The San Francisco Chronicle reports that the U.S. Securities and Exchange Commission (SEC) has filed fraud charges against Federico Buenrostro, the former CEO of the California Public Employees’ Retirement System (CalPERS). According to the SEC, Buenrostro was involved in forging letters enabling a friend to obtain US $20 million from a New York private equity firm — money the firm thought comprised fees CalPERS had agreed would be paid to the friend in his capacity as a “placement agent” who brought public pension funds together with money management firms for investment purposes. As part of the scheme, the SEC said Buenrostro signed blank sheets of fake CalPERS letterhead that his friend then used to generate additional investor disclosure letters as they needed them.

Lessons Learned

This ongoing case illustrates significant fraud issues with wide-ranging implications for public sector boards and organizations with fiduciary responsibilities. CalPERS manages more than US $225 billion in public money intended to provide retirement income and health benefits security to two million employees, beneficiaries, and their dependents.

CalPERS conducted a special review, which provides several lessons for auditors and the board to consider to prevent similar fraudulent activity in the future. Recommendations to require placement agents to register and disclose their activities, mandate lower and more publicly visible management fees, and restructure and clarify the roles of both internal and external organizational units dealing with placement agents are commendable. Some additional measures that organizations undertake are:

• The introduction of a chief risk officer, reporting to the board, with responsibilities for ethics policies and issues is a good step toward strengthening the board’s risk and oversight capacity. However, values and ethics are a fundamental responsibility of any board and should be assigned to a governance committee headed by the board chair or, better still, assigned to the full board as a regular duty, including monitoring progress and addressing issues. Public-sector companies and their boards should be strongly encouraged, especially by auditors, to establish and follow rigorous values, ethics, and disclosure policies.
• Because of the serious nature of the fraudulent activity uncovered in this case, consideration should be given to establishing clear and finite term limits for board members along with post-employment code of conduct rules. A low limit (e.g., much less than US $10 million), as well as a “cooling-off” period of at least one year, should be placed on any business activity involving former employees.
• It is important for public-sector companies to employ a chief audit executive who reports directly to the board as well as implement a policy requiring that the board — in consultation with senior management — respond with a management action plan addressing the findings and recommendations arising from the work of the internal audit function. To further improve the effectiveness of board oversight on fraud-related matters, a regular fraud risk assessment should be conducted by internal audit, and risk priorities should be reflected in its risk-based audit plan.

West Virginia’s Wheeling Jesuit University and one of its vice presidents have been accused of conspiring to illegally divert federal funds by fraudulently billing expenses under grant programs or cooperative agreements, The Intelligencer/Wheeling News-Register reports. The allegation appears in an affidavit filed by a fraud investigator in the NASA Office of Inspector General to obtain search warrants in an active criminal investigation against the school’s vice president. According to the document, the fraudulent expenses — allegedly billed between 2005 and 2011 — amounted to millions of dollars and were applied toward personal gain as well as the school’s benefit.

Lessons Learned