It was the biggest scandal in CalPERS' history, with allegations of top officials trading pension fund investments for junkets, jobs and other favors.
What made it a criminal case, prosecutors say, was a handful of phony letters.
Fred Buenrostro, the former chief executive of CalPERS, and his longtime friend Alfred Villalobos were indicted Monday by a federal grand jury on charges that included conspiracy and obstruction of justice.
The indictments represented the first criminal charges in a case that rocked the nation's largest public pension fund starting in October 2009. Court papers show the criminal investigation began in spring 2010.
"It's certainly been a long time coming," said CalPERS board President Rob Feckner, who oversaw a series of reforms instituted in the wake of the scandal. "A lot of people were wondering if this was really going to happen."
Villalobos, a former pension fund board member, earned $50 million in commissions as a "placement agent" a kind of marketing rep who secured billions of dollars worth of CalPERS investments for his Wall Street clients.
As detailed in a 2010 state lawsuit, the Lake Tahoe businessman hosted Buenrostro's wedding and took the CEO on a round-the-world trip. The suit says Villalobos also promised Buenrostro a job with his firm and a free Tahoe condominium should he leave CalPERS pledges that were fulfilled soon after the CEO quit the pension fund in 2008.
The indictment, unsealed in U.S. District Court in San Francisco, mentions none of those allegations.
Instead, Buenrostro and Villalobos are accused of creating a series of fake letters designed to make sure Villalobos got his commissions.
The letters falsely claimed that CalPERS knew Villalobos was working on behalf of New York private equity firm Apollo Global Management and would earn a fee if Apollo got CalPERS' investment dollars. In order to comply with Securities and Exchange Commission regulations, Apollo had insisted on such letters before taking money from any investor, including the California Public Employees' Retirement System.
According to a separate lawsuit filed last year by the SEC, Buenrostro signed the letters after an unidentified CalPERS investment official refused to do so. The SEC lawsuit, which is still pending, said it appeared Buenrostro used his computer to copy CalPERS' logo from his business card onto the stationery.
With the letters in hand, the firm obtained $3 billion in CalPERS investments between August 2007 and April 2008 earning Villalobos around $14 million in commissions according to the criminal indictment.
The firm issued a statement Monday saying it was "unaware of any of the misconduct" charged in the criminal case.
The criminal case goes a step beyond the SEC's lawsuit. The grand jury charged that Buenrostro and Villalobos lied about the letters to the FBI, Securities and Exchange Commission, U.S. Postal Service and others.
Buenrostro, 64, and Villalobos, 69, were each released on a $500,000 bond after making an initial court appearance Monday in San Francisco, according to court records. Neither entered a plea.
The two men couldn't be reached for comment. Villalobos' lawyer, Donald Etra, said his client "has done nothing wrong." Buenrostro's lawyer, William Kimball, also said his client is innocent.
Buenrostro, in an interview with The Bee three years ago, argued that CalPERS was well aware of the fees Villalobos was earning a charge denied by top pension fund officials.
If convicted on all charges, Buenrostro could face up to 40 years in prison. Villalobos could get up to 30 years.
The scandal was a huge jolt to CalPERS, prompting the fund to commission a "special review" of Villalobos' activities by Washington, D.C., securities lawyer Philip Khinda.
Khinda concluded, in a report submitted to CalPERS two years ago, that some of CalPERS' investment partners inflated their management fees to compensate for the commissions paid to Villalobos. That cost CalPERS millions of dollars, Khinda said.
Following his report, CalPERS adopted restrictions on placement agents and made other reforms.
"I'm just very happy," Feckner said Monday when asked about the indictments. "We've been through our embarassing times this is a good day."
Khinda called the indictment "the beginning of the end for those who harmed the pension fund."
Buenrostro worked in state government for years, including stints on the boards of CalPERS and the California State Teachers' Retirement System. He was chief deputy director of the state Department of Personnel Administration when he became CEO of CalPERS in 2002.
Villalobos is a longtime investment banker who became a fundraiser in California Republican circles. He served a three-year stint on the CalPERS board in the mid-1990s and was briefly deputy mayor of Los Angeles. A familiar figure at Lake Tahoe and Reno casinos, where he gambled and lost millions of dollars over the years, Villalobos also served for a while on the board of trustees of his alma mater, Whittier College.
In the late 1990s, after leaving CalPERS, he began prowling the pension fund's halls as a placement agent, trying to steer investments to his clients.
Although his activities caused some controversy early on, even sparking hearings at the Legislature, it wasn't until a decade later that his work spawned a full-fledged scandal.
A lawsuit filed in 2010 by then-Attorney General Jerry Brown said Villalobos heaped freebies on Buenrostro and two others at CalPERS: board member Charles Valdes and senior investment officer Leon Shahinian. Both have since left the pension fund.
Valdes accompanied Buenrostro and Villalobos on a 2006 trip to London, Dubai and Hong Kong, paid for by Villalobos, according to the lawsuit.
A year later, Villalobos flew Shahinian to New York on a private jet to attend a museum fundraiser attended by celebrities including Martin Scorsese and Caroline Kennedy. Afterwards, CalPERS approved a $600 million investment with Apollo.
The state's lawsuit, which is still pending, drove Villalobos to file for bankruptcy protection. The bankruptcy case is still pending as well.
Villalobos also became entangled in a separate scandal involving CalPERS' drug-benefits program. Drug wholesaler Medco Health Solutions Inc. paid Villalobos around $4 million to help the company win a contract to fill prescriptions for CalPERS members.
Medco was later dropped by CalPERS and agreed to pay $2.75 million a year ago to settle an investigation launched by Attorney General Kamala Harris' office.
Call The Bee's Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.