This new Motley Fool series examines things that just aren't right in the world of finance and investing. Here's what's got us riled today. If something's bugging you, too -- and we suspect it is -- go ahead and unload in the comments section below.

Today's subject: You know what stinks most about greed? It corrupts good guys, too. Good guys like the shareholder advocates at CalPERS, otherwise known as the California Public Employees' Retirement System. CalPERS is the nation's largest pension fund, with roughly $200 billion in assets under management. Its top holdings as of June 2008 included ExxonMobil (NYSE:XOM), AT&T (NYSE:T), and IBM (NYSE:IBM).

CalPERS gets today's dunce's cap for allowing what appears to have been a cozy, multiyear relationship between its investment staff and Al Villalobos, a former director who secured billions in CalPERS cash for fund managers in exchange for more than $50 million in fees for his placement agency, Arvco Financial Ventures. An internal review of all CalPERS dealings with placement agencies is now under way.

This is a complicated, multipart story that, according to The Wall Street Journal, hinges somewhat on the relationship Villalobos maintained with senior CalPERS staff. That includes former CEO Fred Buenrostro, who now works at Arvco along with Villalobos, preparing research and marketing material.

In its investigation, the Journal cites people "familiar with the matter" who say that Buenrostro "pressured them to look favorably on deals where Arvco was a placement agent."

Is it any wonder the SEC has proposed a ban on using placement agencies for state pension funds? If CalPERS and its peers are Congress, placement agents are lobbyists for fund managers.

And that should scare the bejeezus out of you. In the legislature, these sorts of I'll scratch-your-back-if-you-scratch-mine relationships have helped to make every public policy debate of the past decade a torturous mess of language and nonsense -- the current health-care debate included. But lobbying itself isn't the issue here; only when the lobbyist (or the placement agent, or the publisher) suffers a conflict of interest do things get really sticky.

Ask Katherine Weymouth. The publisher of Washington Post's namesake newspaper was one of the brain-dead trust behind an ill-conceived plan to host sponsored "policy dinners" with Beltway insiders at her home. Trouble was, someone planned to sell sponsorships of these events for as much as $250,000 apiece. The dinners were canceled after news of the plan broke and the paper's editorial integrity was questioned.

Similarly, CalPERS' integrity is now in question thanks to the Journal report.

Why you should be indignant: What makes this story so galling is CalPERS' history. In years past, the pension fund has been bold in representing the interests of common investors. Among its more notable activities:

  • In June of 2003, CalPERS opposed stock-options largesse at eBay (NASDAQ:EBAY) and voted against retaining PricewaterhouseCoopers as the company's auditor because it wasn't truly independent. PwC had been a consultant to eBay even as it was auditing its books. By September of that same year, CalPERS was leading a campaign to eliminate auditor conflicts of interest.
  • In December of 2003, CalPERS sued the New York Stock Exchange for $150 million because of what it said was improper trading by its specialist firms. Less than two years later, in April of 2005, the SEC would settle a $20 million complaint with the exchange over -- wait for it -- its failure to properly oversee its specialists.
  • In March of 2004, CalPERS led the campaign to oust Walt Disney (NYSE:DIS) chief executive Michael Eisner. He resigned 18 months later. Similar campaigns followed, targeting incumbent board members at Coca-Cola (NYSE:KO) and Citigroup (NYSE:C), among others.
  • In March of 2008, CalPERS named Cheesecake Factory as one of its top five underperformers in a variety of categories, including corporate governance. The fund's trustees have since sought several reforms, including a "clawback" policy in which executive compensation achieved via fraud or other illicit behavior would be repaid to the company and its shareholders.

These and other fights have largely been of benefit to investors, and in many ways CalPERS is still fighting the good fight -- an admirable trait. The Villalobos incident stains this otherwise Foolish track record.

What now? CalPERS has hired the lawyers at Steptoe & Johnson to conduct a formal review of its arrangements with placement agents. That's a good first step, but more has to be done. CalPERS also needs to give these bloodhounds unobstructed access to documents, employees, and advisors. Their findings should be published in full view of, well, everyone.

We're all guilty of hypocrisy from time to time. CalPERS is guilty of it here, and that's a blow to shareholder activism because it raises a question no one at CalPERS wants to hear: How can we trust your judgment on corporate governance if you can't properly police yourself?

And that's just one question. What questions do you have for CalPERS? How embarrassing is this incident really? Is it a setback for shareholder activism, or a simple mistake that's not worth sweating?

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Fool contributor Tim Beyers owned shares of IBM at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Yes, the Fool's disclosure policy sings in the rain. So what?