CalPERS trustee target of pay-to-play probe

Inquiry comes as state, SEC plan rules for placement agents

Updated with correction

The taint of pay to play has moved to the nation's largest pension fund.

Charles Valdes, a longtime board member at the $194 billion California Public Employees' Retirement System, Sacramento, is under investigation by a state agency for taking campaign contributions from executives at a placement agent that works for CalPERS.

The investigation by the Fair Political Practice Commission involves contributions made by officials at ARVCO Capital Research of Stateline, Nev., to Mr. Valdes' campaign to be re-elected to the CalPERS board in 2005.

At the same time, a California bill that limits the use of placement agents was passed by the Senate and returned to the Assembly last week for its approval of Senate amendments. Once an agreement is reached, it will go to Gov. Arnold Schwarzenegger for his signature or veto.

In addition, the U.S. Securities and Exchange Commission is creating a national version of placement agent regulations. Individual pension systems across the nation are also instituting their own placement rules, ranging from outright bans and stiff restrictions to disclosure requirements.

The CalPERS investment committee at its Sept. 14 meeting will consider restricting campaign contributions and charitable contributions to system board members or individuals running for board positions, said Brad Pacheco, spokesman. The board is also expected to be asked for direction on how to respond to the SEC's proposed placement agent rules, he said. (Comments are due to the SEC by Oct. 6.)

The investigation into Mr. Valdes' contributions was launched as a result of an audit of campaign finances for his December 2005 re-election, confirmed Roman Porter, executive director of the Fair Political Practice Commission.

Mr. Valdes' re-election campaign accepted $38,600 in donations from ARVCO employees and Capital Formation Partners LLC, according to Mr. Valdes' campaign records obtained by Pensions & Investments. Alfred Villalobos, a former CalPERS board member, is chairman and senior managing director of both companies.

Mr. Valdes could not be reached for comment. Mr. Villalobos did not return repeated phone calls by deadline. Billy Joe Hughes, Mr. Valdes' campaign manager, declined to comment.

Neither Mr. Villalobos nor his firms has been charged with wrongdoing in any transaction.

(Mr. Valdes' term expires in January and he is not seeking re-election, Mr. Pacheco said.)

Among the donors listed in the campaign records are Carrissa Villalobos, ARVCO's general counsel and chief of real estate, and daughter of Mr. Villalobos; Dustin Fox, analyst at ARVCO; and Brian S. David, vice president at ARVCO. Mr. Villalobos did not contribute.

ARVCO successfully secured $3.4 billion in commitments from the giant pension fund from 2006 through 2008; it could not be learned how much the firm was paid.

Coincides with tenure

The commitments to funds marketed by Mr. Villalobos and others at ARVCO coincide with Mr. Valdes' tenure as chairman of CalPERS' investment committee.

ARVCO was the placement agent representing Apollo Global Management LLC in 2007 when CalPERS purchased a 10% stake in Apollo Global Management. Steven Anreder, Apollo spokesman, could not be reached by deadline.

During the same three-year period, CalPERS committed $2.45 billion to three Apollo funds marketed by Mr. Villalobos' company: $1 billion to Apollo Investment Fund VII LP; $800 million to Apollo Special Opportunities Managed Account; and $650 million to Apollo Investment Fund VI.

ARVCO also successfully placed $400 million in the Aurora Resurgence Fund with CalPERS.

The state's Fair Political Practice Commission is required by law to audit the campaign accounts of board members and other politicians who raise more than $1,000 and are involved in a run-off election. Mr. Valdes, a CalPERS board member since 1984, was subject to the audit when he was in a runoff before winning re-election in 2005.

Mr. Villalobos also figured in earlier placements with CalPERS. He marketed an investment in then-startup real estate firm CIM Group LLC in 2000. On Mr. Valdes' motion, the board approved a $125 million commitment to the firm's first fund, CIM California Urban Real Estate Fund, rejecting a staff proposal that the pension fund establish a $50 million separate account (P&I, Oct. 2, 2000).

The board approved the commitment, 7-3, after Mr. Valdes had accused CalPERS staff of trying to block any investment with CIM, P&I reported. (Earlier in 2000, the board had rejected a motion by then-board member William Rosenberg to invest $250 million with CIM; the staff had not made a recommendation at that time.)

One critic of the board says that part of the problem is the tenure of CalPERS trustees.

CalPERS board members stay on the board for decades, said James McRitchie, publisher of corporate governance and PERSWatch, a CalPERS watchdog, websites. Mr. McRitchie unsuccessfully challenged Mr. Valdes to his board seat in the last election.

“There is not much of a revolving door for (board members at CalPERS). Once they're on, it's a lifetime appointment,” Mr. McRitchie said.

Incumbents can travel around the massive state at CalPERS' expense to tell constituents what the pension system is doing, but there is no forum for challengers, he said. The forum was held at the Dante Club in Sacramento.

“I think they (board members) are usually conscientious. ... I just think people may get in with good intentions, but just like corporate boards, after 30 years you can no longer consider someone independent,” said Mr. McRitchie.