Friends of Fred

Disgraced former CalPERS CEO Fred Buenrostro was a ‘puppet,’ say his ex-wife and GP ex-girlfriend. He also may have faked documents and pressured investment staff while enjoying gambling jaunts with a twice-bankrupt pension-board buddy and puppet-master placement agent Al Villalobos.

The private equity industry finally has its own Warren Commission report, which concludes that the assassins of public-pension integrity did not act alone.

If you haven’t had a chance to read what should be called the Steptoe Report, you are missing a rollicking tour of institutional dysfunction. On March 14, the California Public Employee Retirement System released what it calls a “special review report on placement agent activity” after an extensive investigation by law firm Steptoe & Johnson. The 75-page document is based on interviews with more than 140 people, not including two main characters who are refusing to talk – former CalPERS chief executive officer Fred Buenrostro and his long-time system-worker friend, Al Vilallobos.

The story told within the report offers a few new pieces of information related to the ongoing pension “pay to play” scandal. It also gives tawdry details of previously reported incidents. These make you wonder, why did it take so long for this game to play itself out? And how did the political and financial infrastructure surrounding CalPERS fail to stop these senior-level fiduciaries from engaging in such very bad habits?

It may well be that the tawdriest details are yet to come. The Steptoe team says in the report that much was not included because separate state and federal criminal investigations remain underway.

Some of my notes from my reading of the Steptoe Report:

The Fred and Al show – Central to the CalPERS pay-to-play scandal is the relationship between two men who allegedly played together both figuratively and literally. Not only did Buenrostro advocate hard for pension decisions that directly enriched ARVCO founder and former CalPERS board member Alfred Villalobos, the two seemed to really have a great old time together. The report details casino jaunts during which Villalobos handed out gambling chips like candy. The pair flew to Dubai for a conference but stopped in Macau on the way back. Hey, they were already in the Eastern Hemisphere. . .

All this took place between 2002 and 2008, while Buenrostro was CEO of CalPERS and Villalobos was an unregistered placement agent earning tens of millions for directing business to CalPERS.

Along the way, Buenrostro lost the trust not only of the nation’s largest pension but of at least two women with whom he had close relationships. The relationships are not mere personal details, but further examples the the report of instances when Buenrostro appeared to have crossed serious ethical lines. When Buenrostro was married in 2004, the ceremony and party were held at the Nevada estate of Villalobos, who also reportedly paid for the entire affair. Buenrostro was later divorced and ended up dating a woman who was “employed for part of that time by one of CalPERS’ investment managers.” The report does not name the woman or the investment manager. The report does note, however, that both Buenrostro’s ex-wife and the investment-manager ex-girlfriend have came to investigators with information about Buenrostro. Each of them called him a “puppet” of Villalobos.

Buenrostro’s ex-wife told Steptoe investigators that Villalobos made Buenrostro a standing offer for a $300,000-per-year job at ARVCO as well as a Lake Tahoe condominium near the firm’s headquarters. Sure enough, after leaving CalPERS in 2008, Buenrostro took both the job and the condo.

There is evidence that Buenrostro lobbied hard on behalf of clients represented by ARVCO while CEO. CalPERS investment staff came to call these favored few fund managers “friends of Fred.” In one case, he told the then-head of private equity at CalPERS, Leon Shahinian, that he wanted “regular reports” on the vetting process for an ARVCO client, Aurora Capital Group. He also told Shahinian he was “being too tough” in negotiations with Aurora.

At the time, many other placement agents with close ties to CalPERS were making good money, but none so good as Villalobos, who earned an estimated $60 million for securing business from the pension. According to the report, the frustrated head of a competing agency, DAV/Weatherly Financial, left Shahinian a message about not having his calls returned. He said: “Don’t know, maybe I should change my last name to Villalobos to insure [sic] that I get a call back.”

One surprising detail about Buenrostro – he was a part-time ski instructor at Squaw Valley Ski Resort and sometimes gave lessons to ARVCO employees. He sometimes was absent from his office during work days because he was skiing.

The Apollo disclosure forms – The biggest payer of fees to Villalobos was Apollo Global Management, which has not been charged with any wrongdoing and has cooperated in the investigation. Apollo ended up paying Villalobos some $50 million for his success with CalPERS. However, according to the report, in 2006 Apollo hired a new chief legal officer who insisted that no placement agent working for the firm be paid unless it submitted a form stating that the agent had disclosed such fees to the investor.

Apollo wasn’t kidding about the disclosure forms: the report notes that the private equity firm refused to pay ARVCO a fee when the agent failed to provide a similar form signed by “another Apollo investor, a different California state trust fund.”

A charmless exchange about these forms took place the following year between Villalobos’ general counsel (his daughter, Carrissa Villalobos) and the investment staff at CalPERS. In order to get paid $20 million in fees, ARVCO needed the pension staff to sign a form stating that they were aware of the fees to be paid ARVCO in relation to its work with Apollo. A staff member, then-portfolio manager Joncarlo Mark, refused to sign it.

“Months later,” according to the report, Buenrostro signed and sent to Apollo a series of disclosures stating that CalPERS was fully aware the arrangement with ARVCO. This triggered the private equity firm to make a reported $20 million payment to Villalobos.

But there were several problems with the documents that Buenrostro signed, starting with the way they looked. They bore a CalPERS letterhead unlike any that existed among CalPERS’ official forms. They were printed on a color printer “unlike those in the general population at CalPERS and its executive office,” according to the report. They used “an odd form of the CalPERS logo.”

On one form sent to Apollo, Buenrostro listed his title as CEO of CalPERS, despite the fact that he had been relieved of this job more than a week earlier.

There were still other problems. Buenrostro disclosed to Apollo that his pension had received a PPM for an Apollo credit fund, when in fact no PPM for that fund existed.

Apollo has now filed a “proof of claim” against Villalobos, who has declared bankruptcy following the seizure of his assets by California authorities.

Unhealthy – Private equity market participants who have been wearily following the CalPERS-Villalobos saga may be surprised by a key finding of the Steptoe report, which involves Villalobos and Buenrostro, but not private equity. The ARVCO head was also paid $4 million and put on a fat retainer to help Medco Health Solutions win a pharmacy benefit manager mandate with the pension.

Leading up to a 2005 Health Benefits Committee announcement that Medco had won the process, Medco chairman and CEO David Snow (no relation to me) joined gatherings at the home of Villalobos that also included Buenrostro and CalPERS board members Charles Valdes (more on him below), Kurato Shimada and Robert Carlson. Other meetings with Snow and the CalPERS official took place in a “Sacramento hotel and another at Medco’s Las Vegas pharmacy facility.” These meetings were allegedly not disclosed to other pension officials.

The day Medco won the benefits mandate, Medco “had a check cut for hand-delivery. . . a $1 million payment to Villalobos, the final installment of the initial $4 million agreement.” The company also put Villalobos on a $20,000 per month retainer agreement, which was terminated in 2009 as the pay to play scrutiny became public.

The report notes that “law enforcement authority requests” prevent it from disclosing further details of the Medco-Villalobos relationship.

Broke Chuck – Charles “Chuck” Valdes was a CalPERS old hand, having served on its board for 25 years. He was also a friend of Al and Fred who joined in the fun at casinos near the Villalobos home and on the Macao trip.

For a senior official at one of the most important investment institutions in the world, Valdes’ personal finance history was calamitous. He filed for bankruptcy twice, in 1991 and 1997, and had an $18,000 lien judgment filed against him in 2006 due to credit card debt. Because of this, Valdes was unable to secure a CalPERS credit card, which made his pension-related travel logistics particularly difficult. At one point he was banned from official travel until he got his expense reimbursement materials in order.

Villalobos himself was no stranger to personal financial complexities – in 1993 he resigned as the deputy mayor of Los Angeles following press reports detailing a history of lawsuits and a personal bankruptcy. A story in the Los Angeles Times that year reported: “Over a 10-year span in the 1970s and early 1980s, public records show that Villalobos was sued successfully by a dozen creditors–including banks, medical professionals, a lawyer, credit services and the Diners Club. Most of the debts were under $1,000; some eventually were paid.”

Tale of two Leons – In an attachment to the report, Apollo head Leon Black is praised in a letter from Steptoe attorney Philip Khinda for his “thoughtful proposal” to reduce the fees Apollo will charge CalPERS on existing partnerships by $125 million. This lost revenue is on top of the fees that Apollo has paid to Villalobos and now wants back.

From a professional standpoint, another Leon fared far worse in the aftermath of the scandal. The former senior investment officer for private equity, Leon Shahinian, was forced to step down last year. The Steptoe report says that after he “apparently resisted repeated attempts by Buenrostro to improperly influence the investment process,” Shahinian “seemed to lose his way.”

It’s unclear what Shahinian got out of apparently losing his way, other than first-class flights to visit with private equity executives. The report, and many press reports before it, detail a trip to New York to meet with Leon Black at a black-tie Museum of Modern Art gala. He flew there and back in a private jet with Villalobos. He called home twice from the two-bedroom suite that Villalobos had rented. He “accepted three bottles of wine and champagne from Villalobos” following this trip. Two years later, as the investigation began to heat up, Shahinian returned two of the bottles. Presumably he got to enjoy one.

 Fred Buenrostro