SEC Charges NYC Pension Official, Brokers in Pay-to-Play Scheme

The Securities and Exchange Commission has announced fraud charges against a former official of the nation’s third-largest public pension fund and two brokers in a scheme designed to steer billions of dollars to certain firms in exchange for “luxury gifts, lavish vacations, and tens of thousands of dollars spent on cocaine and prostitutes.”

Navnoor Kang, who served as the director of fixed income for the New York State Common Retirement Fund from January 2014 to February 2016, allegedly used his position to direct up to $2.5 billion in state business to Gregg Schonhorn and Deborah Kelley, who were registered representatives at two different broker-dealers. In exchange for this business, which the SEC says netted Schonhorn and Kelley “millions of dollars in commissions,” the brokers provided Kang with tens of thousands of dollars in benefits, including:

  • more than $50,000 spent on hotel rooms in New York City, Montreal, Atlantic City, and Cleveland;
  • approximately $50,000 spent at restaurants, bars, lounges, and on bottle service;
  • $17,400 on a luxury watch for Kang;
  • $4,200 on a Hermes bracelet for Kang’s girlfriend, at Kang’s request;
  • $6,000 on four VIP tickets to a Paul McCartney concert in New Orleans; and
  • an extravagant ski vacation in Park City, Utah, including a $1,000-per-night guest suite.

According to the SEC’s complaint, Kang, as a fiduciary to the fund, had a duty to disclose his solicitation and receipt of the gifts and entertainment he received from Schonhorn and Kelley but failed to do so. The SEC says that Schonhorn and Kelley not only knew Kang was not disclosing his activities to the fund, but took steps to keep the benefits a secret. Kang, in soliciting and accepting the benefits without any disclosure, violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, while Schonhorn and Kelley participated in the fraudulent scheme and provided substantial assistance to Kang in concealing the scheme from the fund, thereby violating the antifraud provisions and aiding and abetting Kang’s fraud.

“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 Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit. “Moreover, they allegedly assisted Kang in covering up his misdeeds, with Kelley going so far as to help Kang obstruct the SEC’s investigation.”

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Kang, Schonhorn and Kelley, charging them with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Schonhorn and Kelley also are charged with aiding and abetting Kang’s violations. The SEC is seeking an order of permanent injunction and disgorgement plus interest and penalties. Additionally, the SEC is 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.

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