Westly Helped Firms Tap State Fund

Soon after taking office in January 2003, state Controller Steve Westly began helping three venture capital firms land multimillion-dollar investments from California’s giant pension system, according to public records including e-mails and officials’ calendars.

Westly, now running for the Democratic gubernatorial nomination, received campaign donations from individuals associated with each of the funds, campaign finance records show.

At any given time, hundreds of fund managers are angling for CalPERS investments. Westly is one of 13 members of the California Public Employees’ Retirement System board, and as the state’s chief financial officer, one of the most influential.

The funds include:

* Markstone Capital Group LLC, a fledgling firm that invests in infrastructure and other “old economy” industries in Israel. CalPERS’ staff expressed concern about a new fund “in a very unstable part of the world.” In search of CalPERS money, Markstone Chairman Elliott Broidy invoked Westly’s name in letters to other board members. CalPERS put $50 million into Markstone.

* Perseus LLC, a politically connected East Coast firm. Westly dined with its chief executive and urged CalPERS to consider investing in it. CalPERS’ outside investment advisor initially balked at the firm’s proposal, but eventually directed $25 million to Perseus.

* Healthpoint Ltd., which was controlled by prominent Democrats, including former New York state Comptroller H. Carl McCall. As The Times reported last month, CalPERS’ staff put $5 million into the fund after its proposal was rejected by the same outside advisor.

Representatives of the three funds have donated a combined $213,000 to Westly since he ran for controller in 2002, his first statewide campaign.

Healthpoint partners, one of whom has since been indicted in a kickback scheme involving an Illinois pension fund, helped Westly raise tens of thousands more.

Westly spokesman Yusef Robb said any suggestion that the controller intervened for those individuals because they were campaign donors “is ridiculous and insulting to the men and women at CalPERS, whose hard work and integrity has created the nation’s largest and most respected public pension fund.”

“There is no litmus test when it comes to companies that Steve Westly refers to CalPERS, other than that they have the potential to increase returns for the fund,” Robb said.

Operating with $200 billion in the retirement accounts of California’s current and retired public employees, CalPERS is the nation’s largest pension fund. It has a large staff of professionals who oversee investments in stocks, real estate and other ventures. The outside consultants that CalPERS hires help direct investments.

CalPERS staffers say board members, including Westly, routinely bring proposals to CalPERS on behalf of political patrons. Business ethics experts warn against such involvement, saying it leaves board members open to charges of using their influence to enrich benefactors.

“The trustee is there for the benefit of the fund, not the trustee,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “As a general rule, trustees shouldn’t be involved in picking investments.... Involvement in a specific investment where you have a connection is fraught with potential problems.”

Westly’s interest in the funds is apparent in an e-mail to him from Rick Hayes, who at the time oversaw CalPERS’ investments in venture capital funds. In the missive, dated May 20, 2003, Hayes outlined the status of funds that he and Westly had discussed.

Among the firms mentioned in the e-mail was Markstone Capital, controlled by Los Angeles venture capitalist Broidy, a Republican who raises big money for the GOP nationally. He sought $500 million for a new fund focused on what some CalPERS analysts viewed as risky ventures in Israel. Westly was particularly attentive to that fund.

Desk calendars and memos obtained by The Times show that Westly met and phoned Broidy, or Broidy’s partners, half a dozen times between May 2003 and October 2004. Westly also went to Markstone’s Tel Aviv office during a 2004 tour of Israel.

CalPERS invested $25 million in Markstone in September 2003, and another $25 million in January this year. Hayes had said in his e-mail to Westly that the most CalPERS could recommend investing was $25 million.

Westly refused to talk about Markstone or any of the other funds he embraced, saying only: “We are always looking at the best companies in California. When I see companies I think have exceptional track records, I am happy to forward them on to the professional staff.”

Markstone had little track record. It had been founded only months before Westly brought it to CalPERS’ attention in 2003.

Broidy, who raised six-figure sums for President Bush’s reelection, has given no campaign money to Westly. But one of Westly’s biggest individual donors is self-described homemaker Robin Rosenzweig -- Broidy’s wife. She has pumped $179,000 into the controller’s political fund since 2002.

In a written statement, Broidy said his wife’s contributions were not made to help his firm land a CalPERS investment. He said in the statement that he and his wife maintain “a clear separation between our charitable and political endeavors and our business interests.”

The couple’s political giving, Broidy’s statement said, is driven by a desire to support causes and candidates “that protect Israel’s sovereignty and independence.”

In his quest for CalPERS money in 2003, Broidy sent notes to several CalPERS board members, saying: “I am writing to you at the suggestion of ... Steve Westly. I am very pleased to announce the launch of Markstone Capital Partners, L.P.”

When Broidy met with CalPERS staff in Sacramento in May 2003 to make his pitch, he brought along a powerful supporter: Westly’s counterpart in New York state, Comptroller Alan Hevesi. Hevesi manages his state’s public employees’ pension fund and had committed $200 million to Markstone. Westly attended the meeting at CalPERS’ executive offices.

Broidy and his wife have donated $83,400 to Hevesi since 2002, New York state records show. Hevesi said the gifts had nothing to do with his decisions. He has a “wall between political contributions and investment decisions,” he said.

Broidy also met in May 2003 with state Treasurer Phil Angelides, another CalPERS board member and Westly’s rival for the Democratic nomination for governor. Broidy followed up with a letter to Angelides offering to help the treasurer “make a trip to Israel in the near future to explore directly the exciting investment opportunities available there.”

Angelides received a $20,000 donation from Rosenzweig a couple of weeks later, but unlike Westly did not travel to Israel. A spokesman for Angelides said one of the treasurer’s deputies forwarded Brody’s proposal to CalPERS staff without any recommendation.

Other funds mentioned in Hayes’ e-mail to Westly also fared well.

Westly helped Perseus LLC, a fund based in Washington, D.C., and New York. Perseus’ partners include Democrats Richard C. Holbrooke, who was U.S. ambassador to the United Nations under President Clinton, and James A. Johnson, former chief executive of Fannie Mae, which provides capital to mortgage companies.

Perseus’ partners have given more than $350,000 to Democratic candidates for federal office and national Democratic Party organizations since 2002, according to data compiled by the Center for Responsive Politics in Washington, D.C. California records show that Perseus’ partners have given $18,000 to Westly. They also gave $7,500 to Angelides.

According to Westly’s official calendar, the controller met Perseus Chief Executive Frank H. Pearl in April 2003 at the Four Seasons restaurant in New York City. CalPERS already had a substantial amount of money in Perseus’ funds. But Hayes had told Westly in the e-mail that CalPERS’ investment advisors were “likely going to pass” on Pearl’s latest proposal.

Westly and Pearl met again at the Four Seasons in September 2003, and in Sacramento in December 2003, according to Westly’s records, which were obtained through the California Public Records Act. CalPERS subsequently put a combined $25 million into two Perseus funds.

Westly spokesman Robb said the controller merely brought Pearl’s proposal to CalPERS’ attention; its outside advisors made the decision to invest.

Outside advisors were also involved in the Healthpoint decision -- they rejected its investment proposal twice. Nevertheless, staff at the pension system put $5 million into Healthpoint. The fund’s principals helped organize at least three fundraisers for Westly.

After being questioned by The Times about Healthpoint, Westly’s campaign pledged last month to return $15,000 that had been contributed by the fund’s partners and relatives. Campaign officials said the controller acted out of an “abundance of caution” after learning of the Illinois indictment of former Healthpoint partner Joseph Cari.