It’s been one of the darkest chapters in CalPERS history, a bribery scandal that prompted a guilty plea from its former chief executive earlier this month.
It’s also been rather profitable.
America’s largest public pension fund has racked up sizable gains from investments brokered by Alfred Villalobos, the Nevada businessman accused of bribing top CalPERS officials. One $974 million investment midwifed by Villalobos is now worth $2.91 billion. A $701 million deal is valued on CalPERS’ books at $1.36 billion.
The track record on Villalobos’ deals represents one of the great ironies of the CalPERS influence-peddling scandal. During a six-year stretch that ended in 2008, the California Public Employees’ Retirement System poured more than $4.4 billion into investments marketed by Villalobos on behalf of Wall Street clients. Out of 11 separate deals, only one has lost money, a relatively small transaction in which CalPERS invested $75 million.
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Experts say CalPERS’ investment profits don’t tell the whole story. They say Villalobos’ alleged misdeeds cost CalPERS money even though the deals he brought to the pension fund largely panned out.
A 2011 investigative report commissioned by CalPERS said the pension fund likely paid tens of millions of dollars in additional investment-management fees because of Villalobos’ work. CalPERS routinely pays management fees to its investment partners, and the investigative report said those firms may have secretly inflated their fees to compensate for commissions they were paying Villalobos.
CalPERS was able to recoup much if not all of that money. Using its considerable clout, it launched a campaign in 2010 to extract fee discounts from dozens of investment partners, including two that had hired Villalobos.
One partner, Apollo Global Management, gave CalPERS a $125 million discount over five years – three times as much as it paid Villalobos in commissions. Another Villalobos client, Ares Management of Los Angeles, agreed to a $10 million fee reduction, or 10 times what it paid Villalobos. The two firms also pledged to stop hiring marketing agents to secure investment dollars from CalPERS.
“Through all this effort we went through, we got money back from these firms,” said CalPERS spokesman Brad Pacheco.
Villalobos’ alleged behavior also may have cost CalPERS in opportunities lost. While it’s almost impossible to calculate the damage, some potentially lucrative investments might not have gotten an audience with CalPERS because they weren’t represented by Villalobos, according to the 2011 report.
In addition, as word got out in the private equity world about Villalobos’ connections with CalPERS, it’s possible that some investment firms stopped bringing proposals to CalPERS because they “believed that the process was not fair,” according to the report, authored by Washington, D.C., securities lawyer Philip Khinda.
“We’re lucky that the investments turned positive,” said retired Assemblyman Dave Elder, who tracks CalPERS’ dealings for public employee unions. “But how much more positive would an alternative investment have been? We can’t tell whether we would have earned relatively more or less with a different investment vehicle.”
Villalobos, a former Los Angeles deputy mayor who served on the CalPERS board during the early 1990s, returned to the pension fund’s headquarters years later as a “placement agent” representing private equity firms seeking CalPERS’ business.
He brokered two deals in the late 1990s but didn’t hit his stride with CalPERS until 2002, when he made a deal on behalf of Ares Management. His commission: $1 million.
Over the next six years, Villalobos earned nearly $45 million in commissions, mainly from Apollo. His lucrative run ended in 2008, when CalPERS fired his main contact at the pension fund, Chief Executive Fred Buenrostro.
Buenrostro, 64, pleaded guilty July 11 to a felony conspiracy charge, admitting that he took $200,000 in cash bribes and other favors from Villalobos to “influence the CalPERS investment staff and CalPERS board.” Buenrostro said he first accepted favors from Villalobos in late 2004, about a year after CalPERS began a string of investments with Villalobos’ clients.
Villalobos, 70, has been charged only with helping Buenrostro create a series of phony letters on CalPERS stationery; the letters were allegedly sent to Apollo to make sure Villalobos got paid his commissions. He has pleaded not guilty.
With Buenrostro now admitting to a wide-ranging pattern of corruption, Assistant U.S. Attorney Timothy Lucey has said the Justice Department will likely file a new indictment that broadens the charges against Villalobos. His trial was supposed to begin this month but has been postponed indefinitely.
According to the Khinda investigative report, Villalobos plied others at CalPERS with favors, including former board members Charles Valdes, Kurato Shimada and the late Robert Carlson, plus former senior investment officer Leon Shahinian. Only Villalobos and Buenrostro have been charged with anything.
Villalobos’ specialty was brokering private equity deals – investments in companies or other entities that aren’t traded on any stock exchange. The deals he orchestrated at CalPERS during the 2000s involved three of the premier firms in the business: Apollo, Ares and Aurora Capital Group of Los Angeles, headed by Gerald Parsky, a former chairman of the University of California Board of Regents.
His knack for representing blue-chip firms didn’t make Villalobos an investment genius, nor did it mean he was doing CalPERS any favors. Given CalPERS’ reputation as a heavyweight investor, the pension fund would have found good investment partners without a placement agent inserting himself into the process.
Any reputable money manager will “find its way to CalPERS anyway,” said Florida pension consultant Edward Siedle, who specializes in investigating pension fraud. “The last thing (CalPERS) needs is some marketing huckster to walk in their door.”
Along similar lines, CalPERS officials said credit for the profits goes to the investment partners. “The performance of the private equity funds is a reflection of the firms’ investment teams,” Pacheco said.
All three private equity firms have said they were ignorant of Villalobos’ alleged misconduct.
Out of 11 deals, only one has lost money for CalPERS. The $75 million it put into AP Investment Europe Ltd., an Apollo-run fund that loaned money to European companies, was worth just $34.6 million at the end of 2013, the most recent data available. Apollo paid Villalobos a $625,000 commission for securing the CalPERS commitment.
At the other end of the spectrum is another Apollo deal, known as Apollo Credit Opportunity Fund I, which bought existing loans from banks and made direct loans of its own.
CalPERS’ $974 million investment in that fund has been richly rewarded. As of last December, it was worth $2.91 billion. The sum includes money that CalPERS has cashed out, plus dollars still in the fund.
The success of that investment hasn’t made everyone happy. Villalobos has taken Apollo to court, demanding that he get paid the remaining $1.5 million of the $9 million he was supposed to receive for brokering the deal.
He’s also suing Apollo over $2.6 million that the firm withheld from another CalPERS deal. Similar litigation has erupted over Aurora Capital’s refusal to pay Villalobos about $2 million.
The fees stopped flowing after the scandal surfaced in late 2009. In court papers, the firms said the allegations mean they don’t owe Villalobos any more money.
The cases are pending.