N.Y. Pay-to-Play Plot Fueled by Bribes, U.S. Says

  • Fund director allegedly got bribes of drugs, McCartney tickets
  • ‘Pay-to-play is back,’ U.S. Attorney Preet Bharara says

When Navnoor Kang interviewed for a job to manage fixed-income investments for New York state’s pension fund, he lied about why he was fired by his former employer -- failing to disclose that he accepted concert tickets and other gifts from clients, authorities said.

He got the position with the New York State Common Retirement Fund in January 2014 and soon reverted to old habits, handing out the state’s fixed-income business in return for cocaine, concert tickets, cash and prostitutes, they said.

Kang, 37, was accused by the U.S. on Wednesday of participating in a two-year scheme to accept at least $180,000 worth of bribes, including a $17,400 Panerai watch and a $4,200 Hermes bracelet for his girlfriend. One broker, Deborah Kelley, was charged with providing Kang with bribes, while federal prosecutors in New York announced that a second broker, Gregg Schonhorn, pleaded guilty and is cooperating with the government.

The case exposes the seamy side of the management of pension money, where investment professionals sometimes engage in so-called pay-to-play tactics to win lucrative commissions. Along with cash and prostitutes, the alleged bribes included ski trips to Utah and a long weekend in New Orleans for a pension fund official overseeing tens of billions of dollars in assets held on behalf of more than 1 million state employees.

Earlier Scandal

It also comes on the heels of another pay-to-play scandal at the pension fund, one in which the former Comptroller Alan Hevesi pleaded guilty in 2010. In the wake of that scandal, New York instituted safeguards that were designed to prevent similar abuses.

“Pay-to-play is back at the New York State Common Retirement Fund,” U.S. Attorney Preet Bharara said at a press conference announcing the charges. The case is “an age-old and classic tale of quid pro quo corruption.”

For more on New York’s previous pay-to-pay scandal, click here

Brian McEvoy, an attorney for Kang, didn’t immediately respond to telephone messages seeking comment. Kang, who was fired by New York state in February, was scheduled to appear in federal court in Oregon, where he lives.

Schonhorn, 44, hung up when called for comment. Kelley, 58, declined to comment when contacted at her office in California, as did her lawyer.

The government didn’t disclose the names of their firms at the time of the alleged crimes. However, Schonhorn has worked at FTN Financial Securities Corp. since 2013, according to the Financial Industry Regulatory Authority Inc. Sally Pace, an FTN Financial spokeswoman, said Schonhorn was fired Wednesday. Kelley worked at Sterne, Agee & Leach at the time of the alleged crimes, according to spokeswoman Danae Boyd. The division Kelley worked for has been sold, and Boyd declined further comment.

New York Comptroller Thomas DiNapoli said he was “outraged” by Kang’s “betrayal of his responsibilities.” The pension fund “has absolutely no tolerance for self-dealing," he said in a statement. Kang “secretly circumvented our rigorous ethical standards and policies.”

Rolex Watch

Court papers describe a brazen scheme.

Kang knew Schonhorn and Kelley before he arrived at the pension fund, the Securities and Exchange Commission said in a lawsuit against the three. In 2012, Kang had secretly accepted an $8,000 Rolex from Schonhorn in exchange for business from Kang’s firm at the time, authorities said.

Later that year, Kang was investigated by his employer for accepting Rolling Stones tickets from a representative of an unnamed broker, they said. The employer found 54 other instances where Kang didn’t report benefits or entertainment he received, and he was fired, authorities said. According to his LinkedIn profile, Kang worked as a senior fixed-income trader at Guggenheim Partners at the time. A Guggenheim spokesman didn’t have an immediate comment.

While looking for work in 2013, Kang received help in his job search from Schonhorn and Kelley. Kelley provided a reference to the New York pension fund, authorities said.

Skirted Rule

In his new post as director of fixed income and head of portfolio strategy, Kang was responsible for investing more than $53 billion in fixed-income securities, overseeing a team of seven investment officers.

Kang initially told Schonhorn he was prohibited from accepting benefits or entertainment, a rule he soon skirted, authorities said. A month into the job, at Kang’s suggestion, he and Schonhorn went on a “lavish” trip to Montreal, the SEC said. Schonhorn picked up the tab for airline tickets, hotel rooms, $3,500 in meals and drinks and cash for cocaine, according to the agency.

At the time, Kelley’s and Schonhorn’s employers weren’t on the approved list to do business with the pension fund. But Kang arranged a fix, so-called “step-out” trades that were routed through approved brokers, but shared with the duo’s employers, which resulted in the pension fund paying higher commissions, the U.S. said.

Kang soon arranged for Kelley’s and Schonhorn’s employers to be approved to do business directly with the pension fund, prosecutors said, and the bribes “escalated.”

Hotel Rooms

From February 2014 to May 2016, Schonhorn spent about $160,000 on Kang on more than 100 separate transactions: $50,000 in hotel rooms in New York City, Atlantic City, Montreal and Cleveland; $25,000 on bars, lounges and bottle service; $25,000 at restaurants; and $4,200 on the Hermes bracelet for Kang’s girlfriend, purchased at Kang’s request, according to the SEC. Prosecutors said the gifts also included drugs, strip clubs and prostitutes.

The two coordinated receipt of the bribes through the messaging service WhatsApp in an effort to keep their communications secret, according to prosecutors.

For her part, Kelley rewarded Kang with travel. After she was warned by a colleague at Sterne Agee not to spend money entertaining state pension employees, she arranged a 2014 trip to New Orleans with Kang and his girlfriend. Kelley spent $8,000 on meals, drinks and entertainment, including $6,000 for four VIP tickets to a Paul McCartney concert, authorities said. She submitted the expenses to Sterne Agee, omitting the names of Kang and his girlfriend, they said.

In February 2015, Kelley arranged a junket for Kang and his girlfriend to Park City, Utah, authorities said. She submitted the $11,000 tab to Sterne Agee.

Business Boomed

Lavishing Kang with gifts and cash paid off for Schonhorn and Kelley, prosecutors said. Kang steered more than $2 billion in fixed-income business to their firms, generating millions of dollars in commissions. Schonhorn’s firm, FTN Financial, became the third-largest broker dealer with which the pension fund did business in domestic bonds. Schonhorn himself often got hundreds of thousands of dollars in monthly commissions, authorities said.

The scheme began unraveling in 2015. That August, Kelley was fired by Sterne Agee after an internal investigation in which she lied about her guests at the Park City ski trip, according to the SEC.

In October 2015, Kelley and Kang hatched a cover story that Kelley used in her response to investigations by the SEC and Finra.

“She testified she only paid for some small expenses” for Kang, and “Kang reimbursed her with cash and rounds of drinks," the SEC said. She didn’t disclose the New Orleans trip, despite being asked if there were any additional expenses.

In January 2016, Kang learned that Kelley decided to come clean about the Park City trip and sought his ex-girlfriend’s help, the SEC said. She wouldn’t take his call.

Kang then asked Schonhorn if he knew someone who could create fake hotel receipts, authorities said. Schonhorn called the ex-girlfriend and asked her to send $4,000 to Kelley for the Park City trip, pretending it was an oversight, the U.S. said. She refused.

In a last-ditch effort, Kang had a colleague hand deliver a check for $4,500 to Kelley. It arrived in a Christmas card, with a note from Kang. “It was brought to my attention” that the ex-girlfriend “never took care of our side” of the ski trip.

— With assistance by John Gittelsohn

    Before it's here, it's on the Bloomberg Terminal.