Report: Firms paid $180M to win CalPERS business
Monday, March 14, 2011
SACRAMENTO, Calif. (AP) — Money managers have paid more than $180 million to middlemen as a way to gain investment business from the nation's largest public pension fund, and at least some of those costs likely ended up being paid by the fund itself through inflated fees, according to a report released Monday.
The results of the internal investigation will be presented Tuesday to the board of the California Public Employees' Retirement System. The 56-page review, which the fund allowed reporters to see late Monday, is part of the fund's investigation into alleged wrongdoing by former officials.
It hired an outside law firm to review the use of so-called "placement agents," the middlemen hired by money managers to attract large institutional investors. More than $120 million went to local placement agents hired for their connections to the pension fund, including those at the center of a fraud case involving the fund, former executives and board members, according to the report by Steptoe & Johnson LLP.
The report found no evidence that the placement agents had enticed the pension fund to invest poorly but said the placement fees were an added expense.
"It appears more simply that CalPERS' returns were reduced because the investment management and other fees charged were higher than they should have been," the report said. "Those high fees, in turn, allowed for placement agent fees that were apparently used to compromise certain individuals to the detriment of CalPERS."
The higher fees drained money that otherwise would have gone to support the retirement benefits of the 1.6 million government workers, retirees and their family members who are covered by CalPERS.
CalPERS has since negotiated more than $200 million in fee concessions from external money managers as a result of the outside review, the pension fund said.
The report said money managers had used placement agents increasingly over the past 15 years, and that it was widely assumed in investment circles that hiring someone with connections inside CalPERS could increase the chances of winning an investment contract.
One placement agent, the report said, left a message for a CalPERS investment manager who had not returned his calls: "Maybe I should change my last name to Villalobos to insure that I get a call back."
That was an apparent reference to placement agent and former CalPERS board member Alfred Villalobos. The report also gives additional details about the relationship between Villalobos, former chief executive Federico "Fred" Buenrostro Jr. and those seeking CalPERS' business.
Villalobos and Buenrostro are charged in a lawsuit filed last May by the attorney general's office alleging fraud and kickbacks. Other former board and staff members also are named.
For example, the report details meetings that began in 2004 and led to Villalobos representing a company that eventually landed a multimillion dollar contact with the pension fund.
In May of that year, Villalobos hosted a meeting at his Lake Tahoe-area home that was attended by Buenrostro and David Snow, chief executive of Medco Health Solutions Inc., the nation's largest pharmaceutical benefits manager. Shortly afterward, Medco agreed to retain Villalobos as a consultant and pay him $4 million, even though the company had already hired another consultant in pursuing CalPERS' business, the report said.
Snow and Buenrostro again met at the house with Villalobos and three other CalPERS board members: Charles Valdes, Kurato Shimada and Robert Carlson. In October 2005, the CalPERS Health Benefits Committee backed a contract with Medco, with Valdes and Carlson voting in favor. Shimada also attended and took part, although he was not a committee member.
The report also notes occasions when Villalobos showered gifts on CalPERS officials who were in positions to influence investment contracts.
Rob Feckner, CalPERS' board president, condemned the conduct described in the report and said the fund has implemented more than a dozen reforms "to guard against future wrongdoing."