New York State Attorney General Preet Bharara this week unsealed an indictment containing criminal charges against Navnoor Kang, former director of fixed income and head of portfolio strategy for the New York State Common Retirement Fund (NYSCRF), and Deborah Kelly, a fixed income broker.
The indictment accuses 37-year old Kang, who worked at the $175 billion state pension system from January 2014 to February 2016, of accepting bribes “in the form of entertainment, travel, lavish means, prostitutes, nightclub bottle service, narcotics, luxury gifts and cash payments” in exchange for NYSCRF fixed-income trading business. Kang had previously worked as a trader for the alternative investment firm Guggenheim Partners but was fired, according to the criminal complaint, for violating internal reporting requirements for the receipt of gifts and entertainment.
The two brokers accused of giving kickbacks to Kang are Kelly, a former managing director with Sterne Agee Group, and Gregg Schonhorn, a fixed income broker-dealer with FTN Financial Securities. Schonhorn was previously co-head of the institutional credit sales desk at MF Global Holdings.
The alleged kickbacks included a lavish vacation to Montreal, including more than $3,500 spent on food and cocaine; a weekend in New Orleans, where Kang and his then girlfriend received tickets to a Paul McCartney concert; and a skiing trip to Park City, Utah, where expenses totalled more than $11,000. Entertainment also included thousands of dollars spent at strip clubs, upscale New York restaurants, hotel reservations, nightclub expenses, concert tickets, tickets to the U.S. Open, Broadway shows, cocaine, crack cocaine, and cash to pay prostitutes.
Kang also requested, and received, two luxury watches -- one when he was at Guggenheim, then a second, a $17,420 Panerai, while at NYSCRF -- and a $4,200 Hermes bracelet for his girlfriend.
“Navnoor Kang, a former portfolio manager at the fund, allegedly steered billions of dollars of business to broker-dealers who bribed him with luxury vacations, high-priced watches, drugs, cash, and more,” Bharar said in a statement announcing the charges. “The hard-earned pension savings of New Yorkers should never serve as a vehicle for corrupt, personal enrichment. The intersection of public corruption and securities fraud appears to be a busy one, but it’s one that we are committed to policing.”
The SEC has filled a parallel civil complaint against Kang, Kelly, and Schonhorn. Sterne Agee was acquired by INTL FCStone in June 2016, the fixed income business was not part of the transaction.
The NYSCRF fund became notorious for problems with pay-to-play in the and around 2007 when then-New York State Attorney General Andrew Cuomo began investigating a case of corruption against then-New York State Comptroller Alan Hevesi. The state’s Comptroller is the sole fiduciary for the state retirement system and Hevesi presided over an elaborate scheme of kickbacks and pay-to-play which centered around alternative investment managers seeking to invest money on behalf of the state. Hevesi landed in jail, having been replaced as Comptroller by former New York State Assembly member Thomas DiNapoli.
Under the congenial DiNapol, NYSCRF was broadly thought to have cleaned up its act. These latest allocations open up a new chapter in the state pension plan’s history, however.
Although Kang had access to both DiNapoli and the pension plan’s chief investment officer Vicki Fuller, prosecutors have presented no evidence to suggest either were involved with the alleged corruption. Instead, the scheme seems to have been for Kang’s own benefit.
According to the SEC complaint, Kang met Schonhorn in Las Vegas some time in 2010, when Kang was working for Guggenheim and Schonhorn was working for MF Global. In 2012 Kang accepted a $8,000 Rolex watch from Schonhorn, a gift he did not disclose to Guggenheim. An internal investigation at Guggenheim subsequently found that Kang had accepted Rolling Stones concert tickets valued at $1,200 from an MF Global colleague of Schonhorn’s, and had failed to report those tickets and 50 or more other instances in which he had received gifts. As a result of these failures, which were a violation of Guggeheim’s ethics policy, Kang was terminated. In his subsequent interviews with NYSCRF, Kang allegedly lied about the circumstances of his departure from Guggeheim.
When Kang joined NYSCRF, where he had oversight for an estimated $50 billion fixed income portfolio, neither FTN Financial Securities nor Sterne Agee Group were executing trades for the pension plan. After allegedly receiving kickbacks from both Schonhorn and Kelly -- who the SEC says Kang had met earlier in his carrier -- Kang got both firms onto the approved list for broker-dealers doing business with NYSCRF. By the fiscal year ending March 2015, NYSCRF was doing $858 million of bond transactions with Financial Securities. By 2016, that number was $2.4 billion. Sterne Agee Group went from no business in fiscal year 2013 to $179 million worth for the year ending March 2016.
According to the SEC, trouble for Kang arose in August 2015, when Sterne Agee Group terminated Kelly after conducting an internal investigation into her activities. In particular, the October 2014 Park City ski trip appears to have raised red flags. Kang allegedly attempted to retroactively make it appear as if the trip had been above board, even unsuccessfully enlisting Schonhorn’s help in contacting Kang’s by then ex-girlfriend to ask her to write a $4,000 check to pay for their half of the trip. The SEC alleges that both Kang, who was terminated from NYSCRF in February 2016, and Kelly perjured themselves in sworn testimony before the Commission.
This past August, according to the SEC, Kang met with Schonhorn. During that meeting Kang returned the $17,400 Panerai watch Schonhorn had bought for him in November 2015. Kang also discussed how to thwart the Commission’s investigation. Kang “also suggested to Defendant Schonhorn that they purchase disposable cellphones in order to further discuss their attempt to cover up their activities without the risk of their telephone calls being monitored.”
Schonhorn has plead guilty to six criminal charges.