Size Matters? CalPERS CEO Pleads Guilty to Conspiracy

July 31, 2014

By: Sara Kropf

If you don’t know what the California Public Employees Retirement System (“CalPERS”) is, you should. It is the second-largest public pension fund in the country. It is responsible for operating the pension benefit system and health care benefit system for all current and former employees of the State of California. It also operates these benefit systems for employees of other California public entities.

Yeah, I know, that sounds boring.

But consider this: CalPERS has nearly 1.7 million members. Its investment portfolio is $200 billion. Billion.

Capturing that investment business is hugely profitable. So, I suppose it’s not very surprising that CalPERS has been the target of a few fraudulent schemes.

CalPERS probably didn’t expect that its own CEO would be part of one.

From 2002 to 2008, CalPERS’ CEO was Federico Buenrostro, Jr. On July 11, 2014, Mr. Buenrostro pleaded guilty to one count of conspiracy to commit honest services fraud and bribery and to defraud the United States.

So, what did he do?

In short, he accepted bribes and he lied.

Relationship to Alfred Villalobos and ARVCO

According to the superseding information to which Mr. Buenrostro pleaded guilty, he paid bribes to ARVCO Capital Research LLC. The head of ARVCO was Alfred Villalobos. Mr. Villalobos had been a member of CalPERS’ Board from 1995 to 1998, so he knew how the investments worked. Mr. Buenrostro met Mr. Villalobos when Mr. Villalobos was on the Board.

The information alleges that ARVCO solicited public pension funds like CalPERS to invest in private equity funds. ARVCO would take a fee based on the percentage of funds invested by the public pension fund. This made ARVCO a “placement agent” for those private equity funds.

Being a placement agent with a connection to a huge pension fund is an incredibly profitable position. Every private equity fund wants a piece of an entity like CalPERS.

A Paper Bag and a Shoebox – The Bribes

Mr. Buenrostro’s plea agreement states that

Villalobos provided, and I accepted, items of value, including money, gifts, domestic and international travel, meals, entertainment and other benefits in order to influence and reward me for the exercise of my powers and duties as CEO over CalPERS’ financial transactions, investment operations, and internal deliberations for the benefit of Villalobos.

The government alleged that Mr. Villalobos bribed Mr. Buenrostro to encourage CalPERS to invest a portion of its funds through ARVCO. Specifically, the information alleges that:

  • Mr. Villalobos hosted and paid for Mr. Buenrostro’s wedding at his house
  • Mr. Villalobos provided Mr. Buenrostro’s wife with casino chips.
  • Mr. Villalobos paid for Mr. Buenrostro to stay in Lake Tahoe and take trips to Dubai, Hong Kong and Macau
  • Mr. Villalobos paid Mr. Buenrostro approximately $200,000 in cash
  • Mr. Buenrostro worked as a consultant for ARVCO after he stepped down as CEO in 2008, earning over $300,000 in salary and a Rolex

In these cases, it is always interesting to see how the deal went down. Given the government’s ability to track anything electronic (side-note: with a warrant or not), these deals are surprisingly old-fashioned.

According to the plea agreement, Mr. Villalobos delivered two payments of $50,000 “each in a paper bag” and another payment of $100,000 “in a shoebox.” They were given directly from Mr. Villalobos to Mr. Buenrostro “in the Hyatt Hotel in downtown Sacramento across from the Capital.”

The Falsified “Investor Disclosure” Letters

ARVCO acted as the placement agent for Apollo Global Management. (To be clear, Apollo is not accused of any wrongdoing.) Apollo is a private equity firm based in New York. Between August 2007 and August 2008, CalPERS invested $3 billion into private equity funds that were managed by Apollo.

Because Apollo was registered with the SEC, it had to obtain “Investor Disclosure” letters from anyone who invested in its funds. These letters disclose that the investor was aware of the relationship between Apollo and the placement agent, the size of the fee that was paid and so forth.

When CalPERS refused to sign the Investor Disclosure letter, Mr. Buenrostro and Mr. Villalobos took matters into their own hands. They fabricated and altered Investor Disclosure letters and sent them to Apollo.

After Apollo received the signed letters, it sent $14 million in fees to ARVCO. Mr. Buenrostro admitted that he

signed those papers . . . to further my corrupt relationship with Villalobos. . . . At no time, before or after I signed those documents, did I ever confer with CalPERS investment staff or its Board as to CalPERS’ position regarding, among other things, ARVCO’s role as a placement agent for Apollo, the nature and fees that ARVCO might earn on the size of CalPERS’ investments into one or more of these Apollo-managed funds and any legal or other impediment that might preclude CalPERS’ execution of the documents.

Mr. Buenrostro also knew that CalPERS had refused to sign one of the letters and agreed with Mr. Villalobos that he would not tell CalPERS about signing these letters.

The Obstruction

The plea agreement also describes Mr. Buenrostro’s efforts to obstruct the investigation. For example, he admitted that he

  • Lied under oath while giving SEC sworn testimony
  • Worked with Mr. Villalobos to develop a plan to hide the falsified letters
  • Lied under oath during testimony taken by the State of California
  • Lied under oath while interviewed by the SEC, DOJ and other government agencies

The Plea

Mr. Buenrostro’s lawyers served him well. Given these facts, it is impressive that he ended up pleading guilty only to one charge of conspiracy with a five year maximum. Mr. Buenrostro was represented by solo lawyer (!) William J. Portanova in Sacramento.

The one element missing from this story, of course, is whether anyone was actually harmed by Mr. Buenrostro’s conduct. I’m not suggesting that bribery can be ignored as long as it doesn’t hurt anyone but I’m curious whether the investments into which ARVCO directed CalPERS performed well.

Is bribery that ultimately benefits the “victim” as serious a crime as a bribery that causes harm?

Perhaps that was the argument made by Mr. Portanova. It’s not a great case for the government if itcan’t put on the stand a  single sympathetic victim.

Published by Kropf Moseley

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