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UPDATE 2-Former Calpers officials targets of fraud suit

(Adds background, detail, comments)

SAN FRANCISCO, May 6 (Reuters) - California’s attorney general has sued two former top officials of the biggest U.S. public pension fund, charging them with fraudulent broker-dealer activities involving $4.8 billion in investments.

The complaint, filed in state court on Wednesday, focuses on Alfred Villalobos, a board member of the California Public Employees’ Retirement System (Calpers) from 1992 to 1995 before he became a placement agent for investment companies.

As a middle man for an investment firm, Villalobos, courted a former Calpers chief executive to help influence investment decisions by the fund, according to the complaint.

Federico Buenrostro Jr is the Calpers’ CEO charged with helping Villalobos and his firm, ARVCO Capital Research, win investment work at the fund when he worked there from 2002 to 2008.

Buenrostro played a “key role in assisting Villalobos and ARVCO in their fraudulent activities,” according to the complaint, which seeks to recover at least $70 million.

The complaint comes as Calpers tries to recover from epic investment losses, increasing concern about the stability and costs of public pensions in California and widespread distrust of large financial institutions.

“People will be looking at Calpers a lot more closely now,” said Jessica Levinson, director of political reform at the Los Angeles-based Center for Governmental Studies. “I hope for their sake that this is shown to have been a unique situation.”

$4.8 BILLION AT ISSUE

The Calpers investments at issue were made from 2005 to 2009 and worth about $4.8 billion of the fund’s money. They earned ARVCO more than $47 million in unlawful commissions stemming from “improper relationships,” the civil complaint by Attorney General Edmund G. “Jerry” Brown Jr’s office said.

The investments included eight Apollo funds to which Calpers committed $4.4 billion and an Aurora Capital Group fund in which the retirement system placed $400 million.

Villalobos was not immediately available for comment. Buenrostro could not immediately be reached for comment.

Apollo said it was troubled by the complaint and would cooperate with regulatory agencies investigating the matter. Last month Apollo agreed to no longer use placement agents to secure new capital from Calpers.

Los Angeles-based Aurora Capital Group was not immediately available for comment.

The complaint says Villalobos sought to influence another Calpers former board member, Charles Valdes, who was the fund’s veteran investment committee chief.

The complaint does not charge Valdes but lays out his dealings with Villalobos. It adds that the fund’s board was unware of them, or of Villalobos’ close relationship with Buenrostro, when it approved a $601 million investment with Apollo in 2007.

It discusses how Villalobos also courted Leon Shahinian, the Calpers senior investment officer managing the fund’s alternative investment portfolio.

REINING IN PLACEMENT AGENTS

Calpers has backed a bill before California’s legislature that would require placement agents be regulated as lobbyists to increase scrutiny of their work, but Calpers Chief Investment Officer Joseph Dear says that might not be enough.

“I want to run Calpers such that no investment manager will feel they need a placement agent,” Dear told Reuters during an interview at the recent Milken Institute Global Conference.

Calpers has over the past year been probing activities of placement agents after an investigation by New York Attorney General Andrew Cuomo of his state’s pension fund drifted west. Last May he won a guilty plea to securities fraud from a former associate of Los Angeles placement agent firm Wetherly Capital Group that raised interest in deals it helped sell at Calpers.

Editing by Andrew Hay

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