Photograph by Ken James — Bloomberg/Getty Images
By Dan Primack
May 6, 2013

In early 2008 I received an anonymous e-mail asking me to meet the sender in a hotel bar. All I was told was that it had to do with private equity investments made by Calpers, the nation’s largest public pension system. As I arrived, a man walked up to me, offered a business card establishing his bona fides, and asked whether I’d ever heard of a man named Alfred Villalobos. I hadn’t. “You will,” he told me. “And it’s going to get very, very ugly.” Since then, Villalobos has been a regular in court documents and newspaper headlines, accused by both state and federal authorities of defrauding private equity funds that had hired him to raise money from big state pension funds like Calpers. Most of the alleged misdeeds were done in cahoots with former Calpers CEO Fred Buenrostro, who actually got married at Villalobos’s home and is also facing legal charges. Both men deny the allegations.

Through it all, Calpers has portrayed itself as an unwitting victim — a portrayal I’m not buying. The pension system, which often holds itself up as a paragon of good governance, commissioned a third-party report that found that Buenrostro “pressured” investment staff to recommend commitments to Villalobos clients. The report also alleged that Buenrostro and Villalobos had forged disclosure documents that Villalobos needed in order to be paid by certain private equity firms for services rendered.

After the report’s publication, Calpers instituted new policies to reduce undue influence of placement agents like Villalobos. It also asked Villalobos client Apollo Global Management “to admit to some type of wrongdoing,” according to a deposition of Apollo CEO Leon Black. Apollo refused, but it did agree to eliminate up to $125 million in future fees so that it could keep its Calpers relationship “on a good track.” In a deposition for a separate but related lawsuit, Black said that Calpers was well aware of Villalobos’s involvement as placement agent.

It’s interesting that the charges against Villalobos and Buenrostro say nothing about influence peddling. Nor are there legal allegations that the pair ever defrauded Calpers out of a single dime. Instead, it’s all focused on that very narrow issue of the disclosure documents. And that’s where the pension system doesn’t look quite so ignorant of what was going on in its hallways.

Here is what we know happened: Apollo and Villalobos had often worked together via verbal agreements, but that changed when Apollo hired a new chief legal officer. Placement agents were asked to obtain letters from any investors they secured confirming that the investor was aware the placement agent was being paid fees by Apollo for such work. Villalobos brought some of those letters to a Calpers staffer, who, upon advice of counsel, declined to sign. That meant Villalobos couldn’t get paid.

The SEC and the Justice Department allege that Buenrostro and Villalobos bypassed Calpers counsel and staff, producing the aforementioned forgeries. Apollo, believing the letters to be valid, paid Villalobos millions of dollars in related fees.

Even if you believe the two forged the letters and technically defrauded Apollo, something doesn’t feel right. Apollo hired Villalobos to get money from Calpers, which he did. Calpers was well aware Villalobos was involved: Not only did Leon Black say so under oath, but I was also told so in that hotel bar, long before any of it was publicized. Yet Calpers wouldn’t sign a simple document attesting to it. When asked why, it simply says that it had never seen such a letter.

Many Calpers officials from that era are gone now, including almost all the senior private equity investment staff. Others remain, however, including its current CEO, general counsel, and board chairman. I’m not claiming that they are guilty of any crimes, but I don’t believe that they were ignorant of the cozy relationship between their former CEO and Villalobos. Refusing to sign the letters may have been a convenient way for Calpers to distance itself from him. When the final chapter of this sorry saga is written, let it include a stain on all parties — including the one stamped with its own seal of good governance.

This story is from the May 20, 2013 issue of Fortune.

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