California's public pension fund severed ties Monday with a major investment manager that had close ties to Alfred J.R. Villalobos, the former pension fund board member who is now accused of fraud.
Pacific Corporate Group of La Jolla oversaw $2.5 billion worth of investments by the California Public Employees' Retirement System. The decision to end the relationship "is part of our systematic restructuring of our private equity program to reposition our assets and focus on improved performance, accountability and transparency with our partners," Joseph Dear, CalPERS' chief investment officer, said in a statement.
Pacific Corporate executives declined to be interviewed about the decision. In a statement, company spokesman Brian Maddox said the firm had generated more than $3 billion in investment gains for CalPERS' retirees over the last 20 years.
The firm had served CalPERS as both a fund manager and an independent investment consultant that gave advice about whether CalPERS should put its money into unrelated private equity deals.
Last year, CalPERS disclosed that Villalobos was paid $17 million by two private equity firms to help them win investment money from the fund. At the same time, Villalobos was working for Pacific Corporate Group, which was advising CalPERS on investments.
CalPERS first learned of the relationship in 2007, but its legal staff found no conflict because Pacific Corporate Group's relationship with Villalobos did not compromise the value of the consultant's advice, and because Villalobos played no direct role in the firm's consulting business, CalPERS spokesman Brad Pacheco said.
But after CalPERS disclosed the relationship, independent ethics experts said it posed a clear conflict because it put Villalobos in a position to recommend the private equity firms that were paying him.
It was just that potential for conflicts of interest that led CalPERS to begin looking at its ties to Pacific Corporate last December as part of a "special review" by Washington law firm Steptoe & Johnson that is still underway.
Villalobos could not be reached for comment. In May, state Atty. Gen. Jerry Brown sued Villalobos, a former Republican Party activist and a deputy Los Angeles mayor under Richard Riordan, in Los Angeles County Superior Court for fraud, accusing him of violating state laws on securities and unfair-business practices. The suit alleged that Villalobos tried to bribe state pension fund officials with such gifts as luxury travel to help his clients secure deals.
Villalobos has denied wrongdoing.
Since that case was filed, Villalobos has filed for Chapter 11 bankruptcy protection.
In dropping Pacific Corporate, CalPERS asked Aviva Capital, a former joint venture partner with Pacific Corporate, to manage $1 billion in CalPERS capital invested and committed in two Pacific Corporate emerging markets funds.
CalPERS also tapped Capital Dynamics to take over management of its $480-million Clean Energy & Technology fund, which it launched in 2007 with Pacific Corporate. A group of former Pacific Corporate executives will help CalPERS sell $1 billion in remaining, maturing investments over the next few years.