The Securities and Exchange Commission has filed a lawsuit against a former chief executive and a former board member of $235 billion California Public Employees' Retirement System—the nation's largest public pension fund—with scheming an investment firm into paying $20 million in fees.

In the lawsuit filed April 23 in U.S. District Court in Nevada, the SEC alleges that Federico Buenrostro, who served as CalPERS CEO from 2002 to 2008, and Buenrostro's close friend, Alfred Villalobos, fabricated documents that had been requested by Apollo Global Management, a New York-based private equity firm.

As a so-called “placement agent,” Villalobos was responsible for securing large investment deals from CalPERS for his private-equity clients.  According to the SEC, Buenrostro and Villalobos fabricated letters to make it appear that CalPERS was aware of the fees Villalobos was being paid by Apollo.

According to the complaint, Buenrostro signed blank sheets of fake CalPERS letterhead for at least five Apollo funds that Villalobos and his firm, ARVCO Capital Research ,then used to generate the phony investor disclosure letters. “Those documents gave Apollo the false impression that CalPERS had reviewed and signed placement agent fee disclosure letters in accordance with its established procedures,” the SEC said in a statement.

“Buenrostro and Villalobos not only tricked Apollo into paying more than $20 million in placement agent fees it would not otherwise have paid, but also undermined procedures designed to ensure that investors like CalPERS have full disclosure of such fees,” said John McCoy, associate regional director of the SEC's Los Angeles Regional Office.

The SEC seeks an order requiring Buenrostro, Villalobos, and ARVCO to disgorge any ill-gotten gains, pay financial penalties, and be permanently enjoined from violating the antifraud provisions of the federal securities laws.

In May 2010, the California attorney general also filed a civil complaint against Buenrostro and Villalobos. The lawsuit case accuses ARVCO of using "unlawful and fraudulent means to effect securities transactions." In addition, Buenrostro is accused of failing to disclose gifts and gratuities. A trial date is set for May.

CalPERS Response

Since the pay-to-play saga engulfed Calpers in 2009, the public pension fund has instituted several reforms to boost its accountability. These include:

Advancing a state law that requires placement agents to register as lobbyists and prohibits them from being paid fees based on whether CalPERS invests with their clients;

Creating an enterprise risk management office and a chief risk officer position with overarching responsibility for risk management throughout CalPERS;

Creating an ethics helpline to help identify fraud, waste, and abuse;

Posting conflict-of-interest forms and travel costs on the CalPERS Website;

Establishing new rules for communications between board members and staff about investment proposals and contracts;

Granting new authority to discipline board members who violate policy;

Conducting periodic audits to ensure compliance with CalPERS policies and regulations that preclude use of the fund's money for payment of placement agent fees; and

Adopting a policy that limits gifts to board members from individuals and firms doing business with the pension fund or seeking to do business with the fund.

CalPERS Board President Rob Feckner also issued a recent statement expressing his disdain about the recent misconduct: “We condemn in the strongest way possible the alleged misconduct of these individuals, and pledge to continue working with all law enforcement authorities investigating these issues.”