New York state pension fund manager charged in federal court

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(Bloomberg) — A senior investment manager for New York’s state pension fund accepted bribes including drugs, prostitutes and tickets to a Paul McCartney concert from two brokers in exchange for millions of dollars in fixed-income business from the fund, prosecutors said.

Navnoor Kang, who served as the New York State Common Retirement Fund’s director of fixed income and head of portfolio security, was charged along with the two brokers, Deborah Kelley and Gregg Schonhorn, according to court documents filed Wednesday in Manhattan federal court.

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, their alleged bribes included ski trips to Utah, a long weekend in New Orleans and cocaine for a pension fund official overseeing tens of billions of dollars in assets held on behalf of more than 1 million state employees.

The allegations are the latest to rock the state pension fund; the nation’s third largest with $184 billion in assets. Former New York Comptroller Alan Hevesi pleaded guilty in 2010 to participating in a wide-ranging scheme in which hedge fund managers and private-equity funds were accused of paying kickbacks for state business. In the wake of that scandal, New York instituted safeguards that were designed to prevent similar abuses.

Schonhorn, 44, hung up on a reporter seeking comment on the charges. A spokeswoman at his firm, FTN Financial in New York, declined to comment. Kelley, 58, also declined to comment when contacted at her office in California. Kang, 37, couldn’t immediately be contacted. Court papers don’t identify their employers. U.S. Attorney Preet Bharara has scheduled a press conference for Wednesday afternoon.

The three were also sued Wednesday by the U.S. Securities and Exchange Commission, which said Kang “demanded and received at least $180,000 in undisclosed and improper benefits, entertainment and travel” from the brokers in exchange for giving them business.

‘No tolerance’
"The New York State Common Retirement Fund has absolutely no tolerance for self-dealing, and we are outraged by Mr. Kang’s shocking betrayal of his responsibilities," state Comptroller Thomas DiNapoli said in a statement. Kang was dismissed in February, DiNapoli said. Kang "secretly circumvented our rigorous ethical standards and policies. When his misconduct was uncovered by federal authorities, our inspector general worked with law enforcement officials to uncover the extent of his scheme.”

According to the government, Kang was responsible for investing more than $53 billion in fixed-income securities and managed those investments for the fund. Shortly after he was hired, Kang received training on the state’s prohibitions on employees receiving gifts, signing a certificate acknowledging he would comply with the rules. Both Kelley’s and Schonhorn’s employers had policies in place that restricted them from giving gifts, according to court documents.

Prosecutors trace the beginning of the scheme to 2014. At the time, Kelley’s and Schonhorn’s employers weren’t on the approved list to do business with the pension fund. In February of that year, Kang told Schonhorn he wasn’t allowed to receive any entertainment or benefits from him. But soon after, Schonhorn began taking Kang — as well as an unnamed “close associate” — on weekend trips to Montreal, providing airfare, hotel, meals and cocaine in exchange for the state’s fixed-income business, according to prosecutors.

‘Step-out trades’
At first, Kang allegedly arranged for "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 gifts “escalated” once Kang got the firms on the approved list, prosecutors said. Kang accepted bribes including tickets to the McCartney concert in New Orleans, a February 2015 ski trip to Park City, Utah, lavish meals, nightclub-bottle service and cash, according to court papers.

The value of business to the two firms skyrocketed, prosecutors said. Schonhorn’s firm became the third-largest broker dealer with which the pension fund executed transactions in domestic bonds, prosecutors said. Since 2014, Kang steered more than $2 billion in business to Kelley’s and Schonhorn’s employers, earning them millions of dollars in commissions, according to court papers.

Bottom of Form
Schonhorn allegedly spent more than $38,000 on dinners, drinks, tickets to concerts and sporting events, drugs and prostitutes for himself and Kang from June to November 2014, according to the SEC’s complaint. After the firm was added to the list, Schonhorn spent thousands of dollars at strip clubs, dinners at upscale New York restaurants, tickets to the U.S. Open tennis tournament and Broadway shows, according to the indictment.

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

The previous scandal at New York’s pension fund had led to major reforms.

Scrutiny of the state’s pension system increased after Hevesi resigned in December 2006 after pleading guilty to using state workers as drivers for his wife. Then-Attorney General Andrew Cuomo began looking for signs of favoritism in the selection of money managers under Hevesi. The U.S. Securities and Exchange Commission joined the probe.

Kickback scheme
In 2009, New York’s former deputy comptroller, David Loglisci, and a top political adviser, Henry “Hank” Morris, were charged with orchestrating a scheme in which hedge-fund managers and private-equity firms paid millions of dollars in kickbacks to obtain investments in the New York state’s pension fund, the nation’s third largest.

Eight people pleaded guilty to charges in connection with the pension probe, including Hevesi and Morris. At least six people and 21 firms settled with Cuomo, paying more than $170 million.

DiNapoli, Hevesi’s successor, adopted rules in 2007 that required all new outside money managers for the fund to reveal to whom they paid referral fees before they are hired, instead of after as previously required. The state in 2009 banned the use of placement agents or lobbyists in investments with the pension fund, as well as contributions from those who did business with the fund.

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