Serious investment implications from CalPERS lawsuit

The decision by California Attorney General, Edmund Brown, to charge former CalPERS board member and placement agent, Alfred Villalobos, his company ARVCO Capital, and former CalPERS chief executive, Federico Buenrostro, with fraud could have serious consequences for the future investment direction of the fund.

“In the old days CalPERS invested in utility stocks, in conservative investments,” the Californian Attorney General, Edmund Brown, said in an almost reminiscent tone.

Speaking at a press conference to announce a civil complaint of fraud, with allegations including the failure to disclose pertinent facts relevant to millions of dollars of investments, against a former CalPERS board member and a chief executive, Brown mentioned on more than one occasion how the move away from conservative investments was problematic for the fund.

While Brown emphasised he did not want to “link any CalPERS losses with these activities”, he did say there had been pressure over time for the fund to move towards more adventurous investments.

“Over time CalPERS has moved to higher risk investments. I think they will have to move to a more balanced portfolio,” he said.

The implication that the questionable actions and activities of the former service providers and staff of the fund may have a direct effect on its future investment direction is serious.

Like most large investors CalPERS has been slowly increasing its allocation to alternatives, and currently has a target allocation to alternatives of 14 per cent. The fund is undergoing an extensive asset allocation review this year.

CalPERS has stated strong support for the Attorney General’s decision to file civil fraud claims with board president Rob Feckner, saying: “Manipulation of this 78-year old institution cannot, and will not, be tolerated. We will continue to work side-by-side with authorities in the pursuit of justice.”

In addition internal investment officer, alternative investments, Leon Shahanian, mentioned in the complaint, has been put on administrative leave.

“We are heartened to have the Attorney General’s office working with us and our special review team to right the wrongs that may have occurred. These matters underscore the importance of passing placement agent reform this year. We urge the Legislature and the Governor to pass our bill so that no one will ever be able to profit inappropriately in the way the Attorney General set forth in his court papers,” chief executive, Anne Stausboll, said in a statement.

In the past year, CalPERS has implemented policies and reforms to ensure full transparency (click here), and is undergoing an extensive review of risk which includes governance.

The complaint centres on a lack of disclosure of the activities of the placement agent, as well as a “troubling and illegal scheme where members of CalPERS were being influenced in the decision-making of who to choose to invest the money of the fund”, Brown said.

The civil suit alleges that Buenrostro, who was chief executive from 2002 to 2008, took tens of thousands of dollars’ worth of gifts from Villalobos, who in addition to being a former board member of CalPERS has also held position as a former Los Angeles deputy mayor and a board member of the Council of Institutional Investors.

According to the suit, Villalobos and his company, ARVCO Capital Research which is an investment banking and advisory firm specialising in alternative investments, received more than $47 million in “undisclosed and unlawful commissions for selling approximately $4.8 billion worth of securities to CalPERS” from 2005 to 2009,

“Buenrostro played a key role in assisting Villalobos and ARVCO in their fraudulent activities,” the suit alleges.

In addition to CalPERS, Arvco claims it has secured investments from CalSTRS, New York State Common, University of California, Ohio PERS, Texas Teachers, New York City, Washington State Board, and Oregon Public Employees. Although none of these funds are connected to the case.

Among the firms that have hired ARVCO in the past are Apollo Europe Management and real estate manager CIM Group.

Both Villalobos and Frederico Buenrostro – who were allegedly friends for more than 20 years – have been charged with fraud.

“Working as a placement agent for ARVCO, Villalobos spent tens of thousands of dollars to lavishly entertain key senior executives at CalPERS, who then influenced the Board to authorise investments that generated over $40 million in commissions to Villalobos,” Brown said.

“None of these actions were disclosed as required by law, as state pension holders and taxpayers have every right to expect.”

Buenrostro went to work with Villalobos when he left CalPERS.

Specific charges allege that:

– Villalobos and ARVCO falsely represented that they had the required securities licences and complied with all laws;

– Defendants gave, accepted, and failed to disclose gifts;

– Villalobos and ARVCO submitted bogus disclosure forms.

Brown seeks to recover more than $40 million in placement agent commissions.

Click here for the California Attorney General’s complaint