More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The Securities and Exchange Commission on Monday charged the former CEO of the California Public Employees’ Retirement System (CalPERS) and his close personal friend with "scheming to defraud an investment firm into paying $20 million in fees to the friend’s placement agent firms."
The SEC alleges that former CalPERS CEO Federico R. Buenrostro and his friend Alfred J.R. Villalobos fabricated documents given to New York-based private equity firm Apollo Global Management.
“Those documents gave Apollo the false impression that CalPERS had reviewed and signed placement agent fee disclosure letters in accordance with its established procedures. In fact, Buenrostro and Villalobos intentionally bypassed those procedures to induce Apollo to pay placement agent fees to Villalobos’s firms. The false letters bearing a fake CalPERS logo and Buenrostro’s signature were provided to Apollo, which then went ahead with the payments,” the SEC says.
John M. McCoy III, associate regional director of the SEC’s Los Angeles Regional Office said in a statement that “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.”
According to the SEC’s complaint, Apollo began requiring signed investor disclosure letters in 2007 from investors such as CalPERS before it would pay fees to a placement agent that assisted in raising funds. “Villalobos’s firm ARVCO Capital Research LLC (which later became ARVCO Financial Ventures LLC) agreed to this contractual provision in a placement agent agreement with Apollo related to CalPERS’s investment in Apollo Fund VII. However, when ARVCO requested an investor disclosure letter from CalPERS’s Investment Office to provide Apollo, it was informed that CalPERS’s Legal Office had advised it not to sign a disclosure letter. ARVCO never again contacted CalPERS’s Investment Office for an investor disclosure letter,” the SEC says.
The SEC alleges that in January 2008, Villalobos instead fabricated a letter using a phony CalPERS logo. At Villalobos’s request, Buenrostro then signed what appeared to be a CalPERS disclosure letter. Upon receipt of the fake disclosure letter for Apollo Fund VII, Apollo paid ARVCO about $3.5 million in placement agent fees.
The SEC’s complaint further alleges that less than two weeks later, Villalobos and Buenrostro created false CalPERS disclosure letters for at least four more Apollo funds under similarly suspicious circumstances. “As part of the scheme, Buenrostro signed blank sheets of fake CalPERS letterhead that Villalobos and ARVCO then used to generate additional investor disclosure letters as they needed them. Based on these false documents, Apollo was induced to pay ARVCO more than $20 million in placement agent fees it would not have paid without the disclosure letters,” the SEC says.
The SEC says it 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.”