Part Seven: Tapping the State Pension Fund: Against All Odds - Literally - a Regent Secures Billions of Dollars in CalPERS Investments Reprint Spot.us

Part Seven: Tapping the State Pension Fund: Against all odds—literally—a regent secures billions of dollars in CalPERS investments

http://spot.us/pitches/337-investors-club-how-the-uc-regents-spin-public-funds-into-private-profit/story

The California Public Employees Retirement System (CalPERS), the nation’s largest public pension fund, is charged with managing $205 billion worth of investments on behalf of 1.6 million state workers. Its portfolio is larger than the gross domestic products of a dozen nations. Given its deep pockets, CalPERS is viewed as an investor to watch—its influence is so great that it can single-handedly make or break a corporation or private equity fund with its decisions.

Billions for Blum
Since 2004, Mr. Blum has had a direct influence on where CalPERS puts its money. His firm, Blum Capital Partners, is paid $3 million a year to handle $500 million worth of CalPERS investments as an external investment advisor.

According to reports issued for CalPERS by the investment advisory firm, Wilshire Consulting, Blum Capital Partners invests CalPERS money in public companies where Blum Capital Partners itself holds dominant ownership stakes, including the for-profit colleges Career Education Corporation and ITT Educational Services. It also places CalPERS money into its own private equity investment vehicles. But as of March 2010, CalPERS has reported an aggregate loss of 18 percent in these Blum funds.
         
In addition to hiring Blum Capital Partners to control a half billion dollars in investments, the pension fund has placed billions of dollars with three other companies where Mr. Blum has significant ownership stakes. CalPERS also pays large management fees to two of these entities.

1.              CB Richard Ellis. Mr. Blum serves as chairman of the board of the giant real estate firm, and CalPERS has invested $229 million in CB Richard Ellis’ European funds. As of June 2009, however, these funds had decreased in value by 56 percent because CB Richard Ellis had taken excessive risks with private equity investments, according to CalPERS reports. Nonetheless, in 2009, CalPERS paid CB Richard Ellis a fee of $3 million for its investment advice. (For my long-time readers...names sound familiar??  They were brought up, or attempted to be brought up at some tables, but was sssshhhh'd...how's that shushing working for us now???)

In total, CalPERS’ investments in Mr. Blum’s private equity empire—via Blum Capital Partners, CB Richard Ellis, TPG Newbridge, and TPG Capital—added up to nearly $2.5 billion in 2009.  (2009 is significant??  That awesome "Great Delta Reform Act of 2009" came down.)

The Governor’s Connection
Mr. Blum is not the only regent with a financial connection to CalPERS. Since 2004, CalPERS has paid $4 million a year to Dimensional Fund Advisors—a firm in which Gov. Schwarzenegger and Mr. Wachter have ownership stakes—to manage a $1.5 billion portion of its portfolio.

CalPERS investment in Dimensional Fund Advisors began in the 1990s and has averaged an annual return of 2.6 percent, according to a CalPERS press officer. (That rate of return was substantially lower than the average 6 percent return from fixed income instruments during the same period.)

CalPERS has also committed $2 billion to four private equity funds operated by Apollo Management. As previously detailed, Gov. Schwarzenegger and Mr. Wachter each have significant ownership stakes in Apollo Management.

Probability As an Investigative Tool
In addition to its direct investments with Blum Capital Partners, CalPERS separately held $76 million worth of stock in all 18 of the companies in Blum Capital Partner’s portfolio of public corporations, as of June 2009. (That deserved red, didn't it??...I'm well into my 3rd glass of excellent Delta wine...the sarcasm will increase appropriately!)

This was not an unusual occurrence for CalPERS, which in previous years had also invested in all of the companies that appeared in the portfolio of Blum Capital Partners, as did UC. But according to two probability theory experts consulted for this story—university professors who wish to remain anonymous—this could not have happened through pure chance.[1] Some basic math makes this clear:

Between 10,000 and 12,000 stocks are publicly traded at any given time, and CalPERS’ portfolio includes investments in about 4,000 public corporations. Thus, the chance of CalPERS picking one of Mr. Blum’s stocks is 0.4 or 40 percent. But the chance of CalPERS simultaneously picking all 18 of his stocks is one in 15 million.[2]  (I love it when someone savvier than I does the math!!)
           
CalPERS and UC’s matching investments in all 18 of Blum Capital’s public company portfolio is not likely a coincidence, nor is it likely based on considerations such as industry concentration or historical rates of return, because the relevant stocks crossed into multiple industries, and had varying return rates (including substantial losses).  (yeah...like the Monterey Agreements...not likely a coincidence, nor is it likely based on considerations such as industry concentration or historical...blah, blah, blah...because the same thievin' shysters are playing the same damn game on us.)

In fact, based on mathematical probability, it’s likely that investment managers at CalPERS and UC purposefully mirrored Blum Capital Partner’s portfolio. And it is widely known that a CalPERS investment tends to benefit its co-investors. (So there...!!!)

In response to this probability exercise, CalPER’s spokesperson, Clark McKinley, said that not all stocks are “institution-grade investments,” so “the probability of overlap existing [between CalPERS and Blum Capital Partners] would be high.” (Wanna know what's scary?? This genius is speaking on behalf of UC...lol)
         
He added, “CalPERS staff has never had any contact with the governor or his office regarding [Dimensional Fund Advisors] or Apollo, or any other investment matters involving him. We deal with external managers and general partners and their funds. We don’t gather information about other limited partners or investors in such funds.” (Plausible deniability, that's all I'm saying.)

--------------------------------------------------

[1] While sheer luck can generate windfall profits for securities traders, the stock market is a great leveler over the long run. It is impossible to consistently outsmart or “time” the market without insider knowledge. A long-term investor is more likely to receive an average return by picking stocks randomly, then she is by trying to outwit the system, or by paying for expensive investment advice from advisors with their own agendas. If you do not believe this somewhat counter-intuitive fact: read the classic analysis of stock market investment techniques: A Random Walk Down Wall Street (1973), by Burton Malkiel or the 2008 bestseller by Leonard Mlodinow, The Drunkard’s Walk, How Randomness Rules Our Lives.

[2] Here is the probability calculation we received after asking a probability theory expert, “What are the chances of an investor, that is holding 4,000 stocks picked out of a universe of 10,000 stocks, to randomly pick a particular group of 18 stocks?”

(And here's the math!!)

The answer: “Label those 18 stocks 1 through 18. Chance of No. 1 being in your selection of 4,000 is 4,000/10,000, or 0.4. Assuming that you have No. 1, chance that No. 2 is in the remaining 3,999 (chosen from the remaining 9,999) is 3,999/9,9999. Etcetera.  So what you want is (4,000/10,000)*(3,999/9,999)*(3,998/9,998)* . . . *(3983/9983). Every one of those numbers is close to 0.4, so the answer is close to 0.4 to the power of 18. Doing the calculation exactly gives a chance of 6.872 * 10^(-8), or about 1 in 15 million.”

Posted by Peter Byrne on 09/22/10

Part Six: Billion Dollar Babies: University of California Invests $53 Million in Two Diploma Mills Owned by a Regent Reprint Spot.us

Part Six: Billion Dollar Babies: University of California invests $53 million in two diploma mills owned by a regent

“Berkeley is a microcosm of the intrusion of corporations into education. … While public schools crumble, while public universities are slashed and diminished, while for-profit universities rise as our newest vocational schools, elite institutions become unaffordable even for the middle class.” -- Chris Hedges (Empire of Illusion, 2009)

In 2009, Richard C. Blum, then the chairman of the UC regents, spoke at the Milken Institute’s Global Conference, held at the Beverly Hilton in Los Angeles. The corporate confab was hosted by Michael Milken, the “junk bond king” who went to prison in the aftermath of the savings and loan fiasco of the 1980s. (You know...I raised my daughters to take into consideration the company one keeps.  There is such a thing as 'guilt by association' and 'you become that which you surround yourself with'.)
          
Barred from securities trading for life by federal regulators, Milken has since recreated himself as a proponent of investing in for-profit educational corporations, an industry which regularly comes under government and media scrutiny following allegations of fraud made by dissatisfied students.
          
At the conference, Mr. Blum, who is a financier by trade, sat on a panel called “The New University and Its Role in the Economy,” alongside the presidents of the Massachusetts Institute of Technology and Arizona State University. The panel focused on how universities can best serve the corporate demand for tech-savvy employees by recruiting smart freshmen with scientific talent. One panel member urged treating universities as “laboratories of business ideas and products.”
          
As someone who oversees investment policy decisions for UC’s $63 billion portfolio, and as the largest shareholder in two for-profit corporate-run universities (in which UC invests), Mr. Blum had a unique perspective to share. He advised public universities to attract business-oriented students with clever advertisements, just as vocational schools do. “It’s like anything else,” he told the crowd. “It’s how you market it.”

Marketing strategy aside, Mr. Blum has taken on two seemingly disparate roles— one as an advocate for a nonprofit university, and the other as an owner of two for-profit educational corporations. As a regent, Mr. Blum has approved cost-cutting policies for UC that appear to have enhanced the profitability of his vocational schools. And in 2007, Mr. Blum’s spouse, Sen. Dianne Feinstein (D-CA), wrote federal legislation that benefited the for-profit college industry. (These two again??  For crying out loud...FBI???  Hello??  SEC, you there??? Senate Ethics...never mind nonexistent, my bad!)


For several years, Mr. Blum’s firm, Blum Capital Partners, has been the dominant shareholder in two of the nation’s largest for-profit universities, Career Education Corporation and ITT Educational Services. As of May, firm’s combined holdings in the two chain schools was $923 million—nearly $1 billion. As Blum Capital Partners’ ownership stake has enlarged over time, so have those made by UC investment managers, who have invested a total of $53 million in public funds into the two educational corporations.
          
Government ethics advocates are displeased by the relationship between UC and Regent Blum’s educational interests. “It is hugely inappropriate for the University of California to invest in for-profit colleges when it should be promoting public education,” said John M. Simpson of Consumer Watchdog, a Southern California nonprofit education and advocacy organization. “And something stinks when university investments end up in companies largely controlled by a regent. To the average fellow on the street, this would seem to be a conflict of interest. It is up to Mr. Blum and the UC treasurer to explain how it could not be a conflict of interest.” (Yeah...well I say, grow a pair and enforce it, geez.)
 

(image from http://www.jasoncrosbyillustration.com)

Recession capitalism Due to cost-cutting polices sanctioned by the UC Regents, including serial tuition hikes, class cuts, and reduced enrollment for in-state students, the gateway to higher learning in California has seriously narrowed. As a regent, Mr. Blum voted in favor of all of these measures—actions which have indirectly benefited the corporate colleges he owns. But Career Education Corporation and ITT Educational Services are not the only chain schools profiting from the financial disaster that besets so many public universities.        

On March 13, The New York Times summed up the situation when it reported that many for-profit schools “have exploited the recession as a lucrative recruiting device while tapping a larger pool of federal aid … selling young people on dreams of middle-class wages while setting them up for default on untenable debts, low-wage work and a struggle to avoid poverty.” The Times noted that for-profit schools are directly benefiting from cuts in education, especially in California where state-funded universities and community colleges have been “forced to cut classes just when demand is greatest.”

In marked contrast to UC and other public universities that have turned students away due to budget cuts, ITT’s revenues have rocketed skyward in tandem with new enrollments. ITT recently reported to its shareholders that due to “higher unemployment rates among unskilled workers” company revenue increased to $1.3 billion, a doubling of its profit since 2005. Responding to a recession-induced increase in demand for vocational training, ITT has raised tuition by 5 percent; 70 percent of ITT’s revenue comes from federal tuition aid programs.

Chain schools get the third degree Nationwide, vocational school students are paying billions of dollars in tuition to stockholder-owned education corporations, primarily using federal grants and loans guaranteed by taxpayers. In the United States, the dominant vocational education corporations are the University of Phoenix, Corinthian Colleges, Strayer University, Kaplan (owned by The Washington Post Company), Career Education Corporation and ITT Educational Services. Collectively, these companies operate hundreds of schools and teach hundreds of thousands of low-income students, most of them eligible for public and private financial aid. The chains offer training for such technical professions as radiological technician, beautician, automotive mechanic, medical billing clerk, Web designer and massage therapist. But they also offer degrees in engineering, computer science and business.

Increasingly, they are promoting online education, which limits the education corporations’ operational costs, even though virtual courses are often not suitable for teaching nursing, cooking, massage, or car repair. As a result of delivering substandard education, some for-profit schools suffer from accreditation problems, according to recent news reports.
         
On a fairly regular basis, government regulators, including the U.S. Department of Justice, have accused chain schools of preying upon low-income individuals and active military service members. Typically, state and federal agency investigators report, chain school recruiters have loaded students down with loan packages averaging $30,000 that are attached to high interest rates. But fewer than 70 percent of enrollees graduate. Such a high dropout rate requires the corporations to continuously wage television, radio, Internet and print media marketing campaigns aimed at enticing students who want to better themselves—and who are, not incidentally, eligible for government-guaranteed loans.
         
Unfortunately, those who do graduate with two-year associates degrees from the chain schools often discover that the curriculum did not prepare them for the technical requirements of the jobs they seek. When graduates do find work, their wages often do not match the inflated salaries promised by school recruiters, according to government reports. And when dropouts and underpaid graduates inevitably default on their student loans, it’s the taxpayers who remain on the hook.

Every few years, mainstream media re-discovers these so-called “diploma mills,” publishing investigative stories to show that despite the marketing materials that tout their educational and career benefits, the chain schools are primarily focused on cashing in on taxpayer-backed grants and loans. Since last fall, The New York Times, Washington Monthly, ProPublica, Bloomberg, Frontline and The Associated Press have published exposés of the $26 billion vocational college industry.
         
In particular, the two schools in which Mr. Blum’s firm has controlling stakes have been targets of these investigations, although press reports do not mention him by name, nor do they reveal that UC invests in his for-profit schools while cutting back on public education.

Students as cash machines Blum Capital Partners, Mr. Blum’s investment firm, entered the for-profit education business in 1987, when he purchased a large block of shares in National Education Corporation, an Irvine-based vocational school that specialized in awarding mail-order diplomas. He joined the company’s board of directors, and took a seat alongside former U.S. Senator Barry Goldwater and David C. Jones, a former chairman of the Joint Chiefs of Staff. (And here is where it all began for Dick.)     

Two years later, Mr. Blum got in hot water when angry shareholders filed a lawsuit claiming “the company issued rosy financial statements while Mr. Blum and other directors were selling their shares,” according to the Los Angeles Times. The shareholders argued in court documents that Mr. Blum sold $2.7 million worth of shares at about $24 per share after he learned—a day before the public announcement—that the company president planned to resign. When National Education Coropration’s share price bottomed out at $3.50 a share following the leadership change, Mr. Blum then re-invested in the troubled company. According to a 1997 The New York Times report, National Education Corporation was then “battered by accusations that its vocational schools were riddled with fraud.” Fraudulent or not, investing in the corporation’s stock remained a profitable pursuit.

By 1995, Mr. Blum had gained control of 11.5 percent of National Education Corporation stock. He  did so by combining his firm’s capital with that of a nonprofit investment fund, Commonfund, for which Mr. Blum worked as an investment advisor. (Commonfund manages investments for more than 1,400 universities, including UC.) In 1997, Harcourt, the textbook publisher, bought National Education Corporation for about $750 million, or $21 a share. Mr. Blum and his private partners appear to have profited handsomely—there was money to be made in education!
         
After his appointment to the UC Board of Regents in 2002, Mr. Blum continued to grow his investment in for-profit education. In June 2005, Blum Capital Partners invested $24 million to buy 5 percent of the stock of Lincoln Education Services Corp., a $300 million operation with 32 campuses. But most notably, Mr. Blum also acquired large blocks of shares in ITT Educational Services and Career Education Corporation following dips in stock prices after government regulators began investigating corrupt practices at the schools.
         
In the case of ITT Educational Services, federal and state regulators investigated the company in 2004 after shareholders and students alleged that it was falsifying student attendance, grades, and job placement records in order to keep federal financial aid flowing. When the news broke, the price of ITT shares halved.
         
Blum Capital Partners pounced, purchasing reams of devalued ITT stock. It soon owned the largest block of stock in the company—a 10 percent ownership stake in 2006. Not long afterward, the investigations were closed with no findings of wrongdoing. By May 2010, ITT’s revenue exceeded $1.3 billion, and Blum Capital Partners’ stake was valued at $415 million.

Similarly, Blum Capital Partners bought shares of Career Education Corporation following a corruption controversy in 2004. A $1.8 billion operation that serves 90,000 students, Career Education Corporation was being investigated by multiple federal agencies after whistleblower lawsuits alleged that the school had allowed failing students to remain enrolled to maintain its pipeline to federal grants and loans. (Speaking of patterns...here's one I'm wondering if any one else has thought about...just exactly who are the people filing these massive amounts of lawsuits, driving down stock prices.  Has anyone investigated each individual, see how many degrees from two to six, of separation there is back to Blum.)              
         
In 2005, after “60 Minutes” televised an unfavorable story about the chain school, the value of the school’s stock dropped by more than half. Blum Capital Partners bought in for $33 million. (I'm curious, who pointed 60 Minutes in that direction?  Who financed the investigation?  Who knew someone that knew the person who made the editorial decisions at CBS...just a line of thought.) As of May 2010, Blum Capital Partners’ stake had grown to $508 million, making Mr. Blum’s firm by far the largest and most powerful shareholder of the chain school. A partner with Blum Capital Partners, Greg L. Jackson, sits on the board of Career Education Corporation. And even as Mr. Blum sat on the regents’ investment committee, UC invested in both ITT Educational Services and Career Education Corporation. (I feel like attorney Fletcher Reed in Liar, Liar...Oohh come on!!)

The UC connectionEven as Mr. Blum was buying stock in Career Education Corporation and ITT Educational Services, UC financial records show that the university’s investment managers were actively buying and selling these same stocks—to the tune of $53 million. But UC was not just holding onto these stocks to accrue value over time (as a prudent manager would do). In fact, UC’s external investment managers were day trading them in large amounts, as much as $2 million a trade, thereby affecting the daily price of these stocks.

         
To recap: UC was investing in two for-profit schools that were largely owned by a company run by Mr. Blum, a regent who oversees the management of the university’s stock portfolio as a member of the university’s investment committee. Does this situation pose at least the appearance of a conflict of interest? (Here is where a reasonable person slaps their forehead and exclaims, 'duh'!)

Not to UC officials. In response to queries about the propriety of UC’s investments in the for-profit colleges that are heavily associated with Mr. Blum, a spokesperson for UC Treasurer Marie Berggren responded by saying that, “The Treasurer’s Office doesn’t track regents’ holdings in making decisions about security selections, though regents’ holdings are disclosed as a matter of policy.”

In other words, the treasurer does not review the regents’ financial disclosure statements, which are public records, for potential conflicts. On the other hand, UC’s investments are also a matter of public record, and a regent could easily avoid conflicts— should he or she choose to—by not taking substantial positions in companies in which UC invests.
         
Mr. Blum did not respond to repeated requests for comment about his investments in for-profit education. But UC spokeswoman Lynn Tierney called on his behalf, saying that the university recruits its students from the intellectual elite, and only those with high grade-point averages and SAT scores are accepted. Therefore, she says, “UC is not losing students to Blum’s vocational schools, and there is no conflict of interest.” Ms. Tierney declined to discuss how UC’s cost-cutting measures could result in channeling UC-eligible students toward for-profit colleges largely controlled by Mr. Blum.

Noah Stern, president of Associated Students at the University of California, says he’s troubled by Mr. Blum’s dueling loyalties to UC and for-profit education: “Student trust in the regents was already shaky. In light of these revelations of investment abuse, we need a structural overhaul of the university governance system.”

Note: CalPERS, the state public pension fund, had invested $6 million in Career Education Corporation, and $10 million invested in ITT Educational Services through its public equities investment program as of the end of 2009. And CalPERS held more than $100 million in shares of both companies as part of a $500 million investment with Blum Capital Partners, which is an investment adviser to CalPERS.

Spot.Us Note: This story was first published earlier this year by The Berkeley Daily Planet, SN&R, North Bay Bohemian, Santa Cruz Weekly and the SF Public Press. Also published by UC Santa Cruz Faculty Association and theDaily Casserole.

Posted by Peter Byrne on 06/23/10

Part Five: Four Case Studies in Conflicts of Interest by UC RegentsReprint Spot.us

Part Five: Four Case Studies in Conflicts of Interest by UC Regents

http://spot.us/pitches/337-investors-club-how-the-uc-regents-spin-public-funds-into-private-profit/story

Study No. 1: Dimensional Fund Advisors and Apollo Management:
The details behind UC’s $486 million investments in deals in which Gov. Arnold Schwarzenegger and Paul Wachter—both UC Regents—had significant interests.
Study No. 2: Glenborough Realty Trust: UC buys a company from Mr. Blum.
Study No. 3: Colony Capital: UC invests in private equity alongside Mr. Blum.
Study No. 4: Janus Capital Group: A remarkable confluence of investments.
(Isn't this getting gooood??  Soon, we will connect the dots of these players and our water fiascoes.)

Study No. 1: Dimensional Fund Advisers and Apollo Management
After Gov. Arnold Schwarzenegger assumed office in 2004, he appointed Paul Wachter, his business partner of more than 20 years, to the UC Board of Regents. Mr. Wachter was also hired to handle Gov. Schwarzenegger’s investments in a blind trust, which (in theory) is set up to sequester investments from all but the trustee’s view in order to limit possible conflicts of interest. For reasons that should be obvious, it was not ethically kosher for the governor to put a business partner, close friend, political advisor, and public servant such as Mr. Wachter in charge of this blind trust.  
      
Still, Gov. Schwarzenegger, who is an ex-officio regent, chose not to place a large portion of his real estate and business partnership holdings in the trust overseen by Mr. Wachter. These assets—valued at about $100 million—became a matter of public record through the governor’s financial disclosure statements.
         
An analysis of the economic disclosure statements filed by Gov. Schwarzenegger and Mr. Wachter reveal that specific UC investments have benefited the financial holdings of both men. UC has placed $411 million with Dimensional Fund Advisors, an investment firm in which Gov. Schwarzenegger and Mr. Wachter each have an ownership stake. An additional $75 million of UC’s monies was invested in private equity funds run by Apollo Management, a firm in which both men hold substantial financial investments.
         
Government watchdogs say that this presents a clear conflict of interest. “The regents putting public money into Dimensional Fund Advisors and Apollo is a conflict of interest just like if Schwarzenegger was a plumber and the regents gave plumbing contracts to his company,” says Robert Weissman, president of Public Citizen.
     
The deals are summarized below.

Dimensional Fund Advisors
Santa Monica, California
The Company: Dimensional Fund Advisors is a privately owned company that operates a type of mutual fund known as an index fund. Stock in Dimensional Fund Advisors is not publicly traded; ownership of the firm is available only by invitation, and investment opportunities are limited to its directors, employees and select individuals, such as Gov. Schwarzenegger and his blind trustee, Mr. Wachter.
Gov. Schwarzenegger’s Interest: According to financial disclosure statements, Gov. Schwarzenegger owns “more that $1 million” worth of Dimensional Fund Advisors stock. (Note: this is not the same as investing with the firm, it is direct ownership of the firm.) Media reports put his ownership stake in the firm at a minimum of 5 percent, and he receives annual cash dividends of “more than $100,000.”
Mr. Wachter’s Interest: According to public disclosure statements, Mr. Wachter owns “more than $1 million” worth of stock in Dimensional Fund Advisors.
UC’s Investment: Since 2004, UC’s retirement fund has invested $329 million with Dimensional Fund Advisors. The UCLA Foundation, an endowment fund overseen by the regents, placed $82.3 million—or nearly 8 percent of its total endowment—in three investment funds offered by Dimensional Fund Advisors. The grand total of UC’s investment in Dimensional Fund Advisors is $411 million.
Fallout: When the economy tanked in 2008, UC’s investments with Dimensional Fund Advisors took a hit. By the end of 2008, the value of UC’s investment with Dimensional Fund Advisors via the retirement fund had fallen to $151 million. UC Treasurer Berggren declined to state whether this was a loss or a divestment.
           
Apollo Management
New York, New York
The Company: Apollo Management is a private equity firm that specializes in leveraged buyouts. It is run by financier Leon Black, who got his start selling “junk bonds” to small banks prior to their collapse during the savings and loan debacle of the 1980s. Mr. Black now raises large amounts of Apollo’s investment capital from university and union pension funds.
Gov. Schwarzenegger’s Interest: Gov. Schwarzenegger has “more than $1 million” invested in two Apollo Management funds (Apollo IV and Apollo V). Since 2004, he has reported income of more than $200,000 a year in dividends from these two investments.
Mr. Wachter’s Interest: Main Street Advisors, Mr. Wachter’s private investment firm, has invested up to $100,000 in Apollo IV (alongside Gov. Schwarzenegger). He holds up to $1 million in each of two other Apollo Management funds (Apollo VI and Apollo VII).
UC’s Investment: Since 2004, the regents have invested $75 million in two Apollo Management funds in which Mr. Wachter is invested (Apollo VI and Apollo VII). Both Apollo funds helped finance the less-than-lucrative Harrah’s Entertainment leveraged buyout in consortium with the investment firm TPG Capital, where Mr. Blum is an owner and executive. UC is not directly invested in Apollo IV or Apollo V, but all the Apollo funds share the same general partner, Apollo Management. See Harrah's Entertainment from Part Four.

Toeing the ethical Line
As the official who appoints most of the regents, Gov. Schwarzenegger has the ability to influence his colleagues on the board. But state laws and UC policy provide theoretical guidance on how to avoid a conflict of interest. If Gov. Schwarzenegger chooses to influence a regent, he is obligated to do so in a manner that does not conflict with his own financial interests. He could also ensure that his personal holdings do not overlap with UC’s holdings—not a difficult task since both the holdings of the governor and UC are part of the public record.
         
However, this did not happen with Gov. Schwarzenegger’s investments in Apollo Management and Dimensional Fund Advisors. The two firms received a total of $486 million in UC investments after he and Mr. Wachter joined the board of regents in 2003.
         
Mr. Wachter defended these investments by saying that the reg ng a UC investment committee meeting, UC Treasurer Marie Berggren told the regents that she is open to their suggestions when hiring outside investment management firms.)
         
Study No. 2: Glenborough Realty Trust
In addition to his executive position with the global real estate giant, CB Richard Ellis (CB Richard Ellis is another interest 'rabbit trail' that leads back to the same warren of nasty), Mr. Blum’s business interests include the purchase and sale of real estate companies for his personal portfolio. At least one such transaction, the 2006 leveraged buyout of Glenborough Realty Trust, was made possible by a UC investment.
The Deal: A real estate company based in San Mateo, California, Glenborough was sold to Morgan Stanley Real Estate in a $1.8 billion leveraged buyout that took the company private in November 2006.
UC’s Investment: UC invested $42 million in the Morgan Stanley private equity investment fund that bought Glenborough.
The Blum Connection: At the time of the Glenborough sale, Mr. Blum owned Glenborough stock worth about $2.5 million, and he sat on the company’s board of directors. U.S. Securities and Exchange Commission disclosure statements filed by the real estate company prior to the sale asserted that as a member of its board of directors, Mr. Blum would see direct financial benefit from the buyout.
Details of the Deal: Glenborough owned scores of high-end office buildings in a half-dozen major cities, including San Francisco. Private equity suitors regularly came calling on the Glenborough board of directors, hoping to buy the profitable company. Morgan Stanley won Glenborough’s hand with a $1.9 billion offer via one of its private equity investment funds called MSREF V. 
Public records show that before the sale, UC held $8 million in this Morgan Stanley fund (MSREF V). After the sale of Glenborough was announced, UC increased this amount by $34 million, for a total investment of $42 million.
The Morgan Stanley fund (MSREF V) put up a cash payment of $325 million to realize the Glenborough deal (UC’s contribution, via the Morgan Stanley investment fund, was equivalent to 13 percent of the cash that was made as a down payment). The majority of the remaining $1.8 billion purchase price was leveraged by a loan from Deutsche Bank Securities. The original members of the Glenborough board of directors, including Mr. Blum, sold their stock at a premium price.
Fallout: Glenborough was saddled with a tremendous debt load from the acquisition and it struggled mightily to meet the loan obligation. The deal turned out to be a bad investment for UC. By the end of 2009, due to the collapse of the real estate market and the company’s debt burden, the value of UC’s investment in the Morgan Stanley fund (MSREF V) had plummeted to $3.5 million, recording an apparent loss of $38.5 million from its height.           
         
Study No. 3: Colony Capital
Since 2007, UC has invested millions of dollars with Colony Capital, a Los Angeles private investment firm. One of Colony Capital’s principal partners is Richard Nanula, a longtime trustee of the University of California, Santa Barbara. One of Colony’s business partners is Mr. Blum. The intersection of financial interests between UC, Colony Capital, and Mr. Blum is revealed through the workings of the leveraged buyout deals of Fairmont Raffles Holdings International in Toronto and Station Casinos in Las Vegas.
         
Summaries of both deals are presented below.

Fairmont Raffles Holdings International
Toronto, Canada
The Players:
• Colony Capital is a $45 billion private equity firm specializing in the privatization of hotels and casinos. It owns one of the world’s largest casino-hotel conglomerates, Resorts International.
• Prince Alwaleed bin Talal bin Abdulaziz Alsaud is a member of the royal family of Saudi Arabia and one of the world’s wealthiest individuals.
• Kingdom Holding Company (KHC) is Saudi Arabia’s largest corporation. Prince Alwaleed owns 95 percent of KHC, which in turn owns large stakes of American corporations, including Citigroup, Apple, and News Corp.
• Kingdom Hotels International is a KHC subsidiary.
• Fairmont Raffles Holdings International is an international luxury hotel chain. Mr. Blum has been a member of its board of directors since 2006.
The Deal: In 2006, Kingdom Hotels and Colony Capital partnered to realize a $5.5 billion merger and acquisition of two hotel chains: Fairmont Hotel and Resorts and Raffles International. The companies were combined into a privately held entity named Fairmont Raffles Holdings International.
The Blum Connection: To finance the buyout deal, Colony Capital set up a series of private equity investment funds. Sen. Dianne Feinstein has disclosed that Blum Capital Partners invested in the hotel chain merger through a Colony Capital investment fund named Colony HR Co – Investment Partners III. Mr. Blum was appointed to the new corporation’s board of directors by Colony Capital and Prince Alwaleed.
UC Investment: As the hotel deal was in process, Colony Capital created a related fund (Colony Capital VIII) to develop hotel and casino properties in the Middle East and elsewhere. Between 2007 and 2009, UC’s endowment and retirement funds invested $16.6 million in this Colony Capital fund. This fund did not directly finance the Fairmont Raffles merger, but its hotel and casino funds interlock, each sharing an interest in the success of the others.
Fallout: California conflict of interest law deems a limited partner in a private equity fund to be invested in the general partner of that fund. Consequently, say the state’s conflict of interest guidelines: “When the limited partner has such an investment, he or she must disqualify [from the decision making process] with respect to decisions affecting the general partner personally or through business entities controlled by the general partner.” In sum, Mr Blum’s investment in Colony HR Co – Investment Partners III gave him an economic interest in all of Colony Capital’s funds, including the fund UC invested in, Colony Capital VIII. But, apparently, Mr. Blum did not recuse himself from making any policy or other decision making consideration that could have affected UC’s investment in Station Casinos via Colony Capital VIII.

Station Casinos
Las Vegas, Nevada
The Players:
• The Fertitta family operates and partially owns Station Casinos, one of the largest casino chains in Nevada. Until three years ago, it was a publicly traded company.
• Real estate firm CB Richard Ellis bills itself as “the leading global casino real estate advisor.”
The Blum Connection: Mr. Blum is the chairman of the board and a controlling shareholder of CB Richard Ellis. He is a member of the board of directors of the hotel chain Fairmont Raffles Holdings International, owned by Colony Capital. He is also an investor in a Colony Capital acquisition fund.
The Deal: In 2007, Colony Capital partnered with the Fertitta family in a $5.7 billion leveraged buyout (taking the public company private). Colony partly financed the deal with Colony Capital VIII. U.S. Securities and Exchange Commission records show that as the deal was being negotiated, Station Casinos hired CB Richard Ellis to evaluate the Fertitta-Colony offering to Station Casino’s public shareholders. CB Richard Ellis was charged with determining if the offering was fairly priced. Mr. Blum’s firm told Station Casino shareholders that the deal was a solid investment.
UC’s Investment: While Mr. Blum served on the regents’ investment committee, UC invested $16.6 million in the Colony Capital fund (Colony Capital VIII) which bought Station Casinos in a deal that was partly overseen by CB Richard Ellis, a company Regent Blum controls. The deal benefited Colony Capital, a firm to which Mr. Blum is deeply connected through investments and a board directorship.
Fallout: Not long after it was privatized, Station Casinos declared bankruptcy due to the combined effects of the recession and the $1.6 billion operating debt that its new owners had imposed on the company via the buyout. Former shareholders of Station Casinos claimed that the deal was not in their best interest, as CB Richard Ellis had claimed. The Colony Capital fund that financed the Station Casinos buyout (Colony Capital VIII) has lost more than half its value due to the soured deal, enraging institutional investors. As of December 2009, the value of UC’s investment in Colony Capital VIII had decreased by $6.3 million.

Study No. 4: Janus Capital Group
The Players:
• Axa Rosenberg, a division of the global investment firm, Axa, was one of several dozen external investment managers retained by the regents to handle millions of dollars from the UC’s retirement and endowment portfolios after Treasurer Small was ousted.
• Janus Capital Group is a financial company that manages mutual funds.
•  Blum Capital Partners invests in both private and public equity on behalf of its private clients (whose identities are not public).
UC’s Investment: UC Treasurer Marie Berggren has disclosed that her external investment managers—she declined to specify which ones—bought and sold $26 million in Janus Capital stock on UC’s behalf between 2005 and 2008. During the same time period, Axa Rosenberg’s parent company, and three other UC external managers, invested heavily in Janus Capital stock using non-UC funds. These investments were made concurrently with large investments in Janus by Mr. Blum’s investment firm, Blum Capital Partners.
The Deal: These substantial investments by four UC external managers—using UC funds and also on behalf of other clients—had the effect of ratcheting up the price of the Janus stock because these purchases increased demand.
Fallout: Even if the substantial investments in Janus by Blum Capital Partners and UC’s external managers were purely coincidental, there is an appearance of a conflict of interest because Blum Capital Partners, a market mover, invested heavily in Janus stock in tandem with UC, another market mover, and several investment firms contracted to manage UC investments, all market movers. And UC’s investments were overseen by Mr. Blum, as a regent.
         
The story ends differently for the various parties. Blum Capital Partners sold its Janus stake at its apogee in 2007 for a substantial profit. Meanwhile, it appears that the investment resulted in a financial loss for UC.
         
TIMELINE OF BLUM CAPITAL PARTNERS’ and UC’S INVESTMENT IN JANUS CAPITAL GROUP (Sourced from SEC filings, UC investment data, commercial databases, press reports.)

2004 to 2005
• In April 2004, UC hires Axa Rosenberg as an investment advisor, ultimately making it responsible for managing $156 million of the UC retirement and endowment funds.
• In the first quarter of 2005, Blum Capital Partners makes an initial investment in Janus of $102 million, paying about $13 a share.
• Throughout the course of the year, UC (though external managers) purchases $5.6 million in Janus shares.

2006
• Early 2006: Axa Rosenberg’s parent company, Axa, invests $7.8 million in Janus.
• Mid-2006: Axa increases its holding in Janus to $56 million. Dimensional Fund Advisors (a UC external manager that is partially owned by Regents Wachter and Schwarzenegger), holds $39 million in Janus stock. Adage Capital, also a UC external manager, holds $2.9 million.
• Third quarter 2006: Blum Capital Partners purchases more Janus stock, and now owns $388 million worth of shares in the company for an ownership stake that exceeds 10 percent. The Janus stock price continues to rise.
• Fourth quarter 2006: Blum Capital sells a portion of its Janus stock, and Axa increases its investment ten-fold to $575 million. The share price reaches $21. Dimensional Fund Advisors nearly doubles its holdings in Janus.
• Throughout the course of the year, UC engages in a series of rapid trades of Janus stock, buying and selling $3.4 million worth of shares. Rather than maintaining a solid position, UC external managers often trade the stock several times a day, hoping for small profits in the margins as the stock price continues to rise.

2007   
• Early to mid-2007, Blum Capital Partners buys, sells, and re-buys Janus stock, turning a profit by taking advantage of fluctuations in the market (this tactic is called “arbitraging”). On their own accounts, four UC external managers—Axa Rosenberg, Dimensional Fund Advisors, Adage Capital, and Goldman Sachs Group—also buy large amounts of Janus stock, for a combined total of $781 million worth of shares, or about 15 percent of the company.
• September: After buying and selling Janus stock throughout the year, the value of Blum Capital Partner’s Janus holdings increases to $502 million, making it the third-largest Janus shareholder. Axa remains the largest shareholder, holding $622 million in Janus stock.
• Throughout the course of the year, through its external managers, UC trades $4.2 million in Janus stock. In at least one instance, UC buys and sells $3.1 million worth of shares in a single day.
• Late November: Due to high demand—created in part by the large Janus investments made by UC’s external managers—the price of Janus stock peaks at $36 per share. During the last quarter, Blum Capital Partners sells its entire stake—about 17 million shares—for more than a half-billion dollars, clearly reaping a huge gain.
         
2008
• As the recession hits, Janus’ stock price freefalls, bottoming out at $3.95 a share.
• UC continues to trade Janus stock, buying and selling a total of $12.7 million in rapidly failing Janus stock—sometimes more than $2 million a day—in an effort to squeeze pennies out of minor fluctuations in the meltdown process. By the end of the year, UC has traded $26 million in Janus stock since the beginning of 2005.
• The amount of money Axa Rosenberg manages for UC plummets from $156 million in 2007 to $69 million by the end of 2008. UC Treasurer Berggren declined to say if this was a result of Janus investments.

2009
• December: Axa holds $1.7 million worth of Janus stock and UC still has nearly $2.5 million in Janus shares on its books. Since gainfully divesting itself of Janus stock in 2007, Blum Capital Partners has not reinvested in it. UC Treasurer Berggren declined to say how much UC has gained or lost as a result of the Janus investments.

Posted by Peter Byrne on 09/22/10

Part Four: Seven Private Equity Deals: How Regent Richard C. Blum Benefited from $748 Million Worth of Private Equity and Bond Investments by UC Reprint Spot.us

http://spot.us/pitches/337-investors-club-how-the-uc-regents-spin-public-funds-into-private-profit/story

Blum Capital Partners, based in San Francisco, handles a $2 billion portfolio. Mr. Blum is the chairman of the investment firm’s board. He is also a principal executive and an owner of Fort Worth’s $45 billion private equity firm, TPG Capital, which has a history of partnering with a New York-based private equity firm called Apollo Management. (Aaah and here we have one of the ties that bind Mr. Blum to one Mr. William K. Reilly.  Who is William K. Reilly, you ask? Well, Mr. Reilly is the Senior Advisor with equity holding in TPG Capital...see link to TPG Capital and Texas Public Utilities leveraged buyout fiasco link in Part 3. 

And how is Mr. Reilly significant in this?  Well, he sat on the Delta Vision Blue Ribbon Task Force, for starters as related to current water shenanigans...his genealogy will be up next, and his is a very interesting pedigree!! )

Mr. Wachter has disclosed multi-million dollar holdings in a range of Apollo Management funds.

During Mr. Blum and Mr. Wachter’s seven-year tenures on the regents’ investment committee, UC has invested $748 million in private equity deals involving Apollo Management, Blum Capital Partners, and TPG Capital. Several of these deals received contributions from the California Public Employees Retirement System (CalPERS), the country’s largest public pension fund, for which Blum Capital Partners is a paid investment advisor. (Reminder...Blum was the investment director during the Carpenters' Health and Welfare Trust Fund hey day...see a pattern developing?? http://www.sacbee.com/2013/12/30/6035570/from-the-notebook-what-calpers.html 

Also note, the original December 28, 2013 front page feature is no longer on Sacbee's website.  AND she settled.)
 
Below are summaries of seven private equity deals in which UC invested when Mr. Blum had concurrent business interests; one of these deals (Harrah’s Entertainment) involved Mr. Wachter.

Theses facts were ascertained from reviewing thousands of pages of SEC filings, commercial databases, UC public records, and press accounts.  (Link to original live links  http://www.spot.us/pitches/337-investors-club-how-the-uc-regents-spin-public-funds-into-private-profit/story )

Harrah’s Entertainment
Las Vegas, Nevada
The Company: Harrah’s Entertainment Inc. operates 52 casinos in seven countries.
The Deal: In 2008, investment firms TPG Capital, Apollo Management and Blackstone Capital Group partnered in a leveraged buyout of Harrah’s for $30.7 billion.
The Blum Connection: In 2008, Mr. Blum disclosed investments worth “over $1 million” in various TPG funds (including funds named TPG IV and TPG V). He was also a TPG Capital owner and executive.
The Wachter Connection: Since becoming a regent, Mr. Wachter has disclosed investments worth “up to $1 million” in two Apollo investment funds (Apollo VI and VII) that provided capital to the Harrah’s deal.
UC’s Investment: At the time of the Harrah’s transaction, UC had $75 million invested in the same two Apollo Management funds in which Mr. Wachter was invested and which were themselves invested in the Harrah’s deal. During that period, UC also held $4.1 million in two TPG Capital funds, including one that helped finance the Harrah’s deal (TPG V). The investments in the TPG funds were made by several UC campus endowment foundations overseen by the regents while Mr. Blum—a TPG Capital executive who was himself invested in the Harrah’s deal (via TPG V)—served on the the regents’ investment committee. UC also had $120 million invested with a private equity fund run by Blackstone Capital Partners (Blackstone Capital Partners V), which participated heavily in the Harrah’s buyout.
In total, UC’s general endowment and retirement funds committed $200 million to four private equity funds that financed the Harrah’s buyout, a deal in which Mr. Blum and Mr. Wachter each had significant financial interests.
The Fallout: Since the buyout, Harrah’s has hemorrhaged capital due to the overall decline of the gambling industry amid the global recession. Its ability to generate enough cash to pay back limited partner investors such as UC has been hampered by the $12.4 billion acquisition debt that Apollo Management, TPG Capital, and Blackstone Capital Partners placed on the books of the casino empire after acquiring it. UC’s  investment in the private equity funds that participated in the Harrah’s deal had lost up to 40 percent of their value, as of March 2009.

Washington Mutual
Seattle, Washington
First American Corporation (now CoreLogic, Inc.)
Santa Ana, California
The Companies: Before its acquisition by New York’s JPMorgan Chase, Washington Mutual (WaMu) was one of the country’s largest banks. In the fall of 2007, it stunned investors by declaring a loss of several billion dollars in the sub-prime housing market. Simultaneously, the New York Attorney General sued a title company, First American Corporation, for conspiring with WaMu to inflate real estate appraisals. The price of WaMu and First American stock fell through the floor.
The Deal: In June 2008, in a major miscalculation of risk factors, TPG Capital bought a $7 billion stake in WaMu, becoming its largest shareholder. (Personally, I disagree with 'major miscalculation', I believe this went down exactly as planned.  What better way to simultaneously wipe out an entire segment of society...the entire middle class?)
The Blum Connection: Mr. Blum participated in the WaMu investment through an interlocking series of TPG Capital funds (including TPG V and a related fund named Olympic Investment Partners). Blum Capital Partners also invested heavily in First American shares when the price plummeted following the allegations of appraisal collusion. (What do we have here??  What's that word? Collusion??...and y'all thought I was just making this up!!)
UC’s Investment: In 2008, the UC Berkeley campus endowment fund invested $4.1 million in two TPG Capital funds that financed the WaMu deal (TPG V and TPG VI). UC retirement fund managers made a bad bet (bad bet my butt...from where I sit, seems to me that bet was right on the money!) by increasing their stake in WaMu bonds seven-fold, from $31 million in 2006 to $215 million by the end of 2007. Through its external managers, UC also purchased First American stock when its share price fell, putting $7 million into the failing company by the end of 2009.
The Fallout: The FDIC seized WaMu in September 2008, selling its assets on the cheap to JP Morgan Chase. Stockholders were wiped out. TPG Capital is reported to have suffered a loss of $1.3 billion, which would likely negatively affect the fund that UC had invested in (TPG V), although this information is not public. By the end of 2008, the value of UC’s investment in WaMu bonds had declined by $48 million. First American continues to struggle financially and in the courts.

Univision
New York, New York
The Company: Univision is the dominant Spanish-language media company in the United States, operating 62 television stations and 69 radio stations. (Spanish or English, finally comprehend why we can Not get a fair shake or even level playing field in the MSM???  Well...here you go.)
The Deal: In March 2007, a consortium of five private equity investment companies led by a former UC Regent named Haim Saban acquired Univision Communications in a $13.7 billion leveraged buyout. The private equity investors were Saban Capital Group, TPG Capital, Madison Dearborn Capital Partners, Providence Equity Partners, and Thomas H. Lee Partners.
The Blum Connection: Mr. Blum participated in the Univision deal through his investments in two TPG Capital funds (TPG IV and TPG V). His spouse, Sen. Dianne Feinstein, disclosed Univision as an asset in 2007. Mr. Blum also maintained a financial interest in the deal by virtue of being a principal executive and owner of TPG Capital.
UC’s Investment: A member of the UC investment committee, Saban resigned as a regent in 2004. Mr. Saban then put together the Univision deal. During the acquisition, UC campus endowment funds had invested $4.1 million in two relevant TPG Capital funds (TPG IV and TPG V). Additionally, UC had invested $150 million in the two Madison Dearborn funds that financed the Univision buyout (Madison Dearborn IV and Madison Dearborn V).
The CalPERS Connection: CalPERS invested a total of $1.8 billion in private equity funds that financed the purchase of Univision: $450 million in two Madison Dearborn funds (Madison Dearborn IV and Madison Dearborn V); $125 million in a Providence Equity Partners fund; $300 million in a Thomas Lee Equity Partners fund; and $950 million in the two TPG Capital funds (TPG IV and TPG V). (That's a lot of change passing through this chump's pockets...NOW do you understand why I say when BDCP collapses, and it will...Blum and Reilly and/or their proxies, will come riding in claiming to be Knights in Shining Armour, here to save the day.  To build the twin tunnels or any form of conveyance that fast-tracks our Public Trust water into the aqueduct and into Kern County Water Bank is mere child's play for these two pirates...certainly money well spent considered the water auction that just when down...)
The Fallout: Following the buyout, Univision’s new owners—including TPG Capital and Apollo Management—placed the $10 billion debt from the buyout on the company’s balance sheet, creating a financial burden. (Isn't there something called Fiduciary Responsibility??  Isn't it about time this rat-bastard is held to the same standard the rest of us are in handling any form of Other People's Money?) The value of UC’s investment in one Madison fund decreased by 17 percent as the spring of 2009, while the other showed a gain of 18 percent. Apollo Management and TPG Capital collectively charged its investors, including UC, a $200 million transaction fee for managing the deal. (And that loss was made up by withdrawals from account holders accounts to make that transaction fee payment, again...a whole lot of hard work taken by the swipe of a pen, or a keystroke.  Gone.  How does one replace 20-30+ years of contributions into what you believe is your retirement and old age security??  Well, you don't.)

Freescale Semiconductor
Austin, Texas
The Company: Freescale is one of the largest semiconductor manufactures in the world.
The Deal: In December 2007, Freescale announced that it had been acquired by a consortium of private equity firms consisting of the Blackstone Group, the Carlyle Group, TPG Capital, and Permira Advisors.
The Blum Connection: To purchase Freescale, a multi-billion dollar down payment was raised from investors, including two TPG Capital funds (TPG IV and TPG V), in which Mr. Blum was invested. Mr. Blum was also a TPG Capital principal.
UC’s Investment: UC was invested in both TPG Capital funds involved with the Freescale transaction (TPG IV and TPG V). It had also committed $120 million to another fund involved in the Freescale buyout (Blackstone Capital Partners V, L.P.).
The CalPERS Connection: CalPERS invested billions of dollars in funds that supported the Freescale transaction, with $1.4 billion committed to the relevant Carlyle Group funds, $347 million in a Permira fund, and $950 million in the two TPG Capital funds (TPG IV and TPG V).
The Fallout: Within months of the buyout, Freescale’s sale of cell phone semi-conductors went into a tailspin. The company began to sink, over-burdened with the $9.5 billion in debt that the private equity firms had loaded onto Freescale’s balance sheet to pay for its own acquisition. (Again, isn't this corporate piracy??  Isn't there a law against this crap??) In April 2008, Business Week called the Freescale deal “one of the ugliest buyouts in history.”

Sungard Data Systems, Inc.
Wayne, Pennsylvania
The Company: Sungard Data Systems is a software company that provides information technology services to financial companies, nonprofit organizations, and school districts.
The Deal: In 2005, a consortium of private equity firms acquired Sungard in an $11.3 billion leveraged buyout. The participating firms included TPG Capital, Silver Lake Partners, Bain Capital, and Blackstone Capital Partners.
The Blum Connection: A principal in TPG Capital at the time, Mr. Blum was also invested in two TPG Capital funds involved in the buyout (TPG III and TPG IV).
UC’s Investment: At the time of the acquisition, UC had invested $80 million in two private equity funds that helped finance the Sungard buyout (Bain Capital Fund VIII and Blackstone Capital Partners IV).
The CalPERS Connection: CalPERS committed a total of $325 million to two private equity funds involved in the Sungard buyout (Silver Lake Partners II and Blackstone Capital Partners IV). CalPERS also had $350 million invested in the TPG Capital funds that bought Sungard (TPG III and TPG IV).
The Fallout: In 2005, the Sungard deal was the second-largest buyout in history, and the largest privatization of an information technology company. (Followed by the acquisition of the largest public water bank. ) UC appears to have made a profit on the investment.

Kinetic Concepts, Inc.
Santa Rosa, California
The Company: Kinetic Concepts manufactures medical equipment to treat wounds, burns and injuries sustained in accidents and combat.
The Deal: In 1997, Richard C. Blum & Associates (the predecessor to Blum Capital Partners) entered into a leveraged buyout deal to purchase Kinetic Concepts with Fremont Partners III, a private equity fund run by the Fremont Group (an investment arm of San Francisco’s Bechtel Corporation) Welcome Bechtel to our family of financial inbreeders). The Fremont Group and Blum jointly acquired a majority stake in Kinetic Concepts, and proceeded to take the company private.
UC’s Investment: In 2003, after Mr. Blum became a regent, UC invested $8.2 million in Fremont Partners III, which was still partnered with Mr. Blum's firm on the Kinetic Concepts deal. In 2004, as the number of wounded soldiers increased from two simultaneous wars in Iraq and Afghanistan, the Fremont Group and Mr. Blum’s firm took Kinetic Concepts public for a reported gain of $800 million. As of the end of 2009, UC has purchased $46.8 million in newly-issued Kinetic Concepts stock. (Folks...I haven't even started down that road...)
The Fallout: UC kept its investment with the Fremont Partners III fund until the end of 2006, and the deal appears to have been profitable for both Mr. Blum and UC. (It ’s worth noting that in 2000, Kinetic Concepts held only $116,000 in contracts with the U.S. Department of Veterans Affairs. By 2006, as wounded soldiers rotated through veterans hospitals, the value of these contracts shot up to $12 million. During this time, Sen. Feinstein was the chairperson of the Senate Appropriations subcommittee on veteran’s affairs that vetted and approved these projects.)
     
Commonfund
Westport, Connecticut
The Company: Commonfund is a $26 billion nonprofit asset management company that handles investments for more than 1,400 public and private university pension and endowment funds.
The Blum Connection: From 1995 to 2004, Blum Capital Partners served as an investment advisor to Commonfund. Advisors are typically paid a percentage of the amount of capital they are able to attract to the fund.
UC’s Investment: In 2002, the same year that Mr. Blum became a regent, several UC campus endowment foundations collectively invested $3.1 million in a series of private equity and venture capital partnerships sponsored by Commonfund. This amount tripled the following year. By the middle of 2004, Commonfund no longer reported Blum Capital Partners as an advisor, but its relationship with UC expanded. By 2008, UC’s overall investment in Commonfund had grown to $41.3 million.
The Fallout:  When the sub-prime mortgage meltdown hit Wall Street, Commonfund suffered. The value of UC’s Commonfund investment sank by $5 million. In 2009, UC Treasurer Marie Berggren reported to the regents that Commonfund was temporarily “shutdown,” and that UC would no longer receive its cash back upon demand.

Posted by Peter Byrne on 09/22/10

Part Three: The Regents Club: Conflicts of Interest Are Nothing New at UC, but They May Be Getting Worse

Part Three: The Regents Club: Conflicts of interest are nothing new at UC, but they may be getting worse

http://spot.us/pitches/337-investors-club-how-the-uc-regents-spin-public-funds-into-private-profit/story

“It is just amazing that these regents are enriching themselves at the expense of the institution they are supposed to be leading. We are not talking about one or two isolated instances, or a piddling amount of money but $2 billion. Financially, California is going down like the Titanic, and these people are pocketing the silverware.”
--Ken Boehm, National Legal and Policy Center

Historical photo - UC Regents, April 18, 1959

For decades, the UC Board of Regents has consisted of wealthy and politically connected individuals who have often been beset by charges of conflict of interest. The past is prologue.

On June 23, 1974, the Los Angeles Times published an investigation titled, “UC Regents: An Elite Club That Runs a Vast University.” The story revealed that many of the regents were millionaires with little or no background in education policy. Most had plenty of experience leveraging political connections for pecuniary gain. This wealthy group of socialites, lawyers, oil men, and industrialists was out of touch with students and the common people, the Times observed: “They drive fine cars and own boats and airplanes. They belong to the best clubs and play tennis on their own private courts.” And in their dealings with each other, “the camaraderie and gentility of a private club are maintained … Most regents consider it bad form to discuss their finances.”
        
Today, some 35 years later, this clubby mentality still rules.

A history of conflict

The UC Board of Regents was created in 1868 to govern the state’s public research universities. Over the years, usually in the wake of financial scandals or charges of conflicts of interest, its structure has been reconfigured.

Currently, the governor appoints 18 of the 26 members to 12-year terms; the regents themselves select a student representative for a one-year term. The balance of voting regents are considered ex-officio, and they are drawn from a constitutionally-mandated list of state officials that includes the governor. In other words, the regents are—and always have been—a fabulously politicized body.

          

In the past half-century, the financial pedigrees of many regents have created particular challenges for avoiding conflicts of interest. In 1965, Free Speech Movement activist Marvin Garson responded to a call by the California Federation of Teachers to “investigate the composition and operation of the Board of Regents.” He produced a well-documented study noting that, “taken as a group, the Regents are representatives of only one thing—corporate wealth.” The study observed that the prospect of conflicted interests was very real for the regents, whose “business is carried on in executive session in informal meetings of which no written record may exist. … It is entirely possible for a Regent to telephone his broker with a buy or sell order right after the Committee on Investments decides to buy or sell a big block of shares.”

          

Five years later, the California State Auditor found that Regent Edwin W. Pauley, owner of Pauley Petroleum, had personally profited when university officials steered $10.7 million dollars into one of his company’s business deals. Additionally, the auditor discovered that several regents had conflicts of interest due to business ties with a private real estate firm, the Irvine Company, which was developing the land surrounding a new campus, the University of California at Irvine. Following these revelations, the regents passed a conflict-of-interest policy prohibiting university officials from “making personal gain out of university transactions.”

The regents were also increasingly bound by state laws enacted in the ‘70s to monitor the ethical behavior of public officials. In 1972, voters passed a statewide proposition requiring open meetings of public bodies, which includes the regents. Although some secret sessions are allowed under this law, a large portion of UC’s financial records are considered part of the public record.

          

Two years later came the California Political Reform Act of 1974, which prohibits public officials from even the appearance of using their position to influence governmental decisions that might be personally beneficial. To increase transparency and accountability, each regent must now file an annual economic disclosure report listing his or her assets in California.

          

Notwithstanding these safeguards, conflicts of interest continued to arise:

• In 1978, the state auditor found that UC was improperly investing in a corporation that included a regent on its board of directors.

• In the early 1990s, the state auditor reported that some regents were improperly availing themselves of lavish travel and entertainment allowances. This audit unleashed a storm of public outrage, since the regents had simultaneously raised tuition.

• In the mid-2000s, a series of media exposés were published concerning a variety of problems at UC, including excessive salaries and benefits for UC administrators; the regents’ mismanagement of the nation’s nuclear laboratories; and the hiring of an investment firm (Wilshire Associates) with business connections to then-Regent Gerald Parsky.

• During that time period, an employees’ union revealed that then-Regent John Hotchkis had a financial interest in a firm selected to manage $430 million worth of university investments. Additionally, the head of another firm chosen to manage $311 million in UC funds turned out to be Mr. Hotchkis’ daughter.

Today, UC’s current operating budget is $20 billion. The various endowment and retirement funds totaled $63 billion at the end of 2009. With such an enormous amount of public funds in play, the regents are bound to meticulously adhere to state laws and university policies that prohibit self-dealing. It is incumbent upon those individuals who are charged with overseeing the UC pension and endowment funds to avoid influencing or voting on investment decisions that potentially, actually, or even appear to affect their personal business affairs.

The current crop of regents has failed to consistently hold itself to these ethical standards—especially when it comes to private equity investments.

The private equity fiasco

Private equity investing is attractive to sophisticated investors and large institutions because it has the potential for large returns. But unlike deals that take place on public stock exchanges—where sales and purchases are public information and regulated by the U.S. Securities and Exchange Commission—the realm of private equity is opaque, largely unregulated, and extremely difficult to exit should a deal go bad.

After Patricia Small left the UC Treasurer’s office in 2000, the number of private equity partnerships in UC’s portfolio doubled. By 2003 the amount of money placed in private equity had more than tripled, and in 2009, the university’s books carried a balance of $6.7 billion committed to 212 private equity partnerships, which consist primarily of leveraged buyout funds See Leveraged Buyout of Texas Public Utilities for additional players!--more than ten percent of the investment fund total of $63 billion!

These have not proven to be prudent investments, overall. As of spring 2009, UC’s return on the private equity portfolio was running at a negative 20 percent for the fiscal year, asserted Treasurer Marie Berggren's annual report. And according to operating reports made by Berggren to the investment committee, much of the loss to that portfolio was tied to the souring of leveraged buyouts during the recession.

In a leveraged buyout, private equity firms act as a “general partner” by arranging private investment opportunities to purchase companies or real estate. The general partner finds “limited partners”—typically institutions, pension funds, or wealthy individuals—to invest in that fund. (The limited partners have little or no say in how the fund operates since it is being managed by the general partner.) The capital provided by the limited partners is used as a down payment for the purchase, and a large bank loan covers the remainder of the sale price. (Kinda sounds a bit like kiting.)

Although leveraged buyouts can be lucrative for both the limited and general partners, the buyout can also take on a predatory quality. In this scenario, the limited partners have the most to lose.

Here’s how the darker version of these deals go down: Once a company has been acquired, the investors can off-load the responsibility for paying back the large bank loan onto the company itself. At the same time, the new owners can strip the acquired company of cash and other valuable assets to pay dividends to the general partners. Looted companies often collapse from a lack of operating capital brought about by trying to pay off the combination of the unsustainable debt burden and the dividend payouts.

Collapse can cause the limited partners to lose their entire investment. The private equity firm’s general partners may survive because they can charge their investors management fees regardless of a deal’s outcome. While less predatory leveraged buyout acquisitions can certainly benefit both the acquired company and all of its investors, the companies involved in the UC deals discussed in this story, for the most part, do not fall into the beneficial category.

In 2009, Ms. Berggren reported that the average annual “internal rate of return” for the retirement plan’s private equity portfolio since 1979 was a mere 1.8 percent. But fixed-income investments had generated an average annual rate of return of 6 percent over a similar period. The only sector of the portfolio that fared worse than private equity was private real estate.

After Ms. Small left her post as UC treasurer, the university’s allocation to private real estate deals increased from nearly zero to $4.5 billion in less than a decade. By mid-2009, the private real estate portfolio had lost an astonishing 40 percent of its value.

Nonetheless, this notable shift in strategy toward alternative investments—leveraged buyouts, in particular—has had clear benefits for individual regents, as detailed in this investigation. And good government experts question the ethics of these investments. “The investment committee’s act of increasing UC’s allocation to private equity was an extraordinary conflict of interest,” said Robert Weissman, president of Public Citizen. “Some of these regents obviously had vested interests.”

Throwing good money after bad

The private equity losses should not have surprised the regents. In 2008, Ms. Berggren stated in her annual report to the investment committee that private equity and private real estate investments were “overweighted” relative to other financial vehicles during the boom years. She also noted that the regents’ preference for private investment was disproportionately impacting UC during the economic recession.

Amazingly, in the face of the disastrous performance of private equity and private real estate, Mr. Wachter and Mr. Blum have continued to advise Ms. Berggren to increase UC’s investments in these two ailing sectors. (Mr. Parsky left the board in 2008.)

At the February 2009 meeting of the regents’ investment committee, Mr. Wachter, then the committee chair, observed that although private equity and real estate investments were already “overweighted” in the portfolio, they should be “even more overweighted.” (Wow...that's it...just...wow.)

At an investment committee meeting three months later, Mr. Blum, who was then the chairman of the board of regents, urged his colleagues to continue on the same questionable course. According to the meeting minutes, “Chairman Blum expressed concern that the University might become too risk adverse.”

At the same meeting, Mr. Wachter suggested that UC buy bundles of distressed real estate and mortgage debt to profit off of the collapse of the housing market. (Though a matter of continued debate, experts say such investments are a risky undertaking since another wave of home foreclosures is expected). Recently, Mr. Wachter has championed increasing the volume of UC’s investments in risky timber and oil ventures.

But the entire investment committee is not in lockstep with Mr. Wachter’s and Mr. Blum’s predilection for alternative investments. Regent George Marcus, a real estate executive who sits on the committee, has consistently opposed them. In a March 2010 meeting, he described this strategy of over-emphasizing private equity as the equivalent to “gambling in Las Vegas.”

Posted by Peter Byrne on 09/22/10