Funding for Westly Followed Investment

State Controller and gubernatorial candidate Steve Westly steered California’s giant pension system to invest in a fledgling venture capital fund whose politically connected partners helped him raise campaign cash.

Before Westly’s involvement, the pension board’s outside advisors had rejected the fund as ill-suited for its portfolio. After the investment was made, one of the partners became enmeshed in an unrelated pension-fund scandal in Illinois, pleading guilty to attempted extortion.

As New York-based Healthpoint Partners LP lobbied the California Public Employees Retirement System in 2003 and 2004 to invest in their fund, two managing directors, including the one in Illinois, raised money for Westly at events in New York and Chicago. One partner had run for governor of New York; the other had been a finance chairman for the Democratic National Committee.

Westly, whose job is to manage and audit state spending, is an influential member of the 13-person CalPERS board. He took up Healthpoint’s cause in the spring of 2003 as the contributions began to flow.

Within a year, the Healthpoint partners had helped Westly’s campaign coffers grow by more than $50,000 -- money that could be for a variety of political purposes. And the company had secured a $5-million investment from CalPERS.

Westly’s intervention did not take place in public meetings, but rather in private, over restaurant lunches and in e-mails. It has been reconstructed through documents obtained by The Times and interviews with some participants.

Westly acknowledged that he had private discussions with CalPERS staff on Healthpoint’s behalf.

“I want to make sure we do everything we can to maximize the returns to our pension funds,” he told The Times at an event in Modesto last month. “I’m always looking out for firms I think can provide above-average returns, and I do that from time to time.”

He declined to comment further. But his campaign spokesman, Nick Velasquez, told The Times on Tuesday that the controller would return $15,000 donated directly by Healthpoint employees and their relatives, “out of an abundance of caution.”

He said Westly had been unaware of the Illinois indictment, although the CalPERS staff sent board members a memo outlining it eight months ago. “I can only assume the campaign didn’t get the memo,” Velasquez said.

Both Healthpoint managing directors, who left the firm after the CalPERS investment was made, said through spokesmen that they had done nothing improper. One was Joseph Cari, a Chicago attorney and former Democratic finance official, who was indicted in Illinois. The other was former New York Comptroller and would-be governor H. Carl McCall, also a Democrat.

Current Healthpoint executives declined to talk publicly about their former partners’ efforts to attract cash from CalPERS.

CalPERS spokeswoman Pat Macht said everything about the Healthpoint investment was done by the book. She said venture capital firms regularly direct their pitches to CalPERS board members, who then take the proposals to staff.

Macht said CalPERS staff had made other investments in firms rejected by outside experts, and the staff did not feel pressure from Westly to put CalPERS money in Healthpoint.

“When we looked at it a year later, the investment staff thought they had an interesting strategy,” Macht said.

Corporate governance experts say Westly’s actions were questionable.

“This looks like a case where you have a politician making a call to help out donors,” said UCLA law professor Stephen Bainbridge. “It’s fine for a politician to call the DMV to shake something loose for a constituent. But you should not have the state retirement system making decisions on that basis.”

Healthpoint, which invests in companies that make medical devices such as orthopedic implants, was created in 2002. The firm quickly set its sights on pension funds, including the $200-billion-plus CalPERS system. CalPERS puts the pension money in a variety of investments, including real estate, hedge funds and common stocks.

McCall led the effort to woo Westly, documents and interviews show. He had joined Healthpoint in 2003 after losing the 2002 New York governor’s race to incumbent Republican George Pataki.

He enlisted fellow Healthpoint partner Cari to help with fundraising. Cari gave $4,000 to Westly and urged some of his political associates to donate, the associates said.

Both Cari and McCall were coveted contacts for any Democrat seeking higher office. Westly was no exception, despite a personal fortune gained as an early EBay executive that has enabled him to give more than $22 million to his campaign for the gubernatorial nomination against state Treasurer Phil Angelides.

Westly’s desk calendar shows that he and McCall met privately for 45 minutes at the controller’s Sacramento office in March 2003, two months after Westly took office. Neither Westly nor McCall would discuss what they talked about.

At that time, Healthpoint already had approached CalPERS staff and been referred to an outside expert, the Boston firm Grove Street Advisors, which manages many of CalPERS’ venture capital investments.

Macht said Grove Street rejected the proposal because Healthpoint didn’t fit its strategy of investing in high-tech firms. Grove Street officials declined to discuss the decision.

In March, Westly attended a fundraiser in New York that McCall also attended. The following month, Westly reported receiving checks from several Healthpoint executives. McCall did not write a check, and campaign finance reports show he has never donated to Westly -- although he asked others to, and his wife gave $1,000.

Within weeks of the New York fundraiser, Westly lunched at Il Fornaio in Sacramento with the CalPERS executive who oversaw venture capital investments, Rick Hayes.

Hayes sent a follow-up note to Westly’s personal e-mail, saying: “I wanted to followup on a few of the deals we discussed.”

He included Healthpoint: “Carl McCall, Healthpoint: ... my team met with Carl/team when they were out 2 months ago, and we referred the deal to Grove Street. I believe Grove Street passed, and I can get the report if interested.”

Hayes’ team referred Healthpoint to Grove Street a second time in June 2003. Grove Street still did not invest.

In September, Healthpoint partners held another fundraiser for Westly, this time at the Chicago Club, a private business club.

Michael Bauer, a local Democratic activist who attended the event, recalled in an interview seeing McCall and Cari there. McCall introduced Westly to the gathering, Bauer said.

Two weeks later, the desk calendar shows, Westly and Hayes had lunch again at Il Fornaio. Meanwhile, Healthpoint continued lobbying CalPERS.

In March 2004, Westly was feted at a third fundraiser, also at the Chicago Club. Healthpoint executives, McCall’s wife and others they solicited gave at least $20,000 at that time. The same month, Hayes and his staff used their discretionary authority to direct $5 million to Healthpoint. Campaign finance reports show no contributions linked to Healthpoint after 2004.

Hayes declined to comment for this article. He left the state’s pension system in June 2004, taking a job as a managing partner with Oak Hill Capital, a national financial firm that does business with CalPERS.

Macht said the staff move came after a second outside consultant reviewed the Healthpoint investment proposal and found it sound. CalPERS attorneys said the consultant’s report was not a public record and declined to release it.

Meanwhile, Cari was angling for investments for Healthpoint from Illinois’ pension funds. Eventually he was charged with participating in a kickback scheme. He was indicted on, and pleaded guilty to, a single count of attempted extortion. He is cooperating with federal authorities and has not been sentenced.

In the CalPERS memo in August informing the board about the Illinois indictment, the staff noted that there was no indication that Healthpoint as a company participated in the scheme, and that “the investigation is not expected to have a negative impact on the performance of the fund.”

CalPERS maintains its investment in Healthpoint. Officials say it is too early to tell whether the investment will be profitable because it typically takes more than two years for venture capital funds to mature.

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Timeline

State Controller and gubernatorial candidate Steve Westly steered California’s $200-billion public employee pension system, CalPERS, to invest in Healthpoint Partners, a venture capital firm. Health-

point executives helped raise campaign money for Westly.

2003

March

* Healthpoint executive meets with Westly, a CalPERS board member.

* Fundraiser for Westly held in New York (Healthpoint partners’ donations are recorded the following month).

* CalPERS investment advisor rejects investment in Healthpoint.

May

* A top CalPERS executive, overseeing investments, e-mails Westly about Healthpoint’s status as a potential investment.

September

* Healthpoint executives hold a fundraiser for Westly in Chicago.

2004

March

* Healthpoint partners help organize a third fundraiser for Westly, also in Chicago.

* CalPERS invests $5 million in Healthpoint.

2005

August

* Healthpoint partner Joseph Cari is indicted in an investigation into the Illinois teachers’ pension system. (He pleads guilty to extortion a month later.)

* CalPERS staff informs the board about the federal indictment but says Healthpoint is not implicated.

2006

April

* Westly’s campaign says the controller, becoming aware of the Illinois indictment, will return $15,000 contributed directly by Healthpoint executives and relatives.

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Source: Times reporting