Prominent Retiree Chides CalPERS for Repeating Conduct that Led to Past Private Equity Scandals

A well-respected CalPERS system beneficiary has written a letter to the president of the board of CalPERS and given us permission to reproduce it.

I strongly suggest you read the letter in full. Tony Butka, now retired, was California’s Presiding Conciliator of its State Mediation & Conciliation Service. Butka states that his reason for concern is that CalPERS’ stonewalling my request for private equity data looks to be repeating the exact sort of behavior that the giant pension fund system vowed to renounce after it was mired in a private equity fund-related scandal that became public in 2009. He says he’s filed a Public Records Act request that duplicates mine and says he believes the fund should give him the information as part of its fiduciary duty to system members.

In 2010, Federal prosecutors launched a criminal investigation into a possible pay-to-play activities at the giant pension fund’s private equity investments. CalPERS’ top placement agent, Arvco Financial Ventures, had received nearly $60 million in fees. It also happened to be headed by former CalPERS board member Alfred Villalobos. A short recap from City Journal:

Yet another feature of CalPERS that has cost taxpayers is double-dealing by the board, ranging from awarding contracts to political donors to alleged outright corruption. In 2010, Jerry Brown, California’s attorney general at the time, launched a lawsuit accusing Alfred Villalobos of trying to bribe current board members (including Charles Valdes) to win investment business for his clients, mostly large financial firms that wanted a piece of the huge CalPERS portfolio. Villalobos pulled in $47 million as a go-between, the suit charged. A month after the lawsuit was announced, Villalobos filed for personal bankruptcy, temporarily blocking the suit. In 2011, the Internal Revenue Service accused him of intentionally depleting his assets while in bankruptcy, including gambling some away in Nevada casinos. News reports revealed that Villalobos had previously filed for bankruptcy, a decade before serving on the CalPERS board.

The lawsuit also accused former CalPERS chief executive Fred Buenrostro of accepting gifts from Villalobos. Separately, a Securities and Exchange Commission lawsuit filed last year accused Buenrostro of forging a document to help Villalobos win a big payment from a client. An internal CalPERS investigation quoted Buenrostro’s wife as calling her husband a “puppet” of Villalobos. The report also pointed out that Buenrostro often intervened with the CalPERS staff on behalf of his acquaintances in the investment world— “friends of Fred,” as the staffers called them.

A Federal grand jury indicted Vlllalobos and Buenrosto in early 2013 on charges of fraud, conspiracy and obstruction of justice.

CalPERS hired a law firm, Steptoe & Johnson, to investigate the improprieties and issue a report. We’ll discuss that report at length in a separate post; suffice it to say that when companies hire law firms (as opposed to less costly consultants or accounting firms) to conduct investigations, the intent can be assumed to impede rather than promote disclosure, as the Treasury Inspector General believed was the case with the JP Morgan investigation into its dealings with Bernie Madoff. And it is not encouraging to see that while the internal investigation was underway, CalPERS entered into a policy of destroying all but the most critical e-mails after a mere 60 days. As the Los Angeles Times noted in 2011:

The California Public Employees’ Retirement System has begun automatically deleting any emails older than 60 days, raising concerns among watchdog groups that the giant pension fund could be destroying evidence of misdeeds….

The email deletion policy was put in place last year but was disclosed only recently in response to a Public Records Act request from the Los Angeles Times…

Under the policy, the nation’s largest public pension fund ordered its 2,300 workers to save only those emails with “administrative, legal or archival requirements” — but left it up to them to decide exactly what documents to ditch. Any emails older than 60 days would be deleted automatically.

Look at the timetable. The LA Times says “automatic” deletion policy was instituted in 2010. When did the Federal investigation begin? 2010. Now, CalPERS issued a rebuttal to the LA Times, saying they initiated this policy in 2000, but one wonders how much it was observed as the cost of storage continued to drop.

No wonder retirees are alarmed when CalPERS acts like it might be up to no good. The behemoth fund’s history says there’s good reason not to give CalPERS the benefit of the doubt.

Again, please read Tony Butka’s letter in full. It is well written and to the point. And I want to thank him personally for his support of our effort.

Tony Butka Letter to CalPERS

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  1. PaulArt

    Private Enterprise ALWAYS needs a bit and bridle and a horse whip no less. Anything that runs on greed needs a straitjacket otherwise this is what happens. As Napolean said,
    “When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”

    Fits Bob Rubin’s description to a ‘T’. Rubin stands atop our current mountain of woe. How many Rubins have we suffered since the 1880s? How many mountains of woe have our people crossed to sate the greed of bankers like Rubin and his parasite brigade?

    When will the bourgeoisie of this great nation ever learn?

    1. susan the other

      This is a very interesting story because the PE aspect has grown and gained power by the simple fact that the special interest has been so exposed. But it has been growing for 20 years. I hate to quote the totally banal, (or maybe not so banal) but Jim Cramer (yes, really) just called out PE and said “private equity is not as good as real equity.” This I take to mean that private equity is pure, high return, speculation and real equity is a long term social goal. This from Jim Cramer. Excuse me for my astonishment.

        1. Jim Haygood

          Comic Sans is probably REQUIRED for official correspondence in Kali, along with a footnote stipulating that ‘this font contains chemicals known to the State of California to cause cancer …’

          Thanks for your compliance.

    1. BondsOfSteel

      Comic Sans was the first thing I noticed too.

      I don’t feel Comic Sans is a bad thing… it’s just when you read it you should use the voice of Goofy. It really talks away from the message in this case :(

    2. just_kate

      Me too! A couple of my favorite old timer IT dudes use it – one of them always in color and the other in a huge font. It’s a nice touch, adds a little levity.

  2. monday1929

    The next ten years may come to be known as “The Era of Broken Promises”. Pensions will not be paid, debts will be defaulted upon.
    While there is, no doubt, all kinds of criminality occurring at CALPERS, the tens of millions lost to theft will be nothing compared to the investment losses caused by the current “reach for yield”. When the Crash resumes, and retirees see losses of 70-90% in their “safe” pensions, their “safe” muni bonds, and their “safe” money market funds, there will be an awakening of righteous anger in this country that may lead to the consideration of a proposal to enact some minor reforms. These reforms will not be enacted, but the Elites may feel a moment of slight discomfort, and even a night or two of restless sleep.

    1. Moneta

      Wall Street feeds on the pension system, yet no one wants their pension to get touched. Reform to our financial system will not happen without huge shocks in the pension system.

    2. Moneta

      Theoretically, we could print to make good on every promise. However, who knows what those printed dollars would buy?

      1. mark999

        most people don’t have a government pension. they would still be better off than most people.

        1. Moneta

          It’s not a question of better off. It’s a question of how you have set up your life around your pension expectations.

          Many here in Canada with DB pensions have bought themselves a nice McMansion and retire with mortgage debt, or buy a few condos as an investment, assuming their are guaranteed 70% of their income when they retire. Not many are fearful of a cut even if it is starting to hit the press.

          If that pension gets cut by 20 or 30% sometime down the road, there will be shockwaves throughout the economy. Their pension might still be better than most but they could end up in a liquidity crunch that breaks them.

        2. monday1929

          The Municipal bonds and money market fund losses will be felt by retirees outside of pension plans.
          The Depression will be felt by almost all.

      2. bob

        You’re monetarist BS is getting really, really old.

        Who knows what those dollars would buy! Mercy! people! with money! that they earned! Spending it!

        1. Moneta

          You’re funny, shooting the messenger. I don’t believe our economy should be run according to monetarism, but the last time I checked, our leaders were still clinging to its principles. As long as it is being run using monetarist principles I will keep on expecting the dislocations that come with it.

        2. Moneta

          BTW, you don’t have to be a monetarist to believe there is a link between the value of money and the production of goods and services.

      3. Procopius

        You know, back in the 19th Century, when the private banks issued their own currencies, a storekeeper had to have a really good memory. I think there were magazines and handbills giving exchange rates for the most common, but there were lots from small banks that only circulated within ten miles of the town. Who knows what the printed dollar will be worth? No one, yet, but I’m pretty sure they will be worth something. Confederate currency was still in use for several years after Appomattox. Have you tried spending one of your gold coins lately? How did that go? If you haven’t, why don’t you try it. Go to the gas station and fill up your tank and offer them a Krugerrand in payment. Or a one ounce ingot of bullion. The Chinese during the T’ang dynasty all carried a kind of tin snips so they could cut the appropriate quantity off the silver ingots they used in those days.

        1. Moneta

          There is a link between the value of a currency and the goods and services we produce. When you print money which ends up in the markets but does not increase the production of goods and services or gets malinvested, you know that the value of this money is getting diluted. It might not show up for a while but it will.

          Look at the investments we have done over the last 20-30 years… most have contributed to increasing entropy. Increasing the amount of energy needed to keep the system going… if the money goes to maintain the infra, that is less to fund services… if you are stuck in your McMansion which you bought in the 80s and need to redo everything when you are 75 and you have no cash flow, you are squeezed. Right now most see the McMansion see as wealth instead of a depreciating money pit.

          In North America, we under report the amount of resources we consume. A lot of it is being consumed by other countries when they are producing our goods and shipping them to us… thus is all used using the emergent market clean balance sheets of low leverage. Externalities abound and they will catch up with us.

          Ultimately, with globalization, the same jobs in India and China and the US should offer equal pay. So it is logical to think there is more devaluation to come unless there is some kind of miracle.

  3. monday1929

    All fiduciaries should be put on notice that they will be held personally liable for violating their fiduciary duty by dealing with known criminal banks ie. JPM, Citi, Goldman etc.
    If these fiduciaries hired an employee who settled dozens of charges, paid billions in fines, and continued to commit further crimes monthly they would fired and sued by the victims. Hiring known felons, such as a company run by Jamie Dimon, is no different.
    Anyone participating in a pension fund should go on record, now, and notify the fiduciary in charge of that pension, that they will hold that fiduciary personally responsible for any losses caused by the fraudulent activities of banks widely known to have criminal proclivities. If you hire a known rapist and he rapes each of your employees (as Jamie has been known to do ie. sewer bond deal bribes,Libor,Forex, electricity price fixing etc etc etc), you are liable.

    1. Moneta

      Then, pensions would quickly get written down to reflect more realistic assumptions.
      Our whole economy is based on mark-to-make-believe, pensions are at the centre of the financial engineering game.

    2. Tony Butka

      You raise an interesting point. Included on the CalPERS Board as “Ex Officio” members are the State’s Treasurer and Controller. I wonder if they can really do an ostrich as they reach for their next political office.

      1. monday1929

        I think the fiduciaries are the weak link in the chain. If they can be publicly notified by those with some standing they will stand exposed to litigation when the “unforeseeable” occurs. They will have little defense, or at least will not be able to say they were never aware that their bankers are known criminals.

        William Black may be a candidate to do this. And, he can explain to them that, yes, sometime people in nice suits DO go to jail.

        1. Moneta

          The fiduciaries according to ERISA must follow the prudent man rule which ends leading them to make sure they are doing the same thing as everyone else.

          Before writing their investment policies they peruse those of the biggest public funds first. To further cover their buts, they hire consultants, actuaries.

          The weakest link is the pensioners who mostly have no idea how pensions work and believe there are guarantees in life.

  4. JerseyJeffersonian

    Mr. Butka knows how to wield the straight razor of irony very well indeed.

    From the O.E.D.:

    As a mass noun. The expression of one’s meaning by using language that normally signifies the opposite, typically for humorous or emphatic effect; esp. (in earlier use) the use of approbatory language to imply condemnation or contempt (cf. sarcasm n.). In later use also more generally: a manner, style, or attitude suggestive of the use of this kind of expression.

    Honor where honor is due.

  5. psychohistorian

    It is nice to see the traction you are getting on this subject but given the 60 day deletion cycle of emails I suspect CALpers has and will continue to spend/abuse more pension funds to skate on prosecution.

    This also reinforces the knowledge that our legal system and many of its current participants are as corrupt as finance. Even if you analyze and provide information that could be used to prosecute CALpers folk like you did with mortgage abuse last year, are there any state or federal prosecutors that will act in the publics’ interest? We certainly know Holder is complicit and corrupt but what about the current CA AG?

    1. Tony Butka

      A 60 day deletion cycle does not necessarily mean that the emails are gone beyond recovery. Backup tapes for large institutions are typically around for a much longer cycle, as folks have found out in discovery proceedings.

      1. psychohistorian

        What do you think CALpers is doing to all those email backups as they stall Yves? The crooks in charge now are crooked to the core and have attorneys managing the legal destruction of any and all evidence against them. I can smell the CALper rot from my back porch in Oregon…..

      2. alex morfesis

        “deleted” emails or anything else “deleted” on a computer is still there on the drive somewhere

        there is no “deleting”…a delete to a computer is mostly just a removal of a file name.

        Unless they take the drives and melt them, they can be recovered.

        1. psychohistorian

          If you are a competent techie you know how to write over any and all sectors of a disk to make anything previously written there unrecoverable. Lawyers directing this sort of criminality know this, it is not rocket science.

  6. dbk

    Excellent. You have acquired a high-profile ally who is also a member of the system.
    One question does come to mind at this admittedly early point: how was it that CalPERS provided all the PE data to the three Oxford academics? Was it administrative oversight (i.e. an accident)?
    Curiouser and curiouser …

  7. H. Alexander Ivey

    One of my pet biases is believing that any and all persons of what used to be called the Establishment can only speak or write, on the record, in tortuous, jargon ladened English from a suspect moral standing. Once again Yves proves me wrong, with an example of clear English, clearly written, with a strong moral standing.

  8. Paul P

    In response to NYC’s pay to play pension scandal, NYC Comptroller Scott Stringer has proposed banning the use of placement agent for NYC pensions.
    As a check on this type of insider theft of pension money, the budgets, audits, and all other data of interest to an auditor should all be online as a matter of law. Transparency of this sort would allow for a public look over the shoulder and be a check on malfeasance.

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