Milking the CalPERS Cash Cow?

Leo Kolivakis's picture

Submitted by Leo Kolivakis, publisher of Pension Pulse.

go-betweens got $125-million-plus from investment firms for arranging CalPERS deals:

from Los Angeles and Sacramento - Private investment funds paid more
than $125 million to scores of intermediaries who helped them win
business with the California Public Employees' Retirement System, new
documents show, prompting calls for stronger oversight of those who
solicit public pension money.

intermediaries, or placement agents, include three former CalPERS board
members -- one of them William D. Crist, a longtime board president --
who lobbied the pension fund on behalf of an investment firm seeking a
share of CalPERS' $205 billion in assets.

Pension experts
say the disclosures are troubling, as lobbying by former board members
could put pressure on CalPERS to put money with investment firms that
charge excessive fees or that don't offer the best returns.

fact that people are being lobbied by people who have relations with
current board members, even though they are former board members, is
totally inappropriate," said Dave Elder, a former assemblyman from Long
Beach who monitors CalPERS for public employee unions.

made the disclosures Thursday in response to a state Public Records Act
request from The Times and other news organizations. The fund, which
manages retirement benefits for 1.6 million state and local government
employees, retirees and their families, has also hired Washington law
firm Steptoe & Johnson to investigate the use of placement agents.

are serious issues, and CalPERS is committed to reviewing them fully
and fairly," said Philip Khinda, an attorney with Steptoe &
Johnson. "Among other things, we're investigating whether the system
was made to overpay or was misled."

CalPERS has invested in
private funds represented by placement agents for more than 15 years,
but the documents provided new details about the practice. Among the

* Former CalPERS board members Matt Fong and Crist
were identified for the first time as pitchmen for investment funds.
Fong served on the CalPERS board in his role as state Treasurer. Crist
-- a retired economics professor at Cal State Stanislaus in Turlock --
was elected to the CalPERS board by state employees.

* Another
placement agent named in the documents was Nicholas Smith, who served
as an alternate to former State Controller Steve Westly on the CalPERS
board. Smith, identified as an executive with Gold Bridge Capital,
attended board meetings when Westly was unavailable to, according to
state pension fund officials. He did not return calls for comment.

The list of placement agents ranged from small independent firms to
some of the biggest names on Wall Street, including Credit Suisse, UBS
and Lazard.

* The No. 1 placement agent was Stateline,
Nev.-based Arvco, led by Alfred J.R. Villalobos, another former CalPERS
board member who was identified as a placement agent by CalPERS last
year. Villalobos was paid $58.9 million for his work on behalf of
private equity funds Apollo Group, Ares Capital and other firms, the
records show.

CalPERS started reviewing payments to placement
agents last year after a New York state pension fund scandal that
included bribery allegations against some agents. With the release of
the new documents, CalPERS Chief Executive Anne Stausboll called for

"Gathering information is not enough," Stausboll said.
"We remain firmly committed to pursuing a full and fair examination
that the special review will provide, and to backing legislation that
would remove contingent fee arrangements and require placement agents
to comply with the same rules as lobbyists."

Assemblyman Edward
Hernandez (D-West Covina), who last year wrote legislation that put new
restrictions on pension board members who work with private investment
firms, said he would push for "tough legislation to end the shadowy
involvement of placement agents and remove the greed factor from public
pension fund investments."

The disclosures of payments over the
last decade also heightened concerns about whether there is a revolving
door at CalPERS, allowing former board members to trade their
connections for big paydays.

Under California law, former
CalPERS board members and staff are allowed to lobby their former
employer two years after leaving the pension agency (the limit was
previously one year), but some critics say the practice raises ethical
concerns and has the potential for abuse.

"It really
demonstrates the politicization of the investment decision-making
process. It really is a way of greasing the palm of a well-connected
insider," said Ted Siedle, a former Securities and Exchange Commission
attorney who now works as a private pension consultant. "They're
providing access, pure and simple, and there's no reason for it."

was on the CalPERS board from 1987 to 2003, serving as president for 11
of those years. Since leaving the board, he has earned more than
$800,000 in fees from London investment firm Governance for Owners, in
which CalPERS has about $200 million invested, records show.

declined to comment on Crist's relationship with the London firm, where
he is a partner and current board chairman. But both the firm's CEO and
the former CalPERS board president asserted that he was more than a
mere go-between.

"I never did think of myself" as a placement
agent, Crist said. "I hate the appearance of that. I don't think I was
particularly central to the CalPERS investing."

Fong, who served
on the board from 1994 to 1998, worked for placement-agent firm
Wetherly Capital when it represented Shamrock Holdings. Wetherly
received nearly $6 million for pitching Shamrock and other investment
funds to CalPERS, the records showed.

Wetherly was one of
several firms that came under scrutiny last year from New York Atty.
Gen. Andrew Cuomo, who has secured several guilty pleas in a kickback
scandal in that state's retirement system.

Fong could not be
reached for comment Thursday. In an interview earlier this week, he
confirmed that he'd pitched investments at CalPERS.

"I have set
up meetings for people to go see CalPERS," he said. "I've actually
guided people, not just at CalPERS but at other funds in other states."

Being a placement agent, he said, "is like anything else; you can abuse it or handle it appropriately."

Weinstein, a Wetherly principal, said he hired Fong because of his
experience with public pension funds. "From his years as a state
treasurer and being a trustee, he understands the whole notion of
corporate governance -- the idea that large institutional investors
wanted to be activist investors," he said.

Another placement
agent identified in the new disclosures was Julio Ramirez, who
represented firms including Blackstone Capital Partners and GSO Capital
Partners. Ramirez, a resident of San Marino, pleaded guilty in May to
criminal securities charges in connection with the New York kickback

The use of placement agents is also being probed
independently by the SEC as well as by the attorneys general of
California and New York state.

I can tell you from
first-hand experience that the overwhelming majority of placement
agents are financial parasites who serve no purpose whatsoever. I often
asked myself why hedge funds and private equity funds use these
placement agents, but in the U.S. it's all about politics and who you

It's high time regulators ban these placement agents. If not, set a
five year rule for board of directors and senior pension fund managers,
not allowing them to join any fund they invested with, or any placement
agent they used to help them invest with, for a minimum period of five
years. Lobbying rules should be equally if not more stringent.

If authorities in charge of oversight want to properly align interests
of pension fund managers and board of directors with their
stakeholders' interests, they need to stamp out all abuses, including the
potential conflicts of interests that can arise between placement agents,
pension fund consultants, private funds and the people in power at these large public pension plans.