Download PCA Faces Suit Linked to CalPERS Bribery Scandal

Agenda Item: F-6
Joint Meeting of the Retirement Boards
Meeting Date: 3/28/2017
PCA Faces Suit Linked to CalPERS Bribery
Scandal
By Alyson Velati March 15, 2017
Pension Consulting Alliance (PCA) and former managing director Michael Moy are being sued
by a former asset management executive for allegedly damaging his career and his firm’s
relationship with the California Public Employees’ Retirement System (CalPERS), according to
a complaint filed March 10.
In the lawsuit, Cesar Baez, founder and former partner of Centinela Capital Partners, a private
equity manager, claims that Moy reported false information to the pension in 2011 that Baez was
tied to people that were involved in pay-to-play scandals, which led to his firing.
The suit was filed just days after PCA resigned as CalPERS’ private equity consultant following
an announcement that Moy was retiring, as reported. Moy was responsible for advising the
pension on its $26 billion private equity allocation.
The lawsuit alleges that CalPERS forced PCA to resign because of the complaint.
Moy and Richard Patcher, PCA’s attorney, did respond to multiple requests for comment.
The pension declined to provide further comment on the PCA suit.
According to the complaint, PCA made “false and/or reckless” claims about Baez’s connections
to former CalPERS CEO Fred Buenrostro, Jr., former CalPERS board member Alfred
Villalobos, former CIO of the New York pension fund David Loglisci, as well as other
individuals embroiled in pay-to-play scandals.
As a result of these claims, CalPERS, which had already invested in two Centinela offerings,
verbally agreed to a third mandate with Centinela, only if Baez was no longer part of the firm.
Centinela, which was founded by two minority owners in addition to Baez, was then essentially
forced to oust Baez from the firm, the suit alleges. CalPERS ultimately decided not to invest in
the third fund.
However, Baez asserts that any relationships he had with Buenrostro, Villalobos, Loglisci or
others named in the suit were not problematic. “[N]early everyone in the pension and investment
community would have connections to Buenrostro and Villalobos, the CalPERS CEO and a
board member, respectively, of the largest pension fund in the United States, and Loglisci, the
Chief Investment Officer of New York’s pension fund, the second largest in the country,” the
complaint states.
Instead, the lawsuit claims former CalPERS CIO Joe Dear, who began his tenure in 2009,
allegedly “harbored a deep-seated animus towards Baez.” Baez further claimed the pension was
discriminating against him for being Latino.
Dear “wanted [Baez] out of Centinela, or at the very least wanted to be seen as cleaning house
following the CalPERS pay-to-play scandal,” the lawsuit states.
“PCA knew this and wanted to keep CalPERS, a very important and PCA’s largest client,
happy,” according to the suit.
Buenrostro pleaded guilty in 2014 to taking bribes and cash from Villalobos, who pleaded not
guilty and committed suicide in 2013 before his trial started, as reported. Loglisci pleaded guilty
to corruption charges in 2010, as reported.
CalPERS first began its relationship with Centinela back in 2006 after releasing an expression of
interest for a private equity fund of funds focusing on emerging managers and managers from
racially diverse backgrounds. In October 2006, the pension committed to Centinela’s Capital
Link Fund I. In April 2008, CalPERS agreed to create Capital Link Fund II with Baez and other
founders, Robert Taylor and Fidel Vargas. In total, Centinela ran about $1 billion dollars for
CalPERS. PCA conducted the due diligence for both funds.
During its due diligence for a potential third mandate with Centinela, PCA allegedly made a
reference call to Baez’s former employer, the State of New Jersey Division of Investments, the
complaint states. Baez was the head of alternative investments for New Jersey from January
2004 to July 2005, according to his LinkedIn profile.
As part of the vetting process, Moy allegedly asked another PCA managing director, Judy
Chambers, to call William Clark, the former director for the division of investments for New
Jersey, the complaint states. Moy then allegedly produced a memo recounting the call in which
Clark allegedly disclosed that Baez “had frequent contact with individuals associated with
certain pay-to-play scandals.”
However, Baez alleges that the call in question never actually happened.
“Clark never had a reference call with Chambers about Baez and does not otherwise recall
speaking to her about Baez. He also never made the statements attributed to him by PCA. Clark
swore to this in a declaration in another action, Baez v. California Public Employees’ Retirement
System, Superior Court of the State of California, Los Angeles County Case No. BC498010,” the
lawsuit states.
Chambers declined to comment for this story.
Although a trial date has not yet been set, many are skeptical about the new lawsuit’s prospects.
It’s typically difficult for an asset manager to win a case against an investment consultant, says
Todd Cipperman, CEO of Cipperman Compliance Services, who was not related to this case.
“But remember, you can’t just pass on lies or discriminate,” he says. “An opinion is different
from a defamation.”
Although it’s common for institutional investors to give managers a reason for termination, they
don’t necessarily need to, as long as it’s not discriminatory, says Ernest Badway, a litigation
attorney who is co-chair of Fox Rothschild’s Securities Industry Practice, who is not related to
this case.
This suit may even prompt investment consultants to document opinions and basis for their