CalPERS board endorses ethics proposals
Directors of the California Public Employees’ Retirement System endorsed ethics and open-government proposals but put off decisions on stronger measures aimed at avoiding conflicts of interest and self-dealing, issues that have plagued the fund over the last few years.
CalPERS wrestled with recommendations from an internal review of operations after it was rocked by claims that it was too cozy with outside investment firms and allowed go-betweens to get exorbitant fees simply for referring deals to many of Wall Street’s most powerful private equity, hedge fund and real estate investment managers.
On Wednesday, directors adopted nine proposals that would regulate fee payment to agents who help funds gain access to CalPERS decision makers, ensure that the same staff members who negotiate investment deals do not monitor their success and require investment partners to hold meetings in modest, office settings instead of vacation resorts.
Meanwhile, they delayed action on proposals to reduce or eliminate travel, gifts and other accommodations that outside investment firms provide board members and to impose a two-year waiting period before former employees could work for firms that handle more than $10 million in CalPERS business.
The reforms are “big and important steps, but not the last ones” said Philip Khinda, a Washington securities lawyer hired by CalPERS to conduct the review. A final report that CalPERS expects to release next month, he said, will address the need for even more changes in the way CalPERS operates.
Critics called Khinda’s recommendations helpful but faulted the board for missing a major opportunity to repair the reputation of the nation’s biggest public pension fund, now valued at $229 billion.
“I would call it a logical sort of housecleaning, but not a cleanup,” said pension fraud expert Edward Siedle, a Florida lawyer and former U.S. Securities and Exchange Commission finance advisor. “There’s nothing here that’s really going to change the culture. They need to dig deeper, not smooth over what’s been found.”
Widespread allegations of conflict of interest and self-dealing arose in late 2009, when CalPERS released hundreds of pages of financial disclosure documents. The information showed that one former board member, Alfred J.R. Villalobos, had collected more than $40 million in commissions from investment managers for acting as a so-called placement agent. Such go-betweens are paid by investment houses to open doors and make introductions at CalPERS.
Villalobos and a business associate, former CalPERS Chief Executive Fred Buenrostro Jr., are defendants in a fraud lawsuit filed in Los Angeles County Superior Court by the California attorney general. The suit alleges that Villalobos lavished trips and gifts on Buenrostro while the latter was still at CalPERS and did the same for other managers.
The SEC and the U.S. Department of Justice also are investigating the fund, and state prosecutors are continuing their probe, CalPERS confirmed in a memo to the board.
“These investigations are ongoing and are expected to remain active for some time,” the memo said.
Both Villalobos, who has filed for bankruptcy protection, and Buenrostro have said they did not do anything wrong.
Over the last year, CalPERS has gone a long way toward adopting many of the changes proposed by Khinda.
The board supported legislation, effective Jan. 1, to require all placement agents to register with the state as lobbyists. The new law also prohibits them from being paid a commission based on their success at placing an investment with CalPERS or the state’s other big pension, the California State Teachers’ Retirement System.
CalPERS also banned staffers from receiving any gifts, though it hasn’t adopted such a rule covering board members, and has begun to urge investment partners to hold annual and advisory committee meetings in modest surroundings, such as their own offices, rather than at four-star resorts with world-class golf courses.
Current and former CalPERS investment staffers have testified in legal depositions that they accepted gifts of travel in private, executive jets to attend sometimes lavish investment-related meetings.
Charles Valdes, a long-time former board member, allowed Villalobos to host him on a luxury, round-the-world trip to London, Dubai and Hong Kong in 2006. Valdes did not report the gift on his annual state financial disclosure statement.
Khinda’s preliminary report recommended that in-house auditing services be strengthened and reports to the board be made on at least a monthly basis.
Siedle said the actions CalPERS has taken so far have limited effect.
“If you want to really reform things, go after the money,” he said. “The whole placement agent industry has fed at the trough at CalPERS, and it is laughing all the way to the bank.”
