Financial Regulatory Forum

California pension fund Calpers launches probe of placement agent fees

By Reuters Staff
October 14, 2009

By Jim Christie and Svea Herbst-Bayliss
SAN FRANCISCO/BOSTON, Oct 14 (Reuters) – Calpers, the biggest U.S. public pension fund, said on Wednesday it is probing fees paid by outside money managers to win its business, expanding a review of “pay-to-play” schemes at public retirement systems that has spread across the nation.

The $200 billion fund said in a statement its probe centers around payments of more than $50 million that outside managers made over a five-year period to ARVCO Financial Ventures LLC, a firm headed by former Calpers board member Al Villalobos, who served on the fund’s board between 1993 and 1995.

Calpers, the California Public Employees’ Retirement System, said it has notified the U.S. Securities and Exchange Commission and California’s top law enforcement officer of its probe, adding that it will work with both as needed.

Spokesman Scott Gerber said California Democratic Attorney General Jerry Brown is pursuing his own review of middlemen used by investment managers seeking public pension contracts and is open to working with Calpers, the SEC and others.

At issue for Calpers is the role Villalobos’ firm played as a “placement agent” for investment institutions seeking the fund’s business. Villalobos could not be reached for comment.

Placement agents have come under increased scrutiny in other states, notably New York and New Mexico, where politically connected individuals have acted as middlemen for investment institutions, particularly private equity funds.

Last week, New York Democratic Attorney General Andrew Cuomo said the former head of New York’s Liberal Party and a founding partner of Aldus Equity pleaded guilty to taking part in a kickback scheme that corrupted how the state pension fund chose investment managers. Four of the six individuals Cuomo charged have plead guilty; lawyers for the two others say they are innocent.

“The placement agent industry has been a focus of state authorities and the Securities and Exchange Commission over the last year, and we believe it prudent to conduct a full review of the matters related to these recent disclosures to us,” Calpers Chief Executive Anne Stausboll said in a statement.

CLAMPDOWN ON PLACEMENT AGENTS
Calpers spokeswoman Pat Macht said its managers reported fees to ARVCO for the following private equity funds:
* Apollo Alternative Assets LP
* Apollo Credit Opportunities Fund LP
* Apollo European Principal Finance Fund LP
* Apollo Global Management LLC
* Apollo Investment Fund VI LP
* Apollo Investment Fund VII LP
* Apollo Special Opportunities Managed Account LP
* Aurora Equity Partners III LP
* Aurora Resurgence Fund (c) LP, and
* Ares Corporate Opportunities Fund LP,
Macht said the probe is a larger effort at Calpers to tally fees paid to placement agents for its business.

Calpers this year also backed a state bill, which Republican Governor Arnold Schwarzeneger has signed into law, to increase disclosure of payments to placement agents tied to its investments and those at the California State Teachers’ Retirement System, better known as Calstrs. The bill also bars former Calpers and Calstrs officials from soliciting business at the funds for two years after leaving them.

“Ultimately we’re trying to develop a database … and to confirm that at the end of the day that Calpers was not victimized by bearing these fees,” Macht said.

Calpers especially needs to look at business ties to former fund officials, said Stephen Davis of the Millstein Center for Corporate Governance and Performance. “This is a time when investors are under as much scrutiny as companies for mistakes that led to risk-taking and collapses.”

Calpers and Calstrs, seen as politically savvy and well-run by industry analysts, may also be trying to get ahead of new federal rules expected before the end of the year.

“The federal ban will make the use such placement
agents very risky,” said Alan Cleveland, a private pension fund attorney. “A lot of pension funds will try get ahead of this by making direct inquiries and imposing their own rules.”

CALPERS AT POLITICAL RISK
Villalobos is the second former Calpers board member to be swept up in reviews of placement agents this year. In May, former board member Sean Harrigan resigned as president of the board of the Los Angeles Fire and Police Pensions fund, citing the SEC delving into his ties to a firm named in New York’s pension fund probe.

Investigators came across Harrigan because he had been a consultant to a Los Angeles placement agent firm referenced in New York’s indictment of Henry Morris, a onetime advisor to former New York Comptroller Alan Hevesi. Morris, whose lawyer says he is innocent, is accused of taking kickbacks to help firms win business with New York state’s pension fund.

Calpers’ review of ARVCO comes at a difficult time for the pension fund. It is trying to recover from steep losses from the meltdown on financial markets while activists aiming to overhaul California’s pension funds are scoring headlines by advertising Calpers’ members with six-figure annual pensions.

Their payouts come amid severe financial strain for the state government and local governments paying into the fund– and, potentially, growing resentment among voters who have seen the value of retirement savings in 401(k)s swing wildly while paying taxes to maintain guaranteed Calpers benefits.

Keith Richman, a former Republican state lawmaker, said he and others will soon file a ballot measure aimed at overhauling California pension giants with state election officials in a bid to put it to voters. “Our intent is to file an initiative within the next month,” Richman said.

(Reporting by Jim Christie and Svea Herbst-Bayliss; Additional reporting by Joan Gralla in New York; Editing by Richard Chang) ((jim.christie@thomsonreuters.com; +1-415-677-2539; Reuters Messaging: jim.christie.reuters.com@reuters.net))

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