The Securities and Exchange Commission has charged two brokers and a former official of the New York State Common Retirement Fund with fraud in a pay-to-play scheme involving billions of dollars of business that the official steered to certain firms in exchange for at least $180,000 spent on luxury gifts, lavish vacations, cocaine and prostitutes. Criminal charges against all three were also filed by the U.S. attorney’s Office for the Southern District of New York.
The accused are Navnoor Kang, former director of fixed income for the New York State Common Retirement Fund, the country’s third largest pension fund; and brokers Gregg Schonhorn and Deborah Kelley.
In the SEC filing, Schonhorn is identified as “Broker 1” who works in a firm headquartered in Nashville, Tennessee, and Deborah Kelley is called “Broker 2,” working on a firm headquartered in Birmingham, Alabama. A Google search, confirmed by the Financial Industry Regulatory Authority’s BrokerCheck, shows that Schonhorn works at the New York office of FTN Financial Securities (headquartered in Nashville).
The same search found that Deborah Kelley worked at Sterne Agee, headquartered in Birmingham, Alabama, during much of the time the alleged fraud took place, followed by Seaport Global Securities, from which she “separated after allegations in August 2015” and Stifel, Nicolaus & Co., “investigation, 9/14/2015.”
According to the SEC complaint, Kang directed $2.38 billion in fixed income securities trades to Schonhorn, earning the broker often hundreds of thousands of dollars per month in commissions. Schonhorn, in turn, allegedly provided Kang with the equivalent of $160,000 in gifts, including expensive dinners, entertainment at strip clubs, hotel stays, airfare and tens of thousands of dollars’ worth of cocaine and services from prostitutes.
Kelley executed nearly $1 billion in fixed income trades on behalf of the pension fund, for which she also received sizable commissions while allegedly spending nearly $20,000 on concert tickets and hotel stays for the benefit of Kang, according to the complaint.
Altogether, according to SEC press release, the brokers provided Kang with:
- more than $50,000 spent on hotel rooms
- approximately $50,000 spent on restaurants, bars and bottle service
- $17,400 on a luxury watch
- $4,200 on a Hermes bracelet for Kang’s girlfriend
- $6,000 on four VIP tickets to a Paul McCartney concert in New York
- a ski vacation in Park City, Utah, costing $1,000 per night for a guest suite
“This action demonstrates that the SEC will not tolerate public officials who abuse public pension funds to satisfy their own greedy and wanton desires,” said Andrew Ceresney, director of the SEC Enforcement Division, in a statement.
LeeAnn Ghazil Gaunt, chief of the division’s Public Finance Abuse Unit, in her statement, said, “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. Moreover, they allegedly assisted Kang in covering up his misdeeds, with Kelley going so far as to help Kang obstruct the SEC’s investigation.”
The complaint notes that Schonhorn and Kelley met Kang years before he worked at the New York State pension fund when he was a bond trader at an asset management firm, from which he was eventually terminated for accepting gifts from broker-dealers that violated the firm’s compliance and ethics rules and failing to report them.
Schonhorn and Kelley stayed in contact with Kang and, according to the SEC complaint, helped him in his job search with Kelley providing a reference to the New York State Pension Fund.
The SEC is charging all three defendants with violations of several sections of the 1933 and 1934 Securities Acts, and Schonhorn and Kelley with aiding and abetting Kang’s violations. It’s seeking an order of permanent injunction and disgorgement of funds plus interest and penalties and is demanding a jury trial.
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