A California federal judge yesterday sentenced the former chief executive officer of the California Public Employees Retirement System to four years and six months in prison for engaging in a bribery and corruption scheme.

The May 31 sentencing handed down by U.S. District Judge Charles Breyer of the U.S. District Court in San Francisco followed a guilty plea entered in 2014 by Fred Buenrostro, who served as CalPERS CEO from 2002 until he was forced out in May 2008. Buenrostro admitted that in 2004 he began receiving $250,000 in cash bribes and other forms of payment from a placement agent to influence his powers and duties as CEO.

Buenrostro also admitted that he improperly received employment at ARVCO Capital Research after he left CalPERS in 2008. In exchange, Buenrostro attempted to influence the CalPERS investment staff and board to the benefit of the placement agent and his clients, and provided the agent with access to CalPERS’ confidential information relating to investments, internal deliberations, and other proprietary matters.

In sentencing Buenrostro, Breyer stated that Buenrostro’s conduct amounted to “a spectacular breach of trust for the most venal of purposes.” Breyer also imposed a $250,000 fine on Buenrostro but allowed that fine to be reduced if Buenrostro makes payments in response to certain proceedings brought by the State of California or the SEC. 

“This saga has now come to an end,” Rob Feckner, president of CalPERS board of administration, said in a statement. “As an organization, we’ve taken meaningful steps to strengthen accountability and transparency throughout CalPERS. We'll continue to work to make sure these measures are rigorously followed and that we hold ourselves to the highest ethical standards.”

Case background

In 2010, California Attorney General Jerry Brown filed a $95 million civil fraud suit against Buenrostro and Villalobos. The lawsuit accused ARVCO of using “unlawful and fraudulent means to effect securities transactions.”

Then, in 2012, the SEC filed a lawsuit in U.S. District Court in Nevada against Buenrostro, alleging that he and a close friend, Alfred Villalobos, fabricated documents that had been requested by Apollo Global Management, a New York-based private equity firm.

As a so-called “placement agent,” Villalobos was responsible for securing large investment deals from CalPERS for his private-equity clients.  According to the SEC, Buenrostro and Villalobos fabricated letters to make it appear that CalPERS was aware of the fees Villalobos was being paid by Apollo.

According to the complaint, Buenrostro signed blank sheets of fake CalPERS letterhead for at least five Apollo funds that Villalobos and his firm, ARVCO Capital Research, then used to generate the phony investor disclosure letters. “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.

 “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 McCoy, associate regional director of the SEC’s Los Angeles Regional Office.

CalPERS response

“This chapter in our history is now behind us, and CalPERS has emerged a stronger, more dynamic organization,” Anne Stausboll, CalPERS chief executive officer since 2009, said in a statement. “Over the past seven years, we have built a lasting, principled foundation for future success.”

Since 2009, CalPERS has put in place a number of measures that have strengthened internal controls and risk management, improved accountability, and increased openness and transparency. For example, contractors, including external money managers, must disclose whether they’re using agents to seek the pension fund’s business and to disclose how much they paid the agents.

CalPERS also has limited gifts to board members and certain staff from individuals and firms doing business with CalPERS or seeking CalPERS’ business. The policy restricts gifts to board members to a total of $50 per calendar year from any one person doing business with CalPERS or seeking to do business with the pension fund.

Regarding internal and financial controls, CalPERS appointed its first chief financial officer in the organization’s history to oversee an expanded financial office “devoted to budgeting, risk management, internal controls, accounting, treasury management, and financial planning and analysis,” the pension fund stated. It has also increased the number of audits of public agencies to avoid pension fraud and abuse, and has appointed a former federal prosecutor as general counsel of the organization.

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