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My response to 'CalPERS responds'

April 26, 2012: 2:56 PM ET

CalPERS takes issue with fraud post.

FORTUNE -- On Monday, the SEC filed fraud charges against ex-CalPERS president Fred Buenrostro and private equity placement agent Al Villalobos. I reported on the situation Tuesday morning, concluding that the complaint raised several new questions about decisions made by CalPERS during Buenrostro's leadership (for the record, Buenrostro has denied wrongdoing).

The largest one, from my perspective, was why CalPERS chose not to sign an investor disclosure letter that Villalobos submitted at the behest of client Apollo Global Management? After exhausting all other reasonable possibilities, I theorized that the refusal was an effort to establish plausible deniability of Villalobos' shady placement dealings with the pension system.

Well, it seems CalPERS didn't take too kindly to my post.

In a section of its website called CalPERS Responds, the system has penned a post of its own titled "Primack's Conspiracy Theory Doesn't Hold Water."

What follows is the CalPERS post (it's not too long), with my comments in italics:

Dan Primack's Fortune blog post ("New charges in public pension corruption saga", April 24) about why CalPERS refused to sign an investor disclosure letter provided by Apollo Global Management reads more like a best-selling fiction novel and in our view doesn't hold water.

With all due respect to Mr. Primack, and we have talked at length with him about this, the reason we didn't sign Apollo's investor disclosure letter is set out in our Special Review and given under oath by former CalPERS staff.

(1) We had never, ever seen such a letter in the industry before that one.

So what? As I wrote in my original post, novelty is not an automatic disqualifier at CalPERS -- which is known for creating innovative investment structures, and for investing in new fund managers. Perhaps seeing something new would prompt additional review, but that's not what happened here. According to the SEC complaint, investment staff gave it to counsel, who said not to sign it (which is different than, "we need more time").

(2) There was no reason or benefit for CalPERS or our members to sign it and at the time we had no way of knowing the represented facts in the letter were true or not.

Let's take the second part first: This is silly. All CalPERS had to do was call Apollo Global Management, with which it had an existing relationship, and ask for confirmation of the represented facts. Would have taken five minutes. As for the first part, the benefit would have been that Villalobos had been placing funds with CalPERS for years and, as such, CalPERS must have believed his business benefited CalPERS and its members. All Villalobos wanted (at the beginning) was to get paid for services rendered by getting the placement agent version of a receipt.

(3) The fund had nearly closed and there was no business reason for us to sign it. Our staff made a good judgment call by not signing the letter. Even if it had been a different fund or a different placement agent, we still would not have signed it. As clearly spelled out in the charges by the SEC, once CalPERS refused to sign the disclosure letter, Mr. Buenrostro and Mr. Villalobos literally took matters into their own hands, including forging documents, and they did everything they could to do it outside the walls of CalPERS including in a different state. The rest is a sad history of deception and fraud. Whether or not Mr. Primack believes it, those are the facts.

I still do not see how staff made a "good judgment call" by not signing the letter, given that no one (including the SEC) is alleging that the letter contained any false or misleading information. In fact, the "good judgment call" prompted bad actors to commit bad acts that, ultimately, tarnished CalPERS' reputation. There also is a secondary issue of why this letter, once submitted to CalPERS counsel, didn't raise some red flags about how much Villalobos was being paid to hawk Apollo funds.

Again, let me be very clear: I am not asserting that anyone from CalPERS lied under oath, or that there was some vast conspiracy related to this letter. I'm simply saying that CalPERS was presented with an unexpected opportunity to distance itself from someone who many within the organization believed was of questionable character. And it took advantage of that opportunity.

CalPERS has still not provided a compelling legal reason for why it didn't sign the letter, even though its lawyers made the decisions. That's not fiction. It's just the facts.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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