Reporting from Sacramento — —
Investment intermediary Alfred R. Villalobos, seeking to overturn a judge's freeze on his assets, said he did nothing illegal and did not harm California's largest public pension fund when he brokered investment deals that netted him more than $47 million in commissions.
"Not a penny" of the commissions paid him from 2002 to 2008 came from the California Public Employees' Retirement System, Villalobos said in his first public response to a securities fraud lawsuit filed by Atty. Gen. Jerry Brown.
In court papers filed this week, he also denied that he lavished gifts on CalPERS officials to win their support for placing billions of dollars of pension money with his investment manager clients.
Villalobos' defense will be aired Friday before a Los Angeles County Superior Court judge, who must decide whether the state has a strong-enough case to warrant a continued freeze on his assets, including bank accounts, extensive real estate and a fleet of luxury automobiles.
"The AG has misleadingly portrayed CalPERS as a victim of a fraudulent scheme and now seeks to deprive Villalobos of the means to support himself and to prepare a vigorous defense," stated a defense memorandum to Judge John Reid.
CalPERS executives were aware that Villalobos and his firm, Arvco Capital Research, served as go-betweens, or placement agents, and were paid commissions by their investment manager clients based on the size of the pension fund's financial commitment, said defense lawyer Seth A. Rafkin in the papers filed this week.
Rafkin cited minutes of a closed CalPERS Investment Committee meeting in which General Counsel Peter Mixon said that Villalobos and Arvco "will be compensated by the investment firm, not by CalPERS."
Lawyers for the state contended that CalPERS, its members and its board were not the only victims of Villalobos' alleged fraud. His investment fund clients also were defrauded because neither Villalobos nor Arvco had securities licenses required by their contracts, the state said.
Those actions generated unlawful payments to Villalobos that should be recovered to pay as much as $70 million in restitution, the state said. A continuing freeze is essential because "the likelihood that assets will be dissipated is significant," the attorney general said in papers filed Wednesday.
Villalobos has burned through $68 million of his cash, the state said without providing details about how the money was spent or how much remains.
The attorney general alleged that the Incline Village, Nev., resident has a long history of high-stakes gambling and is behind in undisclosed gambling debts owed to El Dorado Casino in Reno. Villalobos also has transferred money overseas to a casino-resort and could do so again, the state said.
The May 5 suit against Villalobos, who sat on the CalPERS board in the early 1990s, and former CalPERS Chief Executive Federico Buenrostro Jr. alleges securities fraud and using improper influence to pressure top CalPERS officials, including board member Charles Valdes and Senior Investment Officer Leon Shahinian.
Villalobos sought to sway decisions at the $200-billion pension fund to benefit his clients, major private equity and real estate investment managers, the lawsuit said. The alleged influence-peddling involved unreported gifts, including luxury international travel and campaign contributions.
It is the first enforcement action involving Villalobos or any placement agent since a scandal involving investments at giant public pension funds spread from New York state to California last year.
Those activities in California also are the subject of an internal probe at CalPERS, as well as a wider inquiry by the Securities and Exchange Commission.
More accusations, both civil and criminal, could be coming, Brown has warned.
Villalobos' lawyers, in their request to lift the asset freeze, took issue with the principal charges in the attorney general's complaint.
They disputed the allegation that Villalobos and his company, Arvco Capital Research, broke state law by not disclosing to CalPERS his clients' agreements and the fees he received from investment managers such as Wall Street giant Apollo Global Management and Aurora Capital Group in Los Angeles.
CalPERS did not even have any such disclosure requirement before May 2009, defense lawyers argued. The defense disputed the state's allegation that Villalobos engaged in "suspicious" real estate transfers. It denied that Villalobos gave Buenrostro a Lake Tahoe condominium, asserting that the property was sold for $600,000.
Other alleged unreported gifts to CalPERS officials did not violate California disclosure laws, Villalobos' lawyers said.
The attorney general's office stressed that the defense provided "an unsigned, unauthenticated and incomplete document that fails to confirm that the alleged $600,000 was actually paid to Villalobos for the Buenrostro condominium."
Villalobos' assertions of transparent dealings are typical of cases involving the fiduciary duties of officials at public pension funds, said Ed Siedle, president of Benchmark Financial Services Inc., an Ocean Ridge, Fla., consulting firm specializing in forensic investigations at pension funds.
The judge is likely to stick to the question of whether a receivership of Villalobos' property is needed and is expected to avoid addressing the broader issues of the state's lawsuit, said Taylor Grant, a court-appointed real estate receiver from Newport Beach.
"The receiver oversees the assets until the court can determine who is right or wrong in the lawsuit," Grant said. The job is "to make sure everything doesn't disappear."