Embattled CalPERS Board Incumbent Henry Jones Puts Foot in Mouth, Doubles Down on Strategy That Got Two Board Members Turfed Out

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A new Sacramento Bee story, California retirees are facing another hot election over who manages their pensions by Wes Venteicher, is generally evenhanded once you get past a slanted intro.1 The story focuses on this year’s election contest for the CalPERS retiree board seat, which pits the challenger, former board member JJ Jelincic, against the incumbent, board President Henry Jones.

Despite currently holding the seat, Jones is at a disadvantage, since Jelincic already has the endorsements of the two key retiree groups, the California State Retirees and the Retired Public Employees Association. Officers of these retiree organizations, as well as prominent individual retirees, such as former CalPERS board member George Diehr and Jim McRitchie, have been taking the unusual step (by CalPERS standards) of coming to Sacramento to voice concerns about how CalPERS has been (mis)managing its affairs.

As the SacBee article points out, CalPERS has been under a cloud due to a past failure of board supervision, namely, former CEO Fred Buenrostro taking bribes from a placement agent on behalf of private equity heavyweight Apollo and four smaller firms close to Apollo. That resulted in a successful criminal prosecution that has Buenrostro serving a four and a half year sentence in Federal prison.

Aside from the perverse spectacle of CalPERS board becoming even more deferential to staff in the wake of the Buenrostro private equity bribery scandal, which also led to four of CalPERS’ thirteen board member departing, the passivity of CalPERS board is also troubling given CalPERS’ deep underfunding.

Jones (and by implication, CalPERS) did himself no favors in this article. Jones made clear that he gives higher priority to not harshing the mellow of CalPERS’ staff than to doing his job as board member. In the through-the-looking-glass of CalPERS board values, asking basic questions in a mild-mannered way to protect beneficiaries is depicted as an affront and somehow detrimental to CalPERS. Funny how CalPERS’ Sacramento sister CalSTRS has board members regularly asking sensible questions and that pension fund isn’t mired in bad press.

The Kentucky Retirement System was at a similar level of underfunding before the financial crisis, when interest rates were higher than now. Its independent experts advised KRS that there was no way it could earn its way out; it would have to levy higher charges to the state to help fill the hole.

CalPERS refuses to address the problem honestly with its so-called stakeholders, regularly pumping out PR decorated with too many large photos of CEO Marcie Frost, cheerleading how great things are despite ample evidence to the contrary, starting with the state making two mini-bailouts and municipal employers being socked with higher CalPERS contributions. No wonder beneficiaries are worried.

Venteicher makes clear that a defining campaign issue is board member oversight of staff, as in doing their jobs as set forth in the Public Employees Retirement Law, with which Jones appears to have limited familiarity. The PERL, as it is commonly called, makes clear that the buck starts and stops with the board. But you’d never get that if you believed The World of Pensions According to Henry Jones.

Venteicher does Jones a favor by presenting his stance first:

Jelincic, who worked as a CalPERS investment officer in addition to serving on its board, regularly questioned the pension fund’s staff in a manner that some people found inappropriate.

“There were a number of times when staff were making presentations to the board and J.J. either said to their face or later made disparaging comments about staff,” said Jones, 78, of Los Angeles. “To me that’s unacceptable.”

We’ll get to the fact that the charge that Jelincic is a meanie is wildly exaggerated. More important is the contrast in positions:

“I’m more concerned about monitoring the staff than being polite; he’s more concerned about being polite than monitoring staff,” Jelincic, 70, of Hayward, said of his opponent.

Jones is doubling down on the campaign messaging that got two other union-backed board members, Michael Bilbrey and former board President Priya Mathur, voted out of office. Margaret Brown beat Bilbrey by a solid six points; Corona police sergeant Jason Perez trounced Mathur by 14 points. Both ran on campaigns of accountability and transparency, as opposed to the norm of the board toadying to staff.

Note CalPERS has pointedly ignored our long-running observation that the board refuses to supervise staff as required by law and has invoked the bogus excuse that being “collegial” is more important than acting as prudent stewards of fund assets. Henry Jones has publicly confirmed our assessment.

Jones seems to think that being in charge means not being responsible. The days when you could get away with that on the CalPERS board are over, at least if you are in an elected seat, in no small measure due to a series of self-inflicted scandals. A partial list:

Misrepresenting CalPERS’ ability to find out what private equity firms were retaining in so-called “carry fees,” one of the biggest charges they levy, on CalPERS’ investments. Fiduciaries are required to know the fees and cost of investments, so this was already a very damaging admission. A firestorm of press criticism led CalPERS to retreat and get the data.

Considerably exaggerating how much CalPERS had reduced investment costs, and failing to back down even after a prominent trade press reporter had started questioning CalPERS’ claims

Failing to do adequate due diligence on a CFO, Charles Asubonten, who was discovered to have made significant resume misrepresentations. CalPERS made this bad situation worse by reflexively defending Asubonten rather than investigating. Asubonten was eventually rejected from probation

Engaging in systematic, flagrant abuse of copyright for years across hundreds of publications, such as purloining over 9000 articles from the Wall Street Journal. Because CalPERS refused to pull down its Daily News Summary site even after we publicized its existence, we collected the data as to which articles CalPERS had lifted and how many it amounted to per publisher. CalPERS got away comparatively easy by paying around $4 million in settlements. No one was held accountable even though this was an obvious dereliction of duty by General Counsel Matt Jacobs

Persisting in the impermissible practice of having board members pre-sign blank expense claim forms when new board member Margaret Brown tried to stop it, leaving her no recourse other than to go to the media

Discussing outsourcing its private equity program with Blackrock without having obtained any authorization whatsoever from the board

Falsely announcing in May 2018 that the board had approved a “new private equity business model,” leading three board members to publicly dispute that claim. That forced CEO Marcie Frost to walk back what she, Chief Investment Officer Ted Eliopoulos, and none other than Henry Jones had told the press at the next board meeting and admit that no decision had been made

Refusing to investigate clear-cut evidence that CEO Marcie Frost had made significant misrepresentations during and after hiring, including presenting herself as enrolled in a non-existent dual bachelor’s/master’s degree program when Frost had never enrolled in any degree program and had only taken a writing course. Not only did the board reject then board member, Treasurer John Chiang’s call for a formal probe, but the board gave Frost a large increase in base pay and a large bonus despite engaging in “why we are in Iraq”-level changing explanations of her (mis)conduct

Yet Jones claims that his approach is working:

Jones said he favors holding the fund’s CEO accountable rather than criticizing staffers in an open setting, a practice he said is unproductive and reflects poorly on the fund, which has many business partners.

“Favors holding the CEO accountable”? Pray tell what does it take for that to actually take place at CalPERS?

Has Jones managed to forget that with the CEO before last, the Federal prosecutors were the ones to had to step in when the board failed to do just that? Recall that the two most influential board members back then, Rob Feckner (who still sits on the board) and Priya Mathur defended Buenrostro to the bitter end.

On top of that, Buenrostro was caught not thanks to internal controls but because his now ex-wife blew the whistle. That calls for more oversight, not less.

Jones makes clear he’s more concerned about optics than CalPERS running a tight ship on behalf of beneficiaries and California taxpayers who backstop the fund. Jones’ complaint about CalPERS’ tarnished image ignores that it is incompetence and dishonestly that hurts CalPERS reputation, not the sunlight. If Jones is unhappy about criticism of CalPERS, he needs to look in the mirror, since he and other lazy board members are ultimately responsible.

The story also makes clear that Jelincic and Jones differ on CalPERS’ newfangled private equity scheme, which is really a costly, risky, and otherwise inferior repackaging of recent fads via what is effectively a separately managed account. CalPERS could have had one of those set up with considerably less brain damage from an established private equity fund manager long ago and avoided the embarrassing spectacle of having staff flail about and expose their ignorance.

CalPERS’ staff has already admitted that the two new vehicles it intends to create will cost more than their current approaches; that one will deliver lower returns, and has failed to explain why the other one will perform well, beyond “because private equity”. No wonder retirees are lining up behind Jelincic. Again from the story:

Jelincic has shown up at board meetings to criticize the plan, saying it gives the fund too little control over investments and provides too little transparency to the fund’s members. Those concerns were shared by the Retired Public Employees’ Association and California State Retirees, another group that has endorsed Jelincic.

Jones said that while private equity is less transparent for members than the stock market, transparency for staff under the new strategy would be enhanced compared to the way the fund invests in private equity now, which puts the fund’s money in the hands of third-party managers.

Help me. First, Jones concedes the far more important issue that Jelincic raised, that the CalPERs would be managing the difficult trick of giving fund managers even more of a blank check than they have now. The new vehicles are intended to be very long lived, removing the one major control investors like CalPERS have on private equity fund managers, that they need to stay in investors’ good graces since they want to be able to raise new money from them in four or so years. CalPERS’ only recourse would be to exit the vehicles, which would be hugely embarrassing, and if the fund managers are competent negotiators, subject to large penalties.

Second, any increase in disclosure is debatable, and its utility limited if not shared with the board. How can the board hold CEO Marcie Frost accountable, which Jones has claimed is important, if it chooses to keep itself uninformed about what she no doubt fancies will be her signature initiative? More important, what good is the additional information since CalPERS’ staff and board won’t be able to act on it? This doesn’t even rise to the level of being oversight theater.

The reason Jelincic has good odds of defeating Jones is that Jelincic has the backing of the retirees, who have emerged as kingmakers in the last two election upsets. Both of them were for seats in which the eligible voters were not just retirees, but also current employees, who are overwhelmingly represented by unions. Yet even though the union members outnumbered the retirees in each of the last two contests, the retirees not only have a higher propensity to vote to begin with but the retiree groups also are better able to get them to turn out.

Recall that Jelincic and Jones are competing for the retiree seat, meaning current union members aren’t voting. Thus union backing does Jones little good. From the article:

Jelincic, a former president of California state government’s largest union, has secured support from some of the biggest retiree groups, who have some of the best contact information for retirees. Jones has support from unions, who he hopes will nudge the retirees among them his way.2

The retirees have long appreciated Jelincic’s vigilance and persistence in the face of staff and board efforts to discredit him. For instance, Jelincic has criticized two Chief Investment Officers, Ted Eliopoulos and his predecessor, Joe Dear, for being unqualified for the job. Eliopoulos’ actions confirmed Jelincic’s assessment because Eliopoulos handed off investment responsibilities, which is the part of his job that warranted the big bucks,3 turning his CIO job into an administrative role. Jones has maligned Jelincic, who correctly called out Eliopoulos’ lack of needed experience, by trying to paint Jelincic as out of line for the very rare occasions when Jelnicic has pointed out staff shortcomings in skills or performance.

As anyone who reviews CalPERS board meetings would have seen over the years, if anything, Jelincic’s failing is in being too mild-mannered, not too tough. He always kept a polite tone of voice and was clearly out to get answers, not to find “gotchas”. Indeed, Jelincic had many opportunities to drive in the knife with pointed follow-on questions when staff members gave misleading or simply lame answers, and I cannot recall a single time when he did so. The whining over being treated with kid gloves is remarkable. Jelincic has become more direct in his public comments as a former board member, but even then, he stays measured.

CalPERS staff members ought to review board transcripts from the mid-1990s to see how often and aggressively board members would go after staff if they thought staff wasn’t giving them the information they sought. More vigorous supervision is key to getting CalPERS back on the right track. CalPERS desperately needs more board members like Jelincic.


1 “In the last two years, a former CalPERS board member known for his sharp criticism of the nation’s largest public pension fund worked to unseat two of its leaders in tense elections.”

Huh? First, “sharp criticism” insinuates that the unfailingly polite and understated Jelincic is unduly aggressive, when his criticisms are well warranted. Second, “worked to unseat” again implies there was something unseemly. Last I checked, California was democracy and the candidates Jelincic backed won, so why not “helped to unseat” or better yet, “helped to replace’?

Third, pray tell how the elections were “tense”. They didn’t even rise to being “hard fought”. Both incumbents (and CalPERS executives) assumed the incumbents would win by virtue of union backing. But given that CalPERS is no longer given the benefit of the doubt by many voters, those days are past.

2 Jones may have misled Venteicher, or Venteicher didn’t want to spend the pixels to give a more accurate explanation. Current unions members are not voting in the retiree election, period. There are some retiree organizations affiliated with unions, such as a retiree organization for former CalFire members. These union-connected retiree organizations have very few members relative to the two main CalPERS retiree groups that have endorsed Jelincic.

3 CalPERS’ CIO is far and away its highest paid employee.

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  1. Clive

    I’m going to be uncharacteristically charitable to CalPERS here (please rest assured this is only a temporary aberration which I’m attributing to the fact that I’m sitting down having a nice cup of coffee with my feet up and inaction has muffled my cognitive abilities, perhaps) and say that, when it comes to unhealthy organisations, they are not doing anything too out-of-the-ordinary.

    Having become something of an expert, through, unfortunately, over-exposure, to businesses and even third-sector agencies which are on a terminal downward trajectory, they do all seem to exhibit the kinds of hastening-the-end behaviors that CalPERS appears to be projecting.

    I’ve seen companies which used to be, genuinely, The Next Big Thing and establish a “killer” product line but — inevitably — find that their competitive advantage gets eroded over time as the competition hots up, flail around either unwilling to admit that their product isn’t able to simply show up and get customers buying or else try to add incremental but meaningless so-called enhancements which simply paper over the cracks. I’ve seen social enterprises which start off with the best of intentions and a small coterie of committed and dedicated staff but nevertheless succumb to managerial-ism, ridiculously inappropriate “targets” and “measures” which all-too-quickly get a life all of their own and take over from good decision making. And I’ve seen Too Big To Fail banks fail, get bailed out, but still carrying on like nuffin’ evah happened, not realising that, eventually, the stench gets so bad that even slow-to-act public bodies have no choice but to step in and have a clear-out.

    In each and every situation like these, the organisation in question goes through a phase of intense bunkerisation. Senior management surrounds itself with layer upon layer of paid-for flunkies (either staff or external consultants brought in with a clearly-communicated and readily-understood message to tell the leadership what it wants to hear), like some corporate rock-wool which can be liberally applied as insulation material. The best staff, seeing the writing on the wall, leave.

    The useless ones, such as my good self, stick around as we know where the bodies are buried and that, sure enough, sooner or later, a new management team will be in place and will want someone who can tell them where to start the exhumations (or else put a load of concrete over the worst of the mass graves).

    There are always, however, a few very notable exceptions, such as Jelincic, who do step up, do do the honourable thing and do act as the ones who drag, kicking and screaming, the entire cadre of diseased management out into the sunlight. Where, like the zombies that they are, they appear to undergo spontaneous combustion. Well, they phone the recruitment agencies and hawk their fictitious resumes around, which is kind-a the same thing.

    Dear long-suffering California public employees. You and your state have the following inescapable choices, when it comes to your pension fund and its long-term viability. You can increase contributions. You can reduce benefits. You can try to increase the rate of return. Or you can reduce the cost of managing the fund.

    Reducing the cost of managing the fund is a good aim. You should see that CalPERS spends every cent wisely and you know where every dollar on overheads is going, but it’s not going to be transformative, given the scale of the current deficit. Increasing the rate of return is possible, but not without risk. Your risk tolerance level is largely fixed, so there’s little, if anything, you can do there. The real solutions are increased contributions and/or reduced benefits. These last two are not, ever ever ever going to be pain-free. You need a board who can advise you truthfully and accurately what your options are and agree with the state employers what is fair and equitable (and permissible in law) for all concerned.

    What you do not need is a board which thinks it is auditioning for Rowan & Martin’s Laugh-In.

    1. vlade

      Indeed. To the last two para. I’d say that costs management are, for a long-term investment, paramount. With CalPERS amount of money, it becomes incrementally harder to get good results.

      Yes, Buffet managed it. But you know, there’s still no settled opinion whether he’s really good, or the statistical fluke that is more or less expected. I, being the cynical bastard I am, say the second, as if he was really good, that would not rule out the statistical fluke, so we’d see a second Buffet somewhere.

      So, forget aiming to be a statistical fluke yourself, and instead embrace mediocrity of returns, with managing the costs down, with known risk profile. That’s all you need. And the costs of running CalPers become negligible. Of course, throwing all those lovely people like your current CEO on the street may seem cruel. But hey.. it’s between your pension, and Marcie’s one. You choose.

  2. The Rev Kev

    Sounds like Board President Henry Jones, 78, is none too happy with former board member JJ Jelincic, 70, because of “stuff”. Listening to the compaints that he had, it was almost like Jones was complaining about that young “whipper-snapper” Jelenic and demanding that he got off his damn lawn. At 78, Jones should really be making a graceful exit while the going is good. If he gets bored in retirement, I am sure that he could find a place at the DNC to keep him busy as they are always looking for young people for their leadership roles.
    I can understand why retirees are supporting Jelenic. If things go south with CalPERS, then they will be first on the firing line with whatever comes down the pipeline. For them it may be a permanent state of BOHICA. Those that have not retired are still semi-protected by the fact that they are still pulling a wage but you cannot say the same of those retirees. And Jelenic has been there doing what other members of the Board seem reluctant to do as in, say, doing the job that he is paid to do. He would be in good company with Margaret Brown and Jason Perez. What was Hemingway’s saying about changing conditions? Oh yeah – at first slowly, then rapidly…
    That SacBee article seemed to be a bit precious in how they criticized Jelenic but I am damn sure that Jelenic has lots of good reasons to take his job seriously – about 360 billion of them. I am sure too that if the author of that article, Wes Venteicher, had his pension with CalPERS, then he might be whistling a different tune. Oh well, if the wheels come off CalPERS sooner rather than later, perhaps a team can be borrowed from another organization to help do the initial culling of all the deadwood. I wonder if CalSTRS might be qualified to help?
    What is really needed though, is for someone to give the command “Dracarys!”

    1. lyman alpha blob

      …looking for young people for their leadership roles.

      Ha! You’re killing me Rev! If I can’t stop laughing I may need last rites.

  3. notabanker

    The Calpers coverage here is a rare and insightful view into board oversight, that it governs what is essentially public money is a notso-coincidental bonus. SacBee shows their bias by framing the issue of staff management, when the real issue is whether they should be investing in PE at all.

    Also, to add to the list of “staff” wtf’s is Bourqui’s cup of coffee tenure and sudden departure.

    Really appreciate this coverage, Thanks.

  4. David in Santa Cruz

    This piece is far too kind to Henry Jones. He has made it his mission to cover-up every bit of wrongdoing by staff and former board members (“Lake Tahoe businessman” my Aunt Fanny) that might expose politicians and current employees to increased contributions, or to reduce the unconscionable fees that are the font of political contributions to the lackluster and term-limited California legislature.

    California’s open-meetings law makes it a misdemeanor for a board member to keep information from the public, and Mr. Jones should be walking along one of California’s dilapidated freeways wearing an orange vest picking up trash as a probationer for his blatant violation of the law. The only reason that this is not the case is that the craven self-promoter Kamala Harris and the two-decades-inactive-lawyer Xavier Becerra have looked the other way as Attorneys General — in violation of their constitutional duty to assure the enforcement of law and administration of justice.

    Since the politicals won’t hold the CalPERS board accountable, the retirees must. The fund has been systematically looted through high-fee strategies executed by staffers who evidently see a private sector revolving door spinning before them. CalPERS could probably make up its losses by managing investments in-house, but for the Stockholm Syndrome of a board (and weak unions) who are afraid of the connected outside money managers who have been pirating fund assets for the past decade-plus.

    Follow the money…

    1. Yves Smith Post author

      Yes, I could have gone full bore after the fact that Jones isn’t merely fawning towards staff, but aggressively exhibits and reinforces the bad norm of board ignorance about what is up at CalPERS and investments generally.

      But Jones is doing such a good job of botching his re-election campaign I thought it was preferable merely not to get in his way.

  5. none

    What is with these unions consistently backing the bad candidates? Are there some non-obvious payoffs / conflicts of interest, or what? Thanks.

    1. Clive

      Unfortunately, all too many union leaders get Stockholm Syndrome and think that by cravenly kow-tow’ing to implied (or overt) demands to avoid employer (i.e. State) contribution hikes they’ll placate any efforts to push down on the other side of the see-saw, namely scheme benefit cuts.

      So, when the Magic Sparkle Pony of abracadabra hey-presto Private Equity outsize returns gets paraded around the show ground, unions can’t help but go ooh and aah and make-believe that golden nuggets fall out of its posterior. Yes, it’s all a fantasy. But isn’t it better than nasty old reality? Board members who add that doesn’t it make a lovely clipperty clopperty sound, too, obviously get union come-hither looks.

      1. Susan the other`

        So, left out of all this impossible expectation of retirement benefits being safe and sound is an honest analysis of employer benefits and matching funds, the going interest rate and the rising cost of living. Does the FedGov do any matching benefits; does the State of CA? Is it all on the corporation/employer? Don’t know how they managed to miscalculate things so badly – but everyone did. If the CalPERS long term plan is in a shambles now is the time for them and every other state retirement plan to calculate an honest solution. There aren’t many places left on this planet to exploit. While they are in the process of being painfully honest, they need to secure the benefits to retirees to insure they have enough to live on. The FedGov and the State can guarantee to supplement current retirement plans and they should all stop pretending that the magic market can do this for them. It can’t. Right now state retirement funds are effectively being appropriated by private equity and investment banking to be their own benefit funds. It is another blatant siphoning of wealth, while at the same time creating an increased push upward on cost of living expenses. Where is all the straight talk needed to turn this around?

        1. Clive

          I can’t help but nod in sad agreement. While a member of a private pension scheme, rather than state funded, I’ve been on the receiving end of this — as you rightly put it — siphoning and hard choices.

          Hard for me, anyway, somewhat easier (I’ve shocked you now haven’t I?) for the employer who gets to cut my benefit — after pointing out my pension scheme was “gold plated”, which is the phrase always used to describe an arrangement which didn’t result in my having to endure an impoverished retirement. The employer made a very modest increase in contributions, I end up with £100,000 reduction in my scheme value.

          I console myself that I, unlike the public employees in CA didn’t also get my pockets picked by private equity. And that I’m too old now for any further scheme crapification to be wrought due to some legacy grandfathering scheme protections which the courts have upheld. I do fear what CalPERS and the State have in store for younger Californian public employees, all the while having the indignity of PE lining its pockets and CalPERS executives making off with their share of the loot. It’s what prompts me to rail against CalPERS every time Yves uncovers yet more flimflam.

        2. David in Santa Cruz

          Let’s not kid ourselves here.

          The Federal government has been under the continuous and uninterrupted control of glibertarian greed-heads since 1980 — the pension “crisis” is by their DESIGN. Tax-cuts, “balanced” budgets, ZIRP, and no-bid “privatized” war-without-end killed the ability of any public or private retirement saver to do anything other than watch as their accounts are looted.

          The only hope might be the election of a socialist president, but the power structure is fighting that possibility at every turn. In America, minds have been turned to mush by materialism and advertising. Americans LOVE to be lied-to.

  6. James McRitchie

    I support JJ Jelincic, against the incumbent, board President Henry Jones. JJ will bring needed independent leadership and expertise to oversee staff and the System.

  7. ALM

    As a CalPERS retiree who is disgusted with the Board’s dismissal of Marcie Frost’s substantial resume fraud as unworthy of an investigation, you can count on me to vote for Jelincic and to advise other Board members why I will be doing so.

  8. shinola

    So, former CEO Buenrostro got 4 1/2 years for accepting bribes from Apollo & related entities. Just curious – what punishment did Apollo receive?

    1. Yves Smith Post author

      The whitewash called the Steptoe Report (named for law firm/fixer Steptoe & Johnson) took the position that the placement agent Al Villalobos (who committed suicide) had victimized Apollo. If you believe that, I have a bridge I’d like to sell you.

      You can read the agreement Apollo signed here (scroll to the embedded document close to the end of the post). Apollo kinda-sorta promised to make it up to CalPERS and make $200 of concessions (the four small funds agreed to $15 million). As we wrote:

      As we’ll demonstrate, we have absolutely no idea whether this fee recovery proved to be remotely worth its face amount. As readers of this blog know well from the junk credits in various mortgage settlements, anything other than cold, hard, cash payments are likely to have a lot of air in them. Moreover, CalPERS has never released a detailed agreement, which raises the possibility that this was never properly papered up.

      Moreover, this deal assures that CalPERS will continue to do business with the very same firms that hired an clearly dubious placement agent, by virtue of not being properly licensed and supervised by the SEC. By contrast, when a Defense Department contractor is found to have engaged in abuses, they are put in a penalty box and barred from doing new business for a set period of time.

      The report effectively admits that CalPERS had nothing to lose by denying the four funds that engaged Villalobos mandates for a period of time (note one of the five offenders was not allowed into the fee recovery deal, hence we are now discussing four of the original Villalobos five). The very fact that these funds felt they would benefit from hiring him is strong proof that CalPERS is oversolicited and has more attractive opportunities than it can fund. It has the high-class problem of needing to ration money among them.

      But instead we get a sanctimonious description of the deal:

      Recognizing the difficulties that arose from their use of placement agents, and consistent with their leadership in the financial industry, these firms – Apollo, Relational, Ares and CIM – agreed to a total of $215 million in fee reductions to CalPERS.

      And then we have this confection, that it’s technically accurate but substantively misleading to say that the funds “agreed” to a deal when in fact the funds are depicted as having proposed it…..

      Now I imagine that any readers who have been involved in large financial transactions will be gobsmacked by this document. This letter is the legal equivalent of a doodle on a napkin. Yet it is signed by both sides (including, for three of the four GPs, by outside counsel as well) as if this was meant to be a final deal. Notice that the agreement contains no undertaking to come up a definitive agreement. That would include what you’d expect in a normal fee agreement: definitions (or references to existing definitions in the various limited partnership agreements), clear beginning and end dates, details on computation and reporting, and so on.

      So we have one of two possibilities, neither of which is pretty. The first is that this is all that was ever negotiated and agreed to. That puts the general partners in the catbird seat. The utter vagueness of the agreement allows them to interpret what it means and present to CalPERS how they claim they’ve complied as a fait accompli. Of course, that scenario assumes they even bothered. Notice the lack of any penalties or remedies if the GPs fail to live up to their fuzzy obligations.

      The second is that they did eventually draw up a proper agreement (notice that these letters were entered into in mid 2010, but the report was not presented to the public until March 2011), but that’s been hidden from the public, on the assumption that it would not hold up well to third-party scrutiny. In fact, it’s not impossible that the parties negotiated detailed terms and then agreed on the napkin-doodle document for public consumption.

      Notice that the language of the negotiation-theater document is that the funds were proposing the settlement terms. If they also provided the draft detailed settlement language, Khinda allowed them to take the wheel. One of the oldest rules of negotiations is “he who controls the document controls the deal.” The party that proposes the text of an agreement has a tremendous advantage, because the other side is forced to start from that and push for any changes or additions they want.

      And don’t kid yourself. It would not be hard for these funds to come out having made no real economic sacrifices to CalPERS.

      To avoid overloading this comment further, I will not take more material from the post, but it describes one way Apollo could have made what it claimed were concessions yet come out ahead.

      1. shinola

        I appreciate the reply – thanks!

        Doesn’t sound like it even amounts to a wrist slap. Figures…

    2. Anon

      Apollo Management Group was ostensibly tricked into paying $20M(?) to Buenrostro and an accomplice (Villalobos). I don’t believe Apollo was fined/charged for unlawful behavior. Yves, probably knows more.

      1. Yves Smith Post author

        Apollo paid former board member Villalobos’ placement firm, which in turn bribed Buenrostro. And it was $48 million, not $20 million, to Villalobos. More detail:

        CalPERS’ investments have been controversy-ridden since the early 2000s, but the “pay to play” scandal that Butka alludes to directly implicated the CEO and some board members. The former CEO, Fred Buenrostro, as well as the placement agent, Alfred Villalobos, were indicted in 2011. This is how Matt Taibbi summarized the case:

        In California, the Apollo private-equity firm paid a former CalPERS board member named Alfred Villalobos a staggering $48 million for help in securing investments from state pensions, and Villalobos delivered, helping Apollo receive $3 billion of CalPERS money. Villalobos got indicted in that affair, but only because he’d lied to Apollo about disclosing his fees to CalPERS. Otherwise, despite the fact that this is in every way basically a crude kickback scheme, there’s no law at all against a placement agent taking money from a finance firm.

        $48 million wasn’t the total Villalobos got; it was $58 million because he was pushing deals to CalPERS on behalf of four additional clients: Relational, CIM Ares, and Aurora Capital. And the part that has been curiously airbrushed out of every media account of this scandal is Villalobos was engaged in improper conduct, even if he had managed to get the needed sign-offs from CalPERS. He wasn’t a registered broker-dealer, as he was required to be when marketing deals on a regular basis.

        As we’ll explain in due course, this omission appears to be deliberate, to protect the hides of Apollo and the other fund managers (referred to in the trade as general partners or GPs) who hired a placement agent they knew, or should have known, shouldn’t be in that business at all. And it also obscures the fact that CalPERS had tremendous leverage in dealing with these GPs. One of the remedies available under the securities laws when party who is not licensed engages in securities transactions is rescission, as in demanding that the deal be unwound and the funds returned.


  9. flora

    Here’s hoping JJ Jelincic wins.

    Thanks for your continued reporting on CalPERS, PE, and pensions.

  10. Rubio

    Session stack the new organization that calpers has decided to use to assist and helping online members navigate there online access. Does it seem strange that this organization is a foreign corporation with foreign officers that operate the company. I would look at researching this organization.

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