The State Worker

In CalPERS race, unions dig up candidate’s Wall Street past

A candidate for the CalPERS Board of Administration once argued against a financial regulation that targeted pay-to-play investment schemes like the one that became the biggest scandal in the state pension fund’s history.

Michael Flaherman, a former California Public Employees’ Retirement System board member who’s running for election on the pension board this fall, in 2009 wrote to the Securities and Exchange Commission to oppose restrictions on investment fund placement agents. They’re the middlemen who connect investment funds with managers of public pensions.

That year, investigators were building a case to show that former CalPERS Chief Executive Fred Buenrostro had accepted $250,000 in bribes from former CalPERS board member Alfred Villalobos in a scheme that benefited private equity firms that Villalobos represented as a placement agent.

Villalobos later killed himself. Buenrostro pleaded guilty to a conspiracy charge and last year was sentenced to four-and-a-half years in prison.

CalPERS in 2009 endorsed an SEC proposal that in an early form would have banned investment funds from using placement agents to court business with public funds. In 2010, the SEC adopted a version of the proposal that mostly banned placement agents from working with government clients after making political donations to members of their governing boards.

While the SEC considered the rule, Flaherman was an investment fund manager for a private equity firm called New Mountain Capital.

He wrote to the SEC opposing a blanket ban on placement agents, contending that they provide a valuable service to young and startup public funds lacking in experience with private equity. He characterized the pay-to-play scandals like the one that brought down Buenrostro as products of “sleazy operators.”

“The rule was problematic,” he said this week. “It was a little bit broad, and CalPERS was embarrassed because they had been caught dealing with those seedy placement agents, so they had to embrace something that was a little broad and not defensible.”

Flaherman’s message was uncovered by the union-backed campaign for his opponent, state scientist David Miller.

Consultants for Miller’s union, the California Association of Professional Scientists, through the California Public Records Act requested CalPERS’ communications that referred to Flaherman. The Bee requested the documents after CalPERS disclosed on a public meeting agenda that it provided the records to Miller’s union.

The cache included hundreds of pages of emails between Flaherman and board members, as well as a pitch from Flaherman for CalPERS to hire him as a consultant in rooting out hidden fees that investment funds charge to public pension funds.

“Michael Flaherman’s history shows he has put the interests of his Wall Street cronies and himself ahead of those of CalPERS and its members. The pattern of exploiting relationships he developed at CalPERS for personal profit and supporting of the efforts of some to work in the shadows is troubling,” said Steve Maviglio, a political consultant advising Miller’s campaign.

Flaherman said the public records were “thousands of pages of documents showing me exhorting CalPERS to do a better job.”

CalPERS took its own steps to restrict placement agents after uncovering Villalobos’ scheme. It began publicly disclosing fees paid to placement agents, and it struck deals with investment funds to limit their use. CalPERS also lobbied for state law that requires placement agents to register as lobbyists. Another 2014 state law bans former CalPERS officials from accepting fees as placement agents for a decade after leaving the pension fund.

About 1.4 million California public employees and retirees are eligible to vote this month in an election for two seats on the CalPERS Board of Administration.

Flaherman and Miller are competing to replace J.J. Jelincic. Incumbent Michael Bilbrey drew three challengers, retired legislative staff member Bruce Jennings, Garden Grove Unified School District business services director Margaret Brown and retired Redondo Beach engineer Wisam Altowaiji.

Flaherman, a former BART manager, served on the CalPERS board until 2003 and launched a career in private equity after leaving civil service. Recently, he’s been a visiting scholar at UC Berkeley’s Goldman School of Public Service.

He’s pitching himself to CalPERS voters as someone who can strengthen CalPERS’ hand when it deals with Wall Street and hold the pension fund’s staff to high standard.

Miller is a longtime state scientist and union leader who’s vowing to protect public pensions from political campaigns that threaten them. He’s received about $75,000 in campaign contributions from public employee unions.


Adam Ashton: 916-321-1063, @Adam_Ashton. Sign up for state worker news alerts at

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