CalPERS’ big legal bill raises eyebrows
The California Public Employees’ Retirement System paid $11 million to a Washington, D.C., law firm and its advisors to conduct an internal review, an amount that has some of the fund’s own directors proposing more stringent oversight of outside legal fees.
The review found support for allegations of corruption, bribery and influence peddling at the country’s biggest public pension fund, but some lawyers and financial experts familiar with the scandal said they were surprised by the large legal fees.
They also suggested that the investigative work could have been done by the state attorney general’s office, which has sued two former CalPERS officials over fraud allegations.
“I’ve never heard of a pension fund paying that kind of money” on an internal investigation, said Ed Siedle, an expert who investigates pension fund portfolios.
CalPERS -- which oversees a $232-billion fund -- defended the fees, noting that it used the findings from the 18-month review by Steptoe & Johnson to negotiate $215 million in fee reductions from private equity investment managers who handle a large swath of its assets.
The 56-page report, issued in March, also made recommendations for reforming CalPERS’ administrative, oversight and ethical practices, many of which were subsequently adopted by the CalPERS board.
“This study was worth every penny,” CalPERS Chief Investment Officer Joseph Dear said.
The value of the fee reductions, he said, was much greater than all the questionable fees that private equity managers paid to intermediaries for bringing in business from CalPERS.
Dear said the high fees that those managers previously paid were part of standard contracts that go-betweens had with investment houses and that it took Steptoe’s help to reduce management fees that CalPERS paid.
Dear said the review also created “continuing value” by communicating to the marketplace that CalPERS wanted to eliminate the abusive use of politically connected intermediaries -- known as placement agents -- in closing deals with the California pension fund.
CalPERS disclosed the $11-million payment to Steptoe in response to a March 18 request from The Times. Executives said they negotiated a special rate of no more than $400 an hour per lawyer, but they declined to say how many lawyers worked on the case.
Still, the legal bill needs to be closely scrutinized, said state Controller John Chiang, a CalPERS board member. The controller “wants to see a full accounting of the dollars spent,” his spokesman Garin Casaleggio said.
The size of the $11-million payment should spur the CalPERS board to routinely look at all such contracts, Lockyer said.
The treasurer plans to propose that the board adopt a new rule requiring it to approve all new contracts and changes in existing contracts that exceed $1 million, Lockyer spokesman Tom Dresslar said. There is no requirement now for board approval of large contracts, he said.
Other critics said they were underwhelmed by the Steptoe investigation’s findings, many of which had been previously reported in the media.
“They could have learned a whole lot more for a lot less money,” Siedle said. “The fact they spent that much money to learn so little indicates to me that they did not want a real in-depth review.”
Securities lawyer Keith Bishop, a former California Department of Corporations commissioner, was skeptical about the independence of the Steptoe firm after learning from CalPERS that Steptoe had worked previously for the pension fund on a number of proceedings and matters.
“Normally, when you hire an outside law firm to do an investigation of this type, you want someone who doesn’t have a relationship with the company and the management of the company or, in this case, a government agency,” he said.
Bishop also said the CalPERS legal staff, working with the California attorney general, could have pressured investment managers to reduce their fees.
Steptoe lawyers had full independence to “use their own judgment and discretion” to pursue the investigation, said Peter Mixon, CalPERS’ general counsel.
Mixon, who was the fund’s chief attorney while the alleged corruption went on, declined to say whether Steptoe conducted its investigation under his supervision or with complete independence.
He said the special review team worked closely with the attorney general and federal law enforcement agencies to uncover details of alleged misconduct involving placement agents.
The authors of the report, Steptoe partner Philip S. Khinda and Ellen S. Zimiles of Navigant Consulting Inc. of Chicago, said their team looked at roughly 70 million pages of information from “within CalPERS and beyond” and interviewed more than 140 people, including every current member of the CalPERS investment staff.
CalPERS officials and an independent legal expert stressed that the money paid to Steptoe was not out of line with similar probes of corporations. They pointed to the more than $100-million legal bill paid by Avon Products Inc. to the law firm Arnold & Porter for an internal investigation into allegations that the cosmetic company paid bribes to foreign government officials.
“Fees of $11 million for an investigation of this scope, duration and complexity seem reasonable,” said Brad S. Karp, chairman of Paul, Weiss, a New York law firm that has conducted a number of internal reviews of Wall Street banks and investment firms.
The Steptoe report focused on alleged insider dealings at CalPERS that involved multimillion-dollar fee payments to politically connected intermediaries, who helped private equity managers get billions of dollars in pensioners’ money.
Fund managers paid one of those go-betweens, former CalPERS board member Alfred J.R. Villalobos, more than $50 million.
The review alleged that then-Chief Executive Federico Buenrostro Jr. pressured subordinates to invest with Villalobos’ clients.
A surprising part of the report detailed an incident when Buenrostro and two former board members allegedly secured a $4-million consulting fee for Villalobos from a prescription drug benefits management company that was seeking a large CalPERS contract. Buenrostro went to work for Villalobos after retiring from CalPERS in 2008.
The state has sued Villalobos and Buenrostro, alleging fraud. Both have denied any wrongdoing.
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