SACRAMENTO — State Controller and gubernatorial candidate Steve Westly steered California's giant pension system to invest in a fledgling venture capital fund whose politically connected partners helped him raise campaign cash.
Before Westly's involvement, the pension board's outside advisors had rejected the fund as ill-suited for its portfolio. After the investment was made, one of the partners became enmeshed in an unrelated pension-fund scandal in Illinois, pleading guilty to attempted extortion.
As New York-based Healthpoint Partners LP lobbied the California Public Employees Retirement System in 2003 and 2004 to invest in their fund, two managing directors, including the one in Illinois, raised money for Westly at events in New York and Chicago. One partner had run for governor of New York; the other had been a finance chairman for the Democratic National Committee.
Westly, whose job is to manage and audit state spending, is an influential member of the 13-person CalPERS board. He took up Healthpoint's cause in the spring of 2003 as the contributions began to flow.
Within a year, the Healthpoint partners had helped Westly's campaign coffers grow by more than $50,000 -- money that could be for a variety of political purposes. And the company had secured a $5-million investment from CalPERS.
Westly's intervention did not take place in public meetings, but rather in private, over restaurant lunches and in e-mails. It has been reconstructed through documents obtained by The Times and interviews with some participants.
Westly acknowledged that he had private discussions with CalPERS staff on Healthpoint's behalf.
"I want to make sure we do everything we can to maximize the returns to our pension funds," he told The Times at an event in Modesto last month. "I'm always looking out for firms I think can provide above-average returns, and I do that from time to time."
He declined to comment further. But his campaign spokesman, Nick Velasquez, told The Times on Tuesday that the controller would return $15,000 donated directly by Healthpoint employees and their relatives, "out of an abundance of caution."
He said Westly had been unaware of the Illinois indictment, although the CalPERS staff sent board members a memo outlining it eight months ago. "I can only assume the campaign didn't get the memo," Velasquez said.
Both Healthpoint managing directors, who left the firm after the CalPERS investment was made, said through spokesmen that they had done nothing improper. One was Joseph Cari, a Chicago attorney and former Democratic finance official, who was indicted in Illinois. The other was former New York Comptroller and would-be governor H. Carl McCall, also a Democrat.
Current Healthpoint executives declined to talk publicly about their former partners' efforts to attract cash from CalPERS.
CalPERS spokeswoman Pat Macht said everything about the Healthpoint investment was done by the book. She said venture capital firms regularly direct their pitches to CalPERS board members, who then take the proposals to staff.
Macht said CalPERS staff had made other investments in firms rejected by outside experts, and the staff did not feel pressure from Westly to put CalPERS money in Healthpoint.
"When we looked at it a year later, the investment staff thought they had an interesting strategy," Macht said.
Corporate governance experts say Westly's actions were questionable.
"This looks like a case where you have a politician making a call to help out donors," said UCLA law professor Stephen Bainbridge. "It's fine for a politician to call the DMV to shake something loose for a constituent. But you should not have the state retirement system making decisions on that basis."
Healthpoint, which invests in companies that make medical devices such as orthopedic implants, was created in 2002. The firm quickly set its sights on pension funds, including the $200-billion-plus CalPERS system. CalPERS puts the pension money in a variety of investments, including real estate, hedge funds and common stocks.
McCall led the effort to woo Westly, documents and interviews show. He had joined Healthpoint in 2003 after losing the 2002 New York governor's race to incumbent Republican George Pataki.
He enlisted fellow Healthpoint partner Cari to help with fundraising. Cari gave $4,000 to Westly and urged some of his political associates to donate, the associates said.
Both Cari and McCall were coveted contacts for any Democrat seeking higher office. Westly was no exception, despite a personal fortune gained as an early EBay executive that has enabled him to give more than $22 million to his campaign for the gubernatorial nomination against state Treasurer Phil Angelides.
Westly's desk calendar shows that he and McCall met privately for 45 minutes at the controller's Sacramento office in March 2003, two months after Westly took office. Neither Westly nor McCall would discuss what they talked about.