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SEC suit says two former CalPERS officials defrauded equity firm

Former CEO Federico Buenrostro Jr. and former director Alfred J.R. Villalobos fabricated documents to dupe Apollo Global Management into paying $20 million in fees to secure investments from the public pension giant, the suit alleges.

April 24, 2012|By Marc Lifsher, Los Angeles Times

SACRAMENTO — Federal securities regulators sued a former chief executive and a former director of the California Public Employees' Retirement System, accusing them of scheming to defraud an investment firm of $20 million.

The Securities and Exchange Commission alleged that former CEO Federico Buenrostro Jr., 62, and former director Alfred J.R. Villalobos, 68, fabricated documents requested by Apollo Global Management, a New York private equity firm.

Apollo had hired Villalobos, a close friend of Buenrostro, as a so-called placement agent to secure billions of dollars of investments from the country's largest public pension fund.

The documents were used by Villalobos and his companies — Arvco Capital Research and Arvco Financial Ventures of Zephyr Cove, Nev. — to bill Apollo for helping to win private equity investment management contracts.

In all, Apollo paid Villalobos more than $48 million from 2005 to 2009.

Villalobos received at least $12 million in additional placement fees from other investment funds that managed CalPERS money.

Both Buenrostro and Villalobos have denied any wrongdoing. Buenrostro was not involved "in any type of fraud or illegal conduct," said his attorney, Bill Kimball.

Villalobos does not have an attorney, the SEC said. The telephone at Villalobos' onetime office near his Lake Tahoe mansion was disconnected.

The alleged phony documents were patched together to make it look as if the fees had been approved by CalPERS investment staff, the suit alleged. Apollo's lawyers had wanted Villalobos to provide them with proof that CalPERS consented to the fees.

"Those documents gave Apollo the false impression that CalPERS had reviewed and signed placement agent fee disclosure letters in accordance with its established procedures," the SEC said in a statement.

"In fact, Buenrostro and Villalobos intentionally bypassed those procedures to induce Apollo to pay placement agent fees to Villalobos' firms," the SEC said.

The false documents bore a fake CalPERS logo and in at least one instance a copy of Buenrostro's signature taken from an otherwise blank paper, the SEC said.

The suit alleged that Villalobos, Buenrostro and an Arvco staffer created the bogus documents beginning in 2007 after CalPERS investment officers were advised by their lawyers not to sign such disclosure orders.

"Buenrostro and Villalobos not only tricked Apollo into paying more than $20 million in placement agent fees it would not otherwise have paid, but also undermined procedures designed to ensure that investors like CalPERS have full disclosure of such fees," said John M. McCoy III, associate regional director of the SEC's Los Angeles office.

The complaint seeks restitution from Villalobos and Buenrostro as well as financial penalties. It did not say how much the SEC was seeking.

Buenrostro and Villalobos also are the target of a civil fraud suit brought by the California attorney general's office in Los Angeles County Superior Court.

And CalPERS, which has an investment portfolio valued at $235 billion, has confirmed that a federal criminal investigation is pending.

The SEC action is the latest by law enforcement in a probe that began in October 2009, when CalPERS released documents in a Public Records Act request that showed Villalobos was paid unusually high placement agent fees for helping Apollo and other investment firms close deals with the pension fund.

Philip Khinda, a Washington securities lawyer hired by CalPERS to conduct a special review of the placement agent scandal, applauded the SEC.

"It's another impressive action by law enforcement authorities, and I expect more from them to come," Khinda said.

CalPERS board President Rob Feckner commended the SEC for its "perseverance" in the case and vowed to continue working with state and federal agencies in the continuing investigation.

For its part, Apollo Global Management, one of the biggest private equity investment firms in the nation, called the SEC allegations "troubling." Spokesman Charles V. Zehren stressed that the company "only learned of the alleged misconduct while cooperating with the regulatory agencies investigating this matter."

Villalobos, a former deputy to Los Angeles Mayor Richard Riordan in 1993, has had a close relationship with Buenrostro since the two served on the CalPERS board of directors in the early 1990s.

The friendship and working relationship deepened when Buenrostro became CalPERS chief executive in 2002. Villalobos hosted Buenrostro's wedding in his lake view home in 2004.

Buenrostro retired in mid-2008 and began working the next day for Arvco. At that time, Villalobos paid him a $300,000 consulting fee and gave him the title to a Lake Tahoe condominium.

In a lawsuit filed two years ago, the California attorney general's office alleged that "Buenrostro … played a key role in assisting Villalobos and Arvco in their fraudulent activities."

The suit also accused Villalobos of compromising Buenrostro and other CalPERS officials with tens of thousands of dollars in gifts, including international trips.

Such breaches of legal and ethical behavior by CalPERS officials now should be a thing of the past, said current Chief Executive Anne Stausboll.

"We have dedicated ourselves as an organization to pursue all of the appropriate policy changes and remedies available to prevent further misconduct," Stausboll said.

Stausboll said those actions included pushing for a new state law requiring placement agents to register with the state as lobbyists, obtaining commitments for more than $215 million in fee concessions from outside fund managers and limiting the value of gifts that board members can receive from companies doing business with the pension fund.

marc.lifsher@latimes.com

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