“Special Review” Outlines Private Placement Problems at CalPERS

March 15, 2011 (PLANSPONSOR.com) – The nation’s largest public pension plan has published the results of an investigation of practices at the fund, both by senior officials and those with which the fund has done business – and it’s not a pretty picture. 


The report, commissioned by the California Public Employees’ Retirement System (CalPERS) in 2009, was led by Steptoe & Johnson LLP, who retained Navigant Consulting, Inc. to assist in their review, was to examine “whether the interests of the institution’s participants and beneficiaries had been harmed by the use of placement agents or related activities, to pursue remedial measures addressing any such harm, and to make recommendations to prevent future harm”.  

The report acknowledges that the experience of the California Public Employees’ Retirement System (“CalPERS”), the nation’s largest state pension fund, “was apparently no different in this regard than that of a number of other public pension funds”.  Indeed, the report says that while this matter was being investigated “we found that they were not limited to its investment program”.    

Last December the investigators released a set of twelve recommendations that it said CalPERS has already begun acting on, and that it is continuing to do so (see CalPERS Placement Agent Recommendations Include Risk Oversight).  The current report adds four recommendations to that list.  

The Role of Placement Agents  

The Report of the CalPERS Special Review” notes that placement agents, in general terms, are “intermediaries or middlemen paid by external money managers to help gain access to capital from institutional investors”.  Noting that over the “last 15 or so years”, the use of placement agents became “somewhat common” in the world of private equity and real estate investments, a tendency that was not limited to money managers seeking investments from public pension funds, but that in the latter category did give “rise to various “pay to play” schemes run by well-connected “insiders” and their patrons in government service, as has now been widely reported in the press”.   

The authors of the report noted that their efforts were based on voluntary compliance with their requests for information, and that those interviewed included “current and former members of the CalPERS Board, over 100 current and former staff members and executives, including every current member of the investment staff in the CalPERS alternative investment and real estate groups, and a number of external money managers, investment consultants, placement agents and others.”  

That said, they did not receive complete cooperation, specifically citing former CalPERS Chief Executive Officer Fred Buenrostro and placement agent and former Board member Alfred Villalobos (though the report acknowledges they are both now defendants in a law enforcement action brought by the California Attorney General – see Former CalPERS Officials Sued over Investment Scheme).  Moreover, the report’s authors noted that they did not have access to information and materials in the possession of some other relevant third parties “who likewise refused to cooperate,” acknowledging that that information “may have affected our views”. 

“Case” Studies 

With regard to Former Chief Executive Officer Federico ("Fred") Buenrostro, the report says that he “apparently inserted himself in the investment process in a manner inconsistent with prior practice at CalPERS, pressing its investment staff to pursue particular investments without evident regard for their financial merits” (though the staff apparently resisted those pressures).  The report also cited other occasions when Buenrostro apparently intervened on behalf of some private equity and real estate managers – so much so that the CalPERS investment staff would come to call them "friends of Fred” (they also apparently resisted those pressures, and eventually complained about those pressures, becoming a basis for CalPERS’ Board taking steps to replace him as CEO).  The report cites in some detail a number of “undisclosed gifts and other things of value”, including having his wedding in Nevada and lodging for guests paid for by Villalobos, as well as overseas trips to Dubai, UAE, and to Macau, China. 

The activities of former Board Member Charles ("Chuck") Valdes, who apparently had some personal financial trouble (so much so that he was unable to be issued a CalPERS credit card), also draw scrutiny.  The report notes that Valdes “often went months without submitting the documentation needed to reconcile his CalPERS travel account,” and that when he did submit those materials, “they were tendered in unorganized boxes of stray receipts, among other related and unrelated records, leaving to CalPERS staff the task of sorting through them”.  In fact, the report notes that his travel privileges “were suspended as a means of compelling him to bring his expense reconciliations in order”.  Without expressing an opinion as to whether Valdes violated any laws, the report’s authors said they found it “remarkable, in view of his ongoing financial problems and the obvious difficulties they posed to CalPERS' travel and other staff, that Valdes was permitted to travel as he did on behalf of CalPERS beyond attending its Board meetings and, more important, that he was allowed to continue serving as Chair of the Investment Committee of the Board”. 

Also cited in the report were Former Board Member Kurato Shimada, and former AIM Senior Investment Officer Leon Shahinian, among others.  

The report authors also considered whether CalPERS' investment consultants and external managers had acted in a manner consistent with the best interests of the institution and its beneficiaries, noting that “some apparently strayed from this high standard, and CalPERS either terminated its relationships with them or limited their relationships in other ways. Among them were Christopher Bower and his firm, PCG.”  Specifically, the report says it appears that Bower’s “connections to Villalobos may have prevented him from acting in the best interests of CalPERS”.   

The report notes that, “at least in hindsight, the excessive nature of some of the fees paid by CalPERS created an environment in which external managers were willing and able to pay placement agent fees at a level that bore little or no relationship to the services apparently provided by the placement agents.  Moreover, the involvement of placement agents apparently led to pressure to accept external manager fees that may have been higher than they should have been.”  

California State Treasurer Bill Lockyer commented “Swindlers have used PERS to line their pockets, and if they have committed criminal acts, they should be prosecuted and put behind bars.  At a minimum, former officials have committed despicable breaches of the public trust and PERS’ duty to workers and retirees.  Their actions have left a big, ugly stain on the organization.  It will take time and some hard scrubbing to remove the blot.  But with the reforms already adopted by the Board, we’ve started that job, and we will finish it.”  

In releasing the report, CalPERS, which will address the report at a Board meeting today, said that it had “institutionalized more than a dozen new reforms and policies to guard against future wrongdoing, and the special review has identified additional policy changes that will be coming”.  Their response is available at http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2011/mar/special-review-report.xml   

A CalPERS Q&A on the report is available at http://www.calpers.ca.gov/eip-docs/about/press/placement-agent-q-and-a.pdf  

The report is available at http://www.calpers.ca.gov/eip-docs/about/board-cal-agenda/agendas/full/201103/srrr.pdf