In the wake of cratering pension fund returns and the filing of lawsuits against two former top employees, CalPERS, the giant California pension fund, commissioned a report by D.C. law firm Steptoe and Johnson.

The report is scathing, saying former CalPERS CEO Federico Buenrostro steered investments by CalPERS to politically connected firms of his choice, "pressing its investment staff to pursue particular investments without evident regard for their financial merits." Further, the day after he quit (or was forced out), he went to work for former CalPERS board member Alfred J.R. Villalobos, acting as an agent for investment companies wanting CalPERS to invest with them.

Buenrostro did not leave until staffers complained about his behavior to the board, who finally replaced him. This unfortunately shows two rather unsavory things about CalPERS. First, they clearly had no checks and balances to safeguard against influence peddling. It is inexcusable for the biggest public pension in the country to have apparently non-existent ethical safeguards. Second, Buenrostro was allowed to still do business with CalPERS after leaving. At the very least they should have had a rule banning such behavior for a high-ranking employee for several years after leaving. But they had no such rule.

The report says Buenrostro was a "puppet" of Villalobos, who earned more than $50 million in placement fees. While at CalPERS, Buenrostro and others received lavish gifts from Villalobos. It seems rather clear that the quality of investments CalPERS would make through such dubious and ethically challenged means was of secondary concern, at best.

Medco Health Solutions retained Villalobos as a consultant for $4 million, then got a $26 million contract to handle drug benefits for CalPERS. This is being investigated by both California and the Securities and Exchange Commission. CalPERS finally dropped Medco as their drugs-benefit provider just last week, which seems an inordinately long time to deal with something this apparently ethically comprised. In an almost comedic moment, Medco CEO David Snow promised to release more details about their dealings with CalPERS. Yah, if Medco gets subpoenaed, you bet he'll release them. I mean really, what a silly statement.  In the meantime, CalPERS still owns 1.1 million shares of Medco.

CalPERS has taken major steps to address these problems, says the report. But it also warns that the next generation of placement agents may operate in new and different ways, especially when related to hedge funds, real estate, and private equity.

Um, why not just ban placement agents instead? Are they really needed? I think not. Instead, investment firms who seek CalPERS' business should deal with them directly, with no intermediaries.  Placement agents provide no added value and essentially are parasites, and the possibilities for corruption when using them are obvious.

Any new rules CalPERS has established must be enforced, and there must be an outside auditor and investigator with full power to ensure this happens. CalPERS handles money for public employee retirees. It should be held to the highest of standards.