By Dan Primack
April 24, 2012

FORTUNE — The Securities and Exchange Commission yesterday filed federal fraud charges against CalPERS CEO Fred Buenrostro and his placement agent pal Alfred Villalobos, alleging that they bilked private equity firm Apollo Global Management (APO) out of around $20 million.

For regular readers, this shouldn’t be too surprising. Buenrostro and Villalobos were the tips of a pay-to-play spear that corrupted the nation’s largest public pension system, which also used to double as the nation’s most active investor in private equity funds. Both men previously had been charged with fraud by the California Attorney General’s office, and had been painted in a very unflattering light by a CalPERS-commissioned report on the situation.

What did pique my interest, however, was the narrowness of the SEC charges. In fact, they almost raised more questions than they answered.

Here is the gist of the SEC’s case: In 2007, Apollo Global Management began requiring disclosure letters from investors from who Apollo raised capital with the assistance of a placement agent. This was at the urging of new counsel, who felt such documentation would be prudent (particularly from public systems like CalPERS).

The letters were quite short, basically asking the investor to verify three pieces of information: (1) That the placement agent was working on behalf of the private equity firm for a specified fee; (2) The fee is paid by the general partner, not by the limited partner; (3) The investor has a copy of the fund’s private placement memorandum and related documents.

So after CalPERS committed to Apollo’s seventh buyout fund, a Villalobos associate submitted such a letter to CalPERS portfolio manager Joncarlo Mark:

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But Mark declined to sign it, on the advice of CalPERS in-house and third-party counsel (who he was required to consult before signing any such documents). This was a big problem for Villalobos, since he wouldn’t get paid the $3.5 million in placement fees owed to him by Apollo for Fund IV unless he could get the letter signed. So after asking Apollo to intervene (it didn’t), Villalobos allegedly went directly to CalPERS president Fred Buenrostro, told him the situation and got Buenrostro to sign the letter.

According to the SEC complaint, Buenrostro did not ask anyone on investment staff of legal staff about why the letter had not been signed in the first place, nor did he inform them of his action. Villalobos submitted the letter to Apollo, and got paid. But then he took an additional step, allegedly asking Buenrostro to sign a series of other investor disclosure letters for CalPERS commitments to other Apollo funds. Or, more specifically, he asked handed Buenrostro pieces of paper on doctored CalPERS letterhead that were blank except for the signature line. Buenrostro allegedly signed the “documents,” which Villalobos later filled out himself (sometimes with errors) and sent to Apollo.

Altogether, the SEC alleges that the documents (in aggregate) entitled Villalobos to approximately $20 million in fees from Apollo.

That’s the alleged fraud, with Apollo with alleged victim. Seems simple, except for the following issues:

1. Didn’t Buenrostro have the legal right to sign the initial disclosure letter, assuming that the underlying information was accurate (which it appears to have been)? After all, he was the pension system’s CEO. I can see how me might have run afoul of common sense/decency, but can’t the CEO overrule underlings or ignore advice of counsel (again, assuming he was signing a truthful document)? This clearly doesn’t apply to the subsequent letters, but it was only the first one on which Villalobos was paid.

2. Why didn’t CalPERS counsel allow Mark to sign the original letter, given that the information it contained was accurate? I asked this yesterday during a media call with current CalPERS CEO Anne Stausboll, and received hushed whispers and an eventual reply about how CalPERS had never before seen such a letter. Don’t know why novelty would equal refusal to sign. After all, doesn’t CalPERS sometimes commit to new/novel private equity firms?

CalPERS later followed up by adding that the letter related to a third-party contract (between Apollo/Villalobos), and that it didn’t want to get in the middle. Again, not convincing – particularly since CalPERS could have (a) validated the specifics by calling Apollo and (b) CalPERS now requires that very type of information of all prospective general partners. There also was an argument of: Well, the commitment was made so CalPERS didn’t “need” to sign it. True, although the fund hadn’t actually closed yet and not needing to do something remains quite different from refusing to do something.

Here’s my theory (which, for the record, CalPERS disputes): Folks all throughout CalPERS were well-aware something improper was going on with Villalobos, and no one wanted to codify the relationship with their own signature. See no evil, hear no evil. Well, except for Buenrostro – who was in so deep that he likely never thought the corruption would be unearthed.

Someone familiar with the situation yesterday referred to the SEC charges as the ending to a black comedy, in which the crook gets undone by something he tried to do right, rather than something he tried to do wrong. Indeed, Villalobos did the work Apollo paid him to do (get a commitment from CalPERS). And the original document he submitted contained accurate information. But CalPERS refused to sign (insert your rationale here), and he allegedly resorted to fraud in order to get paid and stay in Apollo’s good graces. I guess if you give certain people enough rope, they’ll eventually hang themselves with it.

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