MOORLACH UPDATE — Contrasts — March 26, 2011

We had a wonderful day hike this morning in Loma Ridge, Bee Flat Canyon, and Limestone Canyon with Michael O’Connell, Executive Director of the Irvine Ranch Conservancy.  I am fascinated by California foothills, oak trees, and sycamores.  It was great walking in God’s country.

Here is a photo I found on the internet of Limestone Canyon, which is known for its California live oak grove.


And here is a summer plein air painting by Esther J. Williams that I also found (to give you a sense of the beauty).


I hope to provide more photos of our hike in future UPDATES.

The weather was great with beautiful rain clouds that never threatened us.  We had some 800 hikers who used their cell phones to participate in a conference call to listen to Michael O’Connell describe the numerous flowers we were observing on our trek.  OK, the second sentence is not true.  We had a small group and the experience was very personal and enjoyable.  Thank you to all who were able to join us today.  (I also want to thank John Gump from OC Parks for assisting this morning.)

Today finds me in two articles, one in the OC Register where I am exercising some grace and one in the LA Times where I am not.  Let me explain. 

When the County suffered its bankruptcy filing woes, one could put a significant amount of blame on Merrill Lynch.  The OC bankruptcy greatly impacted Merrill Lynch’s business.  I took a lot of flack, starting back in 1998, by admitting to reporters that I wanted to do business with Merrill Lynch again.  They had a very large inventory and they would handle our account better than any other in the nation.  Merrill Lynch would not mess up on one customer twice in a short period of time.  Inconceivable.  When the OCTA Finance and Administration Committee met last Wednesday, we interviewed the top half of the firms that bid to do the agency’s audit.  Mayer Hoffman McCann (MHM) was one of the four interviewed and is currently OCTA’s auditor.  Staff is happy with MHM and they did very well in the interview. 

The elephant in the room is the city of Bell.  MHM made the argument that this audit was an anomaly and did not reflect the work product of the firm as a whole.  Based on a recently released peer review opinion by Harold Monk of the accounting firm of Carr Riggs & Ingram, LLC., which confirmed that this was the case.  Mr. Monk is a Certified Fraud Examiner and a nationally-known expert on accounting and auditing standards.  Monk recently served as the Chairman of the Auditing Standards Board for the American Institute of Certified Public Accountants (AICPA).  He is a former member of the Board of Directors of the AICPA and served as chairman of the Private Companies Practice Section of the Institute.  In 2002 he was appointed to the U.S. Government Accountability Office’s Advisory Committee on Auditing Standards by US Comptroller General David Walker, where he continues to serve.  Monk also recently completed four years of service on the Financial Accounting Standards Advisory Council, an advisory group to the Financial Accounting Standards Board.  Let’s just say that Mr. Monk is an accountant’s accountant.

What to do?  Dismiss MHM out of hand?  Or leave them in the hunt and see where the scores landed?  They scored high.  We discussed the situation at length and decided to exercise some grace.

I have always disclosed that my eldest son works for MHM on every board that I serve on that has them on retention.  My son recently left for a few reasons.  Thanks to his father, MHM rarely had my son doing audits within the county.  Consequently, my son spent most weeks in a hotel room in Victorville or Indio or you name the locale.  Secondly, my son was happy at the firm and worked very hard for them, but he had a poor manager.  Most people do not leave good jobs, they leave bad managers.  And thirdly, he was frustrated by how the firm handled the communications concerning the city of Bell audit, both internally and externally.  He has since been hired by another great accounting firm that also does municipal audits.

We’ll see how Monday’s OCTA Board meeting goes.  I have no skin in the game.  I do have a long-term respect for MHM, as its earlier iteration as Conrad & Associates was a friendly competitor of mine a couple of decades ago.

As a board member of the Orange County Employees Retirement System, we dismissed a portfolio manager because his resume on his website was misstated.  Consequently, hanging onto a money manager that harmed your system (not that of another system), makes the fact that Apollo is still a portfolio manager for CalPERS a big story.  I guess CalPERS is exercising some grace as well.


OCTA considers hiring city of Bell’s auditor

By Tony Saavedra

The Orange County Transportation Authority is poised to award a $1.1 million, three-year contract to the same Irvine audit firm that gave the city of Bell a clean bill of fiscal health.

OCTA’s finance committee has recommended the full board on Monday approve the contract with Mayer Hoffman McCann, despite accusations by state controller John Chiang that the firm rubberstamped audits in Bell

Orange County Supervisor John Moorlach, who sits on the OCTA committee, said the firm deserves another chance because it is highly unlikely to make the same mistakes.

“We knew we could slam them, but we also felt they made a good presentation,” Moorlach said. “You’ve got a firm that has … taken a lot of hits. Is that worth destroying them over?”

Moorlach disclosed that his son once worked for the company.

Officials from Mayer Hoffman McCann could not be reached for comment. But in a prior prepared statement, the firm said that it was a victim of deception at Bell.

Chiang said in December that Mayer Hoffman McCann failed to follow generally accepted field standards that would have led them to identify some if not all of the problems identified in a state audit.

The state controller said Mayer Hoffman McCann did not adequately look for documentation and evidence to support the city’s records and did not document the reason for deficit balances. Instead the firm relied primarily on comparisons to prior year financial statements, looking deeper only when things changed considerably from year to year, Chiang said.

Also, he said, the firm only looked at the city’s general fund, although salaries were charged to other funds. Had the firm reviewed the records for key employees, it would have found that the chief administrative officer had salary agreements with five other city funds.

MHM released a statement in response to Chiang, saying that the audit firm was subjected to a massive scheme of collusion that reached every layer of Bell’s government.

“The facts show that while there are areas in which procedures should have been strengthened, the audit was in compliance with the standards that exist today,” the statement said. “But under current audit standards the sort of unprecendented and pervasive collusion to deceive auditors as happened at the city of Bell may not be detected even by a properly planned and performed audit.”

The board meets Monday at 9 a.m. at 600 S. Main St. in Orange.


Apollo moves past CalPERS woes

The private equity firm portrays itself as a victim in the public pension fund scandal.

By Stuart Pfeifer and Nathaniel Popper, Los Angeles Times

It’s the name behind some of the most recognized brands around, including Carl’s Jr. restaurants, Norwegian Cruise Lines and Smart & Final warehouse stores.

It’s also the name that came up, again and again, in a recent independent report about corruption inside the nation’s largest public pension system.

Apollo Global Management, a New York private equity investment firm, was not accused of wrongdoing in its dealings with the California Public Employees’ Retirement System. But the report detailed how Apollo had paid tens of millions of dollars to a former CalPERS board member who helped it land billions of dollars of investments from the massive pension fund.

The former board member, Alfred J.R. Villalobos, plied CalPERS staff with gifts, luxury travel, a job offer and a Lake Tahoe condominium to persuade them to invest in firms he represented, including Apollo, the report said.

In July 2007, CalPERS put up $600 million to buy about 9% of the non-voting shares of Apollo, which operates a West Coast office in Los Angeles. Afterward, Apollo paid Villalobos $13 million in fees for helping secure the deal, according to the report commissioned by CalPERS.

The fact that Apollo had so much money to spend on a placement agent is a testament to its vast resources. The company, which is preparing an initial public stock offering, reported that it had $67.6 billion in assets under management last year and $2.1 billion in revenue, according to a prospectus it filed with federal securities regulators.

The firm is one of the giants in the private equity industry, and like its peers — the Carlyle Group and TPG Capital, among others — its operations had been a closely guarded secret until it opened up recently in preparation for the stock offering, which is expected in the next few months.

The core of Apollo’s business is raising money to buy companies that have hit on hard times, including, more recently, Caesar’s Entertainment and Coldwell Banker. The firm then makes changes at the companies and sells them once they are worth more.

"We are contrarian, value-oriented investors in private equity," the company said in the prospectus filed with the Securities and Exchange Commission. It searches for "high-quality companies with stressed balance sheets."

Apollo also has branched out into the hedge fund and real estate businesses.

The firm is led by Leon Black, a former protégé of Michael Milken at high-risk securities operation Drexel Burnham Lambert Group Inc. When Drexel went under in 1990, Black and a few colleagues founded Apollo.

Black, the son of a rabbi-turned-food-industry tycoon, is an avid art collector and sits on the boards of the Metropolitan Museum of Art and the Museum of Modern Art. His net worth was recently estimated at $3.5 billion by Forbes magazine.

Over the years Black and his team have developed a reputation for their willingness to fight it out over deals.

"They stick up for the investors," said Paul Schaye, the founder of Chestnut Hill Partners, a private equity advisory firm. "They want to get transactions done, and sometimes that involves sharp elbows."

The financial crisis hit the firm hard, causing it to delay earlier efforts at a public offering of stock. But last year Apollo’s portfolio grew 26% and generated a profit of $94.6 million.

The upcoming public offering could raise as much as $417 million, which the firm wants to use to expand its operations. The deal is structured to keep decision making power firmly in the hands of Black and his partners.

Apollo does not appear to have been particularly fazed by the CalPERS investigation. In its regulatory filings, the company said it expects that the probe "will not have a material adverse effect on its financial statements."

"Apollo believes that it has handled its use of placement agents in an appropriate manner," the filing said.

The CalPERS report, the culmination of a 17-month investigation by a Washington law firm, focused blame on Villalobos, former CalPERS Chief Executive Federico Buenrostro Jr. and others at the pension fund.

Last week’s report said Villalobos had turned Buenrostro into "a puppet," promising him a lucrative job, lavishing him with gifts and securing a valuable advocate for Apollo and other Villalobos clients inside CalPERS.

Apollo portrayed itself as a victim in a court filing in Nevada, where Villalobos has filed for bankruptcy. The company submitted a claim against Villalobos, saying he violated state and federal law by lavishing CalPERS staff with gifts, causing Apollo "reputational harm."

Apollo spokesman Charles Zehren declined to comment.

The conduct described in the report comes amid national criticism of public pensions in Wisconsin, Iowa and California. Orange County Supervisor John M.W. Moorlach, a longtime critic of what he described as overly generous pensions for public employees, said he hoped CalPERS divested from Apollo as a result of the accusations.

"If there’s an ethical issue, you get out," Moorlach said. "If it hasn’t happened already, it’s because Apollo has ingratiated itself too far with the board of CalPERS."

The relationship between Apollo and CalPERS remains strong. Last year, Apollo said it no longer would pay placement agents such as Villalobos to help it land business with CalPERS.

"We believe that in proactively addressing these issues with our partner and affirming its priorities and objectives, we have established a foundation to enhance and grow our long-term partnership," Black said in a statement released at the time.

Joseph Dear, CalPERS chief investment officer, said the pension system is pleased with its relationship with Apollo.

"If you look at the record, the Apollo investments, with one exception, have been outstanding in their returns."

Times staff writer Marc Lifsher contributed to this report.

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