disgorge all ill-gotten gains from their illegal conduct," plus interest.
The lawsuit, alleging that Villalobos and Buenrostro tricked the Apollo firm, focuses on a corner of the scandal that was mentioned almost in passing in the state's lawsuit and Khinda's report.
A one-time CalPERS board member, Villalobos was a "placement agent" who was paid $58 million by his clients to secure investments from CalPERS.
In 2007, Apollo began demanding disclosure letters from investment partners like CalPERS, acknowledging they knew the Wall Street firm was paying commissions to people like Villalobos.
The suit says Villalobos' firm, Arvco, asked CalPERS investment officials to sign a disclosure letter for an Apollo deal in August 2007. CalPERS refused, and said Monday its staff exercised "good judgment" in not signing the letter.
Villalobos never again asked the CalPERS investment office to sign a disclosure letter. Instead, the SEC said, he and Buenrostro put together a series of fake letters, using the CalPERS logo from Buenrostro's business card, to trick Apollo into paying Villalobos' fees.
"Buenrostro signed blank sheets of paper provided to him by Arvco that had no text, but only the fake CalPERS logo at the top of the page and his signature block at the bottom," the lawsuit says.
The first letter contained numerous irregularities. The CalPERS logo was on the wrong side of the page and its mailing address was missing. Buenrostro identified himself as the head of the "California Public Employees Retirement Fund," which is the wrong name. CalPERS is a "System," not a "Fund."
Nonetheless, Apollo paid Villalobos fees totaling $20 million based on the phony letters, the SEC said.
In an interview in 2009, Buenrostro said it was common knowledge at CalPERS that Villalobos earned big fees from his dealings with the pension fund. CalPERS officials have denied that.
Apollo called the SEC's allegations "troubling" and said it continues to cooperate with government investigators.
In his 2010 bankruptcy filing, Villalobos claimed that Apollo still owes him $7 million for his work. In turn, Apollo filed a claim against Villalobos in bankruptcy court, saying the scandal has cost the Wall Street firm more than $3.5 million in legal fees.
Separately, Apollo promised in 2010 to stop using placement agents when seeking deals with CalPERS. The firm also gave CalPERS about $125 million in fee discounts, although Apollo insisted the discount wasn't because of the Villalobos matter.
Lawyers for Villalobos couldn't be reached for comment on the SEC's suit. Buenrostro dismissed the allegations in the lawsuit.
"Fred strongly denies any allegation that he was involved in any type of fraudulent or illegal conduct," said his lawyer, Bill Kimball.