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Two former CalPERS officials indicted on fraud charges

Two former CalPERS officials indicted on fraud charges
Alfred J.R. Villalobos, left, and Federico Buenrostro Jr.
(Los Angeles Times / Bloomberg)

SACRAMENTO — Three years after a major influence-peddling scandal rocked California and the nation’s largest public pension fund, a federal grand jury indicted two former top officials on fraud, conspiracy and obstruction charges.

The indictment, unsealed Monday in San Francisco, names as defendants Federico Buenrostro Jr. of Sacramento, a former chief executive of the California Public Employees’ Retirement System, and Alfred J.R. Villalobos of Reno, Nev., a former CalPERS board member and one-time deputy Los Angeles mayor.

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The charges are the culmination of a far-reaching investigation into the way the agency invested its money and how the former insider, Villalobos, collected tens of millions of dollars from Wall Street firms for steering CalPERS business their way.

Neither man could be reached for comment, but they have consistently denied any wrongdoing in connection with their CalPERS work. Villalobos’ attorney said his client was innocent and would fight the charges.

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The agency invests $255 billion of employee and governmental contributions to provide retirement benefits for more than 1.6 million public employees, retirees and their families.

Once a highly regarded organization with an international reputation for smart, ethical investing, CalPERS now must wrangle with questions about commissions paid to the little-known intermediaries and their relationships with fund officials.

Steep investment losses during the recent recession also tarnished the fund. Since then, the CalPERS board has conducted detailed investigations, ordered major changes in the way it operates and improved its financial performance.

CalPERS President Rob Feckner called the long-expected federal indictments “another step in the road to justice.”

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Pension fund officials hailed the action as an affirmation that the fund moved forcefully to clean up its relations with intermediaries, such as Villalobos, who collected exorbitant fees from private equity investment funds after they signed lucrative contracts with CalPERS.

The scandal at CalPERS and subsequent investigations and the federal indictment should be a warning to public pension funds across the country that they need to root out any potential or actual corruption, said Edward Siedle, a forensic expert specializing in pension funds.

“What the Department of Justice is doing is sending a shot across the bow,” he said, “that these matters are taken seriously and people will prosecute.”

Pension fund officials credited their own, in-house 2011 review with providing significant findings that helped prosecutors make progress toward indictments.

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At the same time, critics have continued to pummel CalPERS and other large government-worker pension funds for being dangerously underfunded and providing overly generous retirement and health benefits. Those costs unfairly burden taxpayers, most of whom have no access to similar largesse, critics say.

At the center of the investigation was the role of placement agents, the middlemen or intermediaries hired by private equity firms and other financial institutions to win CalPERS business. The investigation came during a rough financial stretch for CalPERS. Its investment portfolio value had plummeted nearly $100 billion, to $169 billion, during the recession.

Since then, the Legislature approved a new law requiring placement agents to be registered as lobbyists, and CalPERS has enacted stringent new policies on ethics, governance, conflicts of interest, and board gifts and travel.

“Given its many reforms, CalPERS is a better, stronger and more transparent pension system than ever,” said Philip Khinda, a Washington, D.C., lawyer, who conducted the special review.

The indictment charged Villalobos with conspiracy to defraud the United States, engaging in a false scheme against the United States and conspiracy to commit mail and wire fraud. Buenrostro was accused of the same crimes, plus making a false statement to the United States and obstruction of justice.

The maximum penalty for the mail and wire fraud is 20 years in prison and a fine of $250,000 or twice the amount of loss, whichever is greater. The other charges carry five-year maximum prison terms and fines similar to the mail and wire fraud charges.

Villalobos, 69, and Buenrostro, 64, were longtime friends. The indictment set out a series of transactions in 2007 and 2008 between the two men while Buenrostro was still running CalPERS.

At the time, Villalobos was working for the New York-based private equity firm Apollo Global Management as a placement agent to help it get CalPERS business.

According to the indictment, the two men conspired to commit fraud by creating and sending phony documents. These disclosures were needed to comply with a requirement from Apollo for proof that CalPERS officials knew Villalobos was being paid large amounts of money to secure $3 billion in CalPERS business.

Buenrostro then retired from CalPERS and went to work for Villalobos’ Nevada firm, ARVCO Capital Research, shortly after Apollo made its last commission payment to Villalobos.

On Monday, both men appeared with their lawyers in federal court in San Francisco, and each was released on $500,000 bail. Later, Buenrostro’s lawyer, William Kimball, declined to comment. Villalobos’ attorney, Donald Etra, said his client “denies all charges” and will vigorously defend himself.

The two defendants also face civil lawsuits brought by the U.S. Securities and Exchange Commission and the California attorney general’s office.

The Justice Department said Monday that the federal indictment capped a 2 1/2 year probe that was assisted by the U.S. Postal Service, FBI, SEC and Secret Service.

In a statement, Apollo said it was troubled by the charges against Villalobos and Buenrostro and “was not aware of any misconduct engaged in by Mr. Villalobos during the time he worked with Apollo.” Apollo stressed that it had “cooperated fully with all regulatory agencies investigating this matter and will continue to do so.”

Apollo paid Villalobos $14 million for CalPERS deals mentioned in the indictment, court papers said.

In all, Villalobos and his companies got a total of $48 million from Apollo from 2005 to 2009, according to an SEC filing in April of last year. He also received an additional $12 million in placement fees from other investment funds that managed CalPERS money.

marc.lifsher@latimes.com

Times staff writer Andrew Tangel in New York contributed to this story


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