Apollo Management, a private equity firm led by chief executive officer and current Dartmouth Trustee Leon Black '73, is now at the center of a probe by the California Public Employees' Retirement System, the largest U.S. public pension firm, CalPERS announced last week. CalPERS began the review after receiving information about a potential conflict of interest regarding payments made by Apollo to an external money manager, according to Clark McKinley, an information officer at the CalPERS Office of Public Affairs.
"There have been allegations of conflict of interest, as it is possible former members of CalPERS' board might have used influence peddling to win business from assets like Apollo," McKinley said.
CalPERS recently received records that Apollo and other investment firms made payments of more than $50 million over a five-year period to ARVCO Financial Ventures LLC, a placement agent firm headed by former CalPERS Board Member Al Villalobos, according to an Oct.14 CalPERS press release.
CalPERS has alerted both the U.S. Securities and Exchange Commission and California law officers of the probe, according to Private Equity Hub, a Reuters online forum. Neither Black nor Apollo has been accused of any wrongdoing, PE Hub reported.
While some states prohibit private equity firms from using placement agents, California does not.
"There is nothing wrong with placement agents," McKinley said in an interview with The Dartmouth. "They, like real estate agents, represent properties as they go between buyers and sellers. The problem is when there is some kind of impropriety involving kickbacks or conflict of interest."
Gov. Arnold Schwarzenegger, R-Calif., recently signed a bill requiring public pension firms to disclose placement agent fees.
CalPERS has operated under a similar disclosure policy since this past May, when its board of administration adopted a new policy to help ensure greater transparency in the firm's investment decisions.
"The placement agent industry has been a focus of state authorities and the Securities and Exchange Commission over the last year, and we believe it prudent to conduct a full review of the matters related to these recent disclosures to us," Anne Stausboll, chief executive officer of CalPERS, said in the release.
McKinley said that CalPERS is investigating other firms as well, but could not provide The Dartmouth with a list by press time.
According to PE Hub, Black was involved in a similar controversy two decades ago.
While Black was serving as a senior banker at investment banking firm Drexel Burnham Lambert and as a lieutenant to "junk bond king" Michael Milken, a fraud investigation led to the firm's collapse, and Milken did jail time as a result.
Black, however, went on to found Apollo in 1990. The firm has $38 billion in assets and become one of the largest private equity firms in the world, according to PE Hub.
Black is ranked No. 158 on the 2009 Forbes list of the 400 richest Americans, at a net worth of $2 billion.
McKinley said that CalPERS still recognizes Apollo's positive performance, despite the current investigation.
"Apollo's funds have come in positive territory," he said. "Historically, they have done very well for us."
Dartmouth economics professor Eric Zitzewitz said that price competition in the investment industry may cause firms to engage in illegal behavior.
"Temptation to aggressively gather assets comes from the high fee levels in the industry and the fact that it is difficult to compete in price," he said.
CalPERS has approximately $200 billion in market assets, according to the press release. The pension fund provides retirement benefits to more than 1.6 million state, school and local public agency employees, retirees and their families, and health benefits to nearly 1.3 million members.
A representative of Apollo Management could not be reached for comment by press time.
