WASHINGTON – The Securities and Exchange Commission and a U.S. attorney have charged a former pension fund official and two brokers with securities fraud over allegations they orchestrated a pay-to-play scheme to steer billions of dollars of business from a New York pension fund to certain firms in exchange for gifts, vacations, cocaine and prostitutes.
The SEC's complaint, filed in the U.S. District Court for the Southern District of New York in Manhattan, names Navnoor Kang, the director of fixed income for the New York State Common Retirement Fund from January 2014 to February 2016, as well as brokers Deborah Kelley and Gregg Schonhorn.
The complaint does not identify the brokers' firms but Financial Industry Regulatory Authority documents show that Kelley worked at Birmingham, Ala.-based Sterne, Agee & Leach Inc., and St. Louis-based Stifel Nicolaus & Co. during the period covered by the complaint and Schonhorn worked for Memphis-based FTN Financial Securities Corp.
U.S. Attorney Preet Bharara's indictment contains six criminal counts against Kang related to securities fraud, honest service wire fraud and obstruction of justice. The indictment contains five criminal counts against Kelley, including four related to securities fraud and honest services wire fraud and one on conspiracy to obstruct justice. Schonhorn, who has pled guilty and admitted his participation in the scheme, was not named in the indictment.
None of the individuals' lawyers returned requests for comment.
Kang is alleged to have used his position to direct up to $2.5 billion in state pension business to Kelley and Schonhorn in exchange for gifts like expensive watches, vacations, concert tickets, cocaine and prostitutes.
"Today we allege a classic, quid-pro-quo bribery scheme at the New York State Common Retirement Fund, the third largest pension fund in the country," said Bharara. The NYSCRF held about $184 billion in assets in trust for more than one million retirees and other beneficiaries.
"We allege that rather than compete fairly for business from the New York State Common Retirement Fund's $50 billion fixed income portfolio, Schonhorn and Kelley bribed their way in, lining their pockets with millions in commissions along the way," said LeeAnn Gaunt, chief of the SEC Enforcement Division's public finance abuse unit.
The SEC is seeking an order of permanent injunction, disgorgement of ill-gotten gains plus interest and an unspecified amount of civil penalties. The commission is also seeking a conduct-based injunction against Kang that would permanently enjoin him from participating in any decisions involving investments in securities by public pensions as a trustee, officer, employee, or agent.
The U.S. attorney's conspiracy to commit securities fraud charge against both Kang and Kelley carries a maximum penalty of five years in prison and a $250,000 fine or twice the gross gain or loss from the offense. The other charges each carry maximum penalties of 20 years and between $250,000 and $5 million in fines.
This is not the first pay-to-pay case involving the NYSCRF. The SEC previously brought charges against 17 defendants over a scheme that extracted sham finder fees and other payments and benefits from investment management firms seeking to do business with the retirement fund. Litigation over the SEC claims was concluded in 2014 with a final judgment from a U.S. district judge.
The actions that led to the most recent SEC and Justice Department charges began in or around 2010 when Schonhorn was introduced to Kang through a colleague. Kang was working for an asset management firm at the time that he met Schonhorn and Kelley. Kang later moved to another asset management firm and while there had a business relationship with Kelley and accepted an $8,000 Rolex watch from Schonhorn. He was eventually fired from his asset management job after the firm discovered least 54 instances where he received benefits and entertainment without disclosing them.
With the help of Schonhorn and Kelley, who served as his reference, Kang was hired at the NYSCRF as its director of fixed income in January 2014. He lied about the reasons for his previous firing to get the job, according to the SEC.
Kang's role at NYSCRF meant he was responsible for about $50 billion of the fund's assets that were held in fixed-income securities. Under New York state law, Kang was a fiduciary of the fund, meaning he was prohibited from "receiving any consideration from any party other than the Office of the State Comptroller in connection with a transaction involving the fund."
Soon after taking the job, Kang began receiving more gifts and entertainment from Schonhorn and Kelley.
In February 2014, Schonhorn and Kang went on a "lavish" trip to Montreal, at the suggestion of Kang, according to the SEC. Schonhorn, who picked up all the expenses for the trip, paid more than $825 for airline tickets, roughly $720 for hotel rooms, and $3,500 for meals, drinks, and cash for cocaine.
In total, the SEC found that Schonhorn paid about $160,000 on more than 100 separate transactions to benefit Kang. The transactions included more than $50,000 spent on hotel rooms, about $25,000 spent at bars and lounges, $25,000 spent at restaurants, a $17,400 Panerai watch, and a $4,200 Hermes bracelet for Kang's girlfriend. Schonhorn paid the expenses on his own and did not expense them to his firm.
Kelley also took Kang on vacations, including an October 2014 trip to New Orleans with Kang and his girlfriend. Kelley paid $8,000 for meals, drinks and entertainment during the trip, including $6,000 for VIP tickets to a Paul McCartney concert. She did not include Kang and his girlfriend's names on the expense reports she subsequently submitted and instead listed clients from a private firm, according to the SEC.
She later took Kang, his girlfriend, and several other people on a ski trip to Park City, Utah. During that vacation, she spent more than $11,000 for limousine services, skiing, hotel rooms, dinners, and drinks, all of which she similarly expensed to her firm without listing Kang's name.
In exchange for those gifts, Kang initially worked through a fund-approved broker to direct business to Schonhorn and Kelley's firms before taking steps to get the two dealers' firms on the list of the fund's approved brokers, according to the SEC. In the period of time when the NYSCRF was soliciting applications for brokers to become part of the approved list, Schonhorn spent more than $38,000 on dinners, drinks, concert and sport tickets, illicit drugs, and prostitutes for himself and Kang.
In total, Kang was able to direct $2.38 billion in fixed income securities trades to Schonhorn's firm during his tenure with the pension fund and nearly $1 billion to Kelley's firm. Both Schonhorn and Kelley received large commissions because of the business, according to the SEC.
The fund eventually fired Kang on Feb. 22, 2016. Kang had been talking with Kelley and Schonhorn about how they could cover up their past activity both before and after he was fired, according to the SEC.
