Ex-Calpers CEO Buenrostro Indicted Over Apollo Investment

Ex-Calpers CEO Buenrostro Indicted Over Apollo Investment

Ex-California Public Employees’ Retirement System Chief Executive Officer Federico Buenrostro was charged with conspiring to trick the pension fund into paying millions of dollars in fees for a $3 billion investment into funds managed by Apollo Global Management LLC. (APO)

Buenrostro, 64, who led the state’s public pension fund from 2002 to 2008, was accused along with Alfred Villalobos, 69, of conspiracy to defraud the U.S., engaging in a false scheme against the U.S. and conspiracy to commit mail fraud and wire fraud in a grand jury indictment announced today by U.S. Attorney Melinda Haag in San Francisco.

The case focuses on false documents the two men allegedly created so Villalobos could garner millions of dollars in fees for acting as a middleman in obtaining money from Calpers, the largest U.S. public pension fund, for the Apollo funds. Fees for middlemen were at the center of a corruption scandal in which Villalobos, a Calpers board member from 1993 to 1995, was sued by state prosecutors and the pension system’s head of private equity resigned.

In the wake of the scandal, Calpers adopted rules compelling any company seeking a contract worth more than $10,000 to report hiring a placement agent to win the fund’s business. The rule also requires disclosure of how much was paid and for what services.

“We’ve been through our embarrassment on this already,” Rob Feckner, Calpers board president, said today in an interview. “This is a good day.”

Placement Agent

Villalobos, founder and managing director of Arvco Capital Research LLC, allegedly acted as a placement agent in helping Apollo to secure investments by Calpers in 2007 and 2008. Apollo required Arvco to obtain an investor disclosure letter from Calpers before paying any fees for securing the investments, Haag said in a statement. One purpose of the letter was to memorialize that investors were aware of the relationship between the placement agent and Apollo, according to the indictment.

After Calpers’ legal and investment offices declined to sign a letter, Villalobos and Buenrostro allegedly conspired to create a series of fraudulent letters that were transmitted to Apollo in 2008 and 2009, according to the indictment. Apollo paid Arvco a total of approximately $14 million in fees after receiving the letters, Haag said.

After civil and criminal investigations were begun, both defendants made false statements to securities regulators and concealed information from them and the FBI about the letters, Haag said.

Buenrostro didn’t immediately respond to a phone message seeking comment on the charges. Chris Nichols, an attorney for Villalobos, didn’t immediately respond to a voice-mail message. The two men appeared in federal court in San Francisco and are free on bond. A hearing in the matter is scheduled for May 8.

Maximum Penalty

The maximum penalty for conspiracy to commit mail fraud, the most serious charge, is 20 years in prison and a $250,000 fine, or twice the loss or gain from the conduct, whichever is greater, according to Haag’s statement.

“Apollo has always followed best practices in handling its placement agent relationships, and was not aware of any misconduct engaged in by Mr. Villalobos during the time that he worked with Apollo,” the New York-based private-equity firm said in an e-mail. “We have cooperated fully with all regulatory agencies investigating this matter, and will continue to do so.”

Buenrostro and Villalobos were sued on similar grounds last year by the U.S. Securities and Exchange Commission in federal court in Nevada.

The SEC alleged that the two men fabricated documents they provided Apollo so that the firm erroneously believed Calpers had reviewed and signed the placement agent fee-disclosure letter Apollo required. Buenrostro left Calpers in June 2008 to work for Villalobos, who is a former board member of the pension fund.

SEC Case

Buenrostro, who is defending himself without a lawyer in the SEC case, denied the agency’s allegations in a July 20 answer to the civil complaint.

Calpers now limits gifts to board members from individuals and firms doing business with the system or seeking to do business with the fund.

State lawmakers also passed a law prohibiting money managers from paying contingency fees to middlemen who help win state retirement-plan contracts and requires placement agents to register as lobbyists.

Calpers commissioned a law firm to review the fees paid by its external managers to placement agents. The review resulted in $215 million in fee concessions from companies such as Apollo Global, Relational Investors LLC and Ares Management LLC and others.

The case is U.S. v. Villalobos, 13-cr-00169, U.S. District Court, Northern District of California (San Francisco).

To contact the reporters on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net; Michael B. Marois in Sacramento at mmarois@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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