Report: Calif. pension fund under federal criminal investigation for investment decisions

Report: Criminal probe targets Calif. pension fund

SACRAMENTO, Calif. — Federal prosecutors have started a criminal investigation into the investment activities of the California Public Employees Retirement System, a newspaper reported Friday.

The Wall Street Journal, citing unnamed people familiar with the matter, said Justice Department officials in Los Angeles are examining potential influence-peddling within CalPERS, the nation’s largest public pension fund.

At issue is whether the investment decisions of fund managers were influenced by bribes rather than the best long-term interests of pensioners.

Thom Mrozek, a spokesman for the U.S. attorney’s office in Los Angeles, declined to comment to The Associated Press. Brad Pacheco, CalPERS’ chief spokesman, told the AP his office was not aware of any criminal investigation.

CalPERS serves 1.6 million active and retired public employees and holds about $200 billion in investments. The fund lost more than a quarter of its value during 2008.

CalPERS transactions are under investigation by the U.S. Securities and Exchange Commission, Pacheco said.

Part of that investigation is believed to revolve around the use of so-called placement agents. Those are middlemen hired by investment firms or hedge funds to find large institutional investors such as CalPERS who may be interested in their business.

Placement agents can earn millions of dollars in fees if they help one of their clients secure a contract with a major investor.

In New York, a pay-to-play scandal involving state pension fund managers has led to six people pleading guilty and an inquiry from the SEC.

So far, no charges alleging improper kickbacks have been filed against any CalPERS official or placement agent.

CalPERS has hired a Washington, D.C., law firm, Steptoe and Johnson, to conduct an internal investigation of how the fund has used placement agents over the past 15 years.

Pacheco, the fund spokesman, said that investigation was triggered by revelations that the New York pension funds were improperly influenced by placement agents. At that time, CalPERS asked for voluntary disclosures from its external investment managers about the fees they paid to placement agents.

CalPERS decided an investigation was warranted when they heard back from those investment managers and learned the size of some of the payments, Pacheco said. The top 10 agents were paid more than $125 million over the past 15 years.

“We’re looking to make sure that CalPERS wasn’t victimized in any way,” Pacheco said. “It could be related to things like kickbacks, those things that have surfaced in the New York investigation.”

According to the information submitted, the top placement agent for CalPERS investments was Arvco Financial Ventures, a company based in Stateline, Nev., that is run by former CalPERS board member Alfred Villalobos. He had been paid $58.9 million in fees.

CalPERS adopted a policy last May that requires fund managers to report the use of placement agents and the fees they paid to them for any new investments or for changes to existing investments.