Many CalPERS investment staffers are looking for new jobs, upset with both proposed ethics rules that they feel go too far and a perception that that all CalPERS employees are disreputable, board member J.J. Jelincic revealed.
“People are getting extremely tired of being beat up all the time,” Mr. Jelincic said in an interview with Pensions & Investments. “Morale is way down.”
The comments by Mr. Jelincic — who also serves as a CalPERS investment officer — are backed up by several former investment staffers of the $230.1 billion California Public Employees' Retirement System, Sacramento. They say privately that some of the fund's most senior and experienced investment personnel could soon be leaving.
Many of the proposed changes would affect personnel at CalPERS' investment office. As one of the largest U.S. pension plans, CalPERS' investment office staff of 240 rivals that of many money management shops. The staff, including support personnel, not only monitors investments, but also invests about half of CalPERS' assets.
The potential departures come as proposed ethics rules would make it easier to suspend without pay or terminate investment staffers and restrict their post-employment options.
The proposed rules are the result of ongoing state and federal corruption investigations as well as a civil suit by the California attorney general charging former CEO Fred Buenrostro and ex-board member Alfred Villalobos with corruption.
Last week, a CalPERS-commissioned investigative report found the nation's largest defined benefit plan spent tens of millions of dollars unnecessarily because Mr. Buenrostro allegedly steered contracts to clients represented by Mr. Villalobos, who had become a placement agent.
Washington lawyer Philip Khinda, who conducted the investigation, said changes such as post-employment restrictions for retirement system employees are needed. “We cannot overstate the importance of these recommendations to safeguard the institution,” he said in an interview.
Mr. Buenrostro went to work for Mr. Villalobos' company, ARVCO Capital Research LLC, seven weeks after he was forced to resign by the CalPERS board, the report said.
The report also discusses disclosure forms from Apollo Global Management to meet what Apollo officials felt were federal securities law requirements and to inform the company's private equity investors that it was paying fees to placement agents.
The forms said CalPERS officials understood that Mr. Villalobos was receiving fees in connection with the pension system's investments in various Apollo funds. The CalPERS investment staff did not feel “it was appropriate for anyone at CalPERS to execute” the disclosures, the report said, and were advised not to sign the forms by CalPERS' in-house and outside counsel.
But Mr. Buenrostro signed 11 different disclosures requested by Apollo in 2007 and 2008.
The disclosures enabled Mr. Villalobos, who had made a standing offer of employment to Mr. Buenrostro, to receive more than $20 million in fees from Apollo, the report said.
One form was signed after Mr. Buenrostro resigned on May 12, 2008, but still listed him as CEO. The report characterized the signing of the forms as a “striking example of Mr. Buenrostro's failure to discharge his duties of care and loyalty to the institution (CalPERS) and the many beneficiaries it serves.”
In a statement to P&I, CalPERS spokesman Brad Pacheco said the retirement system must adopt a series of reforms to “make sure the incidents detailed in the report do not happen again.”
In his report, Mr. Khinda cited the case of Leon Shahinian, a senior investment officer who had headed the system's private equity program. Mr. Shahinian — one of the system's most highly paid employees, who made $500,000 annually in 2006 and 2007, according to state records — earned more than $100,000 while on administrative leave that started in May 2010.
The report said Mr. Shahinian accepted Mr. Villalobos' offer to fly on a private jet to New York City to attend a May 2007 black-tie gala for Leon Black, founder of private equity firm Apollo Global Management, and stayed at Mr. Villalobos' two-bedroom hotel suite. Mr. Villalobos was representing Apollo at the time.
A month later, according to the attorney general's suit against Mr. Villalobos, Mr. Shahinian recommended that the CalPERS board approve the purchase of an ownership interest in Apollo. The report said Mr. Villalobos was reimbursed by Apollo for the cost of the $50,000 plane ride, $8,000 in hotel charges and $1,500 in car service fees.
Mr. Shahinian originally had resisted repeated attempts by Mr. Buenrostro to influence the investment process, telling CalPERS board President Rob Feckner that Mr. Buenrostro was trying to influence the investment process for friends, the report said. It also said Mr. Shahinian told Mr. Black it was unnecessary for Apollo to recruit Mr. Villalobos for help in obtaining CalPERS contracts.
“After years of apparently diligent performance for CalPERS, however, (Mr.) Shahinian seemed to lose his way,” the report said.
The report criticized Mr. Shahinian for his New York trip. “While these dealings do not appear to have altered the analysis that he and the investment staff performed on the proposed transaction, (Mr.) Shahinian's failure to inform his CIO and the board of his activities in New York before their approval of the investment was a disappointing error in judgment — an error as graveas his decision to accept the invitation,” the report said.