“It Depends On What The Meaning Of ‘In’ is.”

In May 2010, then Attorney General Jerry Brown announced that he had filed this complaint against former California Public Employees Retirement System (CalPERS) Board Member Alfred Villalobos, his company ARVCO Capital, and former CalPERS Chief Executive Officer Federico “Fred” Buenrostro, alleging violations of California Corporations Code §§ 25210, 25216 and 25403 and Business & Professions Code Section § 17200.  

A lot of water has passed under the bridge in the ensuing two years.  In September, 2010, I wrote that the Attorney General had suffered a major setback when Bankruptcy Court Judge John Peterson ruled that California’s suit was subject to the automatic stay under the Bankruptcy Code.  The Attorney General appealed this ruling and U.S. District Court Judge Edward C. Reed reversed.  California ex rel. Brown v. Villalobos, 453 B.R. 404 (D. Nev. 2011). 

In the latest turn of events, the Securities and Exchange Commission announced yesterday that it had filed its own complaint against Messrs. Villalobos and Buenrostro in the U.S. District Court in Nevada.  According to the complaint, these two individuals earned placement agent fees from investments by CalPERS in various investment funds.  A problem arose when a private equity firm, Apollo Global Management, began to require investor disclosure letters and condition payment of placement agent fees on receipt of those letters.   When CalPERS refused to sign, the SEC alleges that the defendants fabricated letters from CalPERS in order to get paid.  The SEC’s complaint points out a number of “obvious as well as subtle irregularities” in these letters.  For example, one letter didn’t even have CalPERS’ correct name – even though Mr. Buenrostro had been its CEO and Mr. Villalobos had been a member of its Board of Administration. 

The SEC brought its case under both the Securities Act (Section 17(a)(1)) and the Exchange Act (Section 10(b)).  Section 17(a)(1) makes it unlawful for any person “in the offer or sale of securities” to employ any device, scheme or artifice to defraud.  As I read the SEC’s complaint, at least one of the fabrications occurred after CalPERS invested.  This may make in necessary for the court to interpret “in”.  In U.S. v. Naftalin, 441 U.S. 768 (1979),  the respondent urged that “in” connotes a narrower range of activities than the phrase “in connection with” found in Section 10(b).  The Supreme Court, however, left that question open but did note that Section 17(a)(1) does not require the victim of the fraud be an investor – “only that the fraud occur ‘in’ an offer or sale.”  Thus, the case may depend, at least in part, on what the meaning of “in” is.