Former CalPERS CEO Accused Of Fraud, Definitely Innocent Of Stealing Office Supplies

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I'm just some guy, but two entities of which I have become aware in my travels are (1) Apollo Global Management and (2) CalPERS. I don't want to endorse 100% of what either of them does - CalPERS tend to be governance-scoldy, and I've seen with my own eyes the withered husks of formerly personable M&A lawyers who've spent too much time on Apollo due diligence - but I don't think it'd be too controversial for me to say that they're both acknowledged leaders in their fields, those fields being respectively (1) running private equity funds and (2) investing great gobs of pension money in, among other things, private equity funds. To the point that, (1) if Apollo came to me and asked "who should we ask to invest in our new private equity fund?," CalPERS would probably be high on my list, and (2) if CalPERS came to me and asked "what private equity funds should we invest in?," Apollo would probably be high on that list.

So where is my $20 million?

Today former CalPERS CEO Federico Buenrostro and former independent placement agent Alfred Villalobos were indicted for fraudulently funneling $20 million of placement-agent fees from Apollo to Villalobos. The case is bonkers for reasons well summed up by Dan Primack a year ago when the SEC brought a related civil case. The gist of it seems to be:

  • Apollo engaged Villalobos to help them pitch CalPERS, in exchange for a fee based on the amount CalPERS invested in their funds,
  • CalPERS invested in Apollo funds, earning Villalobos his fee,
  • But stickler Apollo lawyers demanded that Villalobos disclose his involvement to Calpers before they'd pay him,
  • So Villalobos sent a disclosure letter to a CalPERS portfolio maanger,
  • And his stickler lawyers, for unclear reasons, told him not to sign it,
  • Leaving everyone in just a bit of a bind insofar as (1) Apollo had hired Villalobos to do a thing, (2) he had done the thing, (3) they refused to pay him unless he disclosed it to CalPERS, (4) he disclosed it to CalPERS, but (5) it got hung up in paperwork and so he still couldn't get paid,
  • So he sent the disclosure letter to Buenrostro, who had the two key advantages of (1) being his old buddy and (2) being the CEO of CalPERS and so surely authorized to sign stuff,
  • And Buenrostro signed it and he got paid.

So far maybe so good, though no one in law enforcement or at CalPERS seems to agree. (Why?) But it worked a little too well, so Villalobos kept asking Buenrostro to sign all his disclosure letters for his work in placing Apollo funds with CalPERS, and by "sign all his disclosure letters" I mean this (from the old SEC complaint):

Villalobos and Buenrostro created fabricated CalPERS documents regarding at least four more Apollo funds, under equally suspicious circumstances. As part of the scheme, Buenrostro signed blank sheets of (fake) CalPERS letterhead, which Villalobos and ARVCO used to generate investor disclosure letters as needed (by running the paper through a printer a second time). In aggregate, based on these fabricated documents, Apollo was induced to pay ARVCO more than $20 million in placement agent fees it would not otherwise have paid without the disclosure letters.

You might reasonably ask: why couldn't the CEO of CalPERS get actual CalPERS letterhead? That is the great mystery of this case and I've yet to see an answer. There's a report from CalPERS that points out that at least one disclosure letter that Buenrostro signed, on May 20, 2008, was (1) nutty,1 (2) printed on fake CalPERS letterhead, and (3) crucially, signed after Buenrostro had been fired as CEO on May 12, though before he finally left the payroll on June 30. But he also signed other disclosure letters while he was actually CEO, and those seem to have been on fake letterhead too. I do not know what to tell you.

Also one of the disclosure letters was for CalPERS's investment in an Apollo fund that did not exist.2 Villalobos doesn't seem to have gotten paid anything for not convincing CalPERS not to invest in that non-fund though given the rest of the slapdashery here I wouldn't be surprised if he had been.

What is going on here? One possibility is that Apollo was legitimately marketing its funds to legitimate CalPERS portfolio managers who invested in those funds for legitimate reasons, while simultaneously paying $20 million to Villalobos to lobby/bribe CalPERS's CEO (and, briefly, ex-CEO) to make CalPERS invest in Apollo for illegitimate reasons. This was harmless to CalPERS because Buenrostro, both before and after he was fired, was not empowered to obtain office supplies, much less to make investment decisions. As CalPERS's internal report puts it, "Despite these actions by Buenrostro, the investment staff appears to have evaluated these proposals on their merits independently from his overtures, and we understand that the fund investment that was made has, to date, fared well."

It was arguably harmful to Apollo, who seem to have been bamboozled into thinking that they needed to pay Villalobos to get CalPERS to invest with them, though you don't have to shed too many tears for them. Why did they need to pay a placement agent $20 million to introduce them to CalPERS? CalPERS already had billions of dollars invested with Apollo, and seemed to have made out okay. The January 2008 investment that got the ball rolling on the disclosure-letter fraud was Apollo Investment Fund VII; if you look at CalPERS's website you'll notice:

  • Fund VII has made a quite respectable 21.8% IRR for CalPERS, and
  • Fund VII was at least the Vth Apollo Fund that CalPERS invested in, with the others (in which CalPERS invested a little over $1bn) currently showing IRRs of 10.8%, 8.5%, 37.7% and 7.2%.

So this wasn't some upstart private equity fund looking for its big break with CalPERS. I bet that Apollo could have gotten a meeting with CalPERS all on its own. So why did it need to pay Villalobos anything, never mind $20 million, for anything, never mind mostly hanging out with his figurehead CEO buddy and forging some disclosure letters?

Ex-Calpers CEO Buenrostro Indicted Over Apollo Investment [Bloomberg]
Former California Public Employee System CEO and Former Placement Agent Indicted for Conspiracy and Fraud [FBI]
CalPERS fraud case raises new questions [Fortune / Dan Primack, April 2012]

1.E.g. "The disclosure form discusses the Apollo Credit Opportunity Fund, and Buenrostro represented, among other things, that CalPERS had received a copy of an Apollo private placement memorandum for that fund. As Apollo and the CalPERS investment office can both confirm, there was no private placement memorandum for that fund. Further, the proposed fee to be paid is listed as between 0.5% and 4.0% of the CalPERS $1 billion commitment, or between $5 million and $40 million, a potential eight-fold spread in the fee that would have demanded further inquiry by a responsible fiduciary before execution. There are also various typographical and language errors that one would not expect to see on an easily-reviewed, one-page form purportedly relating to a $1 billion investment transaction."

2.From the SEC complaint: "One pair of letters pertained to CalPERS’ alleged investment in AP Investment Asia Limited, but no such fund ever existed. Apollo and ARVCO had discussed an Asia fund at the same time that they discussed AIE (AP Investment Europe Limited), but the Asia version never gained traction. Lacking any meaningful understanding of Apollo’s investment offerings, Villalobos’ assistant prepared investor disclosure letters for the nonexistent fund."

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