<!-- Swiftype Variables -->

INVESTING/PORTFOLIO STRATEGIES

Former N.Y. State Common fixed-income director arrested in pay-for-play scheme

Allegations include receiving travel, prostitutes and drugs for steering business to 2 broker-dealers

Preet Bharara, U.S. attorney for the Southern Dist
Preet Bharara

The former director of fixed income and head of portfolio strategy for the New York State Common Retirement Fund, Albany, was charged Wednesday by the U.S. Justice Department and the Securities and Exchange Commission with multiple counts of securities fraud in an alleged pay-for-play scheme to steer business to a pair of broker-dealers.

Navnoor Kang was charged in a grand jury indictment unsealed Wednesday by Preet Bharara, the U.S. attorney in Manhattan, as well as in an SEC complaint filed in Chicago.

Both complaints alleged a long-running conspiracy between Mr. Kang and the two broker-dealers, who paid for gifts in return for his recommending to the $184.5 billion New York pension fund that their firms be hired to manage fixed-income investments. They said the scheme lasted from 2014 until early 2016.

“This was a classic quid pro quo bribery scheme,” Mr. Bharara said Wednesday.

Deborah Kelley, a broker-dealer, and Gregg Schonhorn, also a broker-dealer, were cited as defendants in the SEC complaint.

Ms. Kelley was listed as a defendant in the U.S. attorney's indictment; Mr. Schonhorn was listed separately in an information document outlining charges by the U.S. attorney. Mr. Schonhorn had cooperated with a grand jury investigation on the alleged play-for-pay scheme, according to the U.S. attorney's indictment. In July, Mr. Schonhorn “began cooperating with the government,” adding that he recorded meetings with Mr. Kang, according to the indictment. The SEC began an investigation in late 2015.

Mr. Bharara said Wednesday that Mr. Schonhorn pleaded guilty Dec. 15 in a New York federal court to six counts of fraud and obstruction of justice.

Mr. Kang was arrested Wednesday. Ms. Kelley was expected to surrender to federal authorities in San Francisco on Wednesday, according to the U.S. attorney's office.

According to the U.S. attorney's indictment, Ms. Kelley, Mr. Schonhorn and unnamed persons agreed to “pay Kang bribes in the form of entertainment, travel, lavish meals, prostitutes, nightclub bottle service, narcotics, luxury gifts and cash payments” in exchange for his recommending their firms.

The indictment said Mr. Kang accepted “more than $100,000 in secret bribes” from Ms. Kelley, Mr. Schonhorn and unnamed others that translated into gifts such as tickets to a Paul McCartney concert, Broadway shows and the U.S. Open tennis tournament, as well as ski lessons, cocaine and strippers.

The indictment said Mr. Kang steered more than $2 billion worth of fixed-income business to Ms. Kelley's and Mr. Schonhorn's firms, which weren't identified in the indictment.

This arrangement enabled the two broker-dealers and their respective employers to earn “millions of dollars in commissions” from the New York State Common Retirement Fund. Ms. Kelley and Mr. Schonhorn “personally earned approximately 35% to 40%” of their respective firms' commissions, the indictment said.

The New York pension fund has a strict prohibition of pay-for-play activities among its employees. Mr. Kang was fired in February 2016.

"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,” Thomas P. DiNapoli, the state comptroller and sole trustee of the pension fund, said in an e-mail statement Wednesday. “In February 2016, he was dismissed.”

Citing the criminal indictment, Mr. DiNapoli added that Mr. 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.”

Attorneys for Mr. Kang, Ms. Kelley and Mr. Schonhorn did not return calls by press time.

The indictment identified Ms. Kelley as a managing director of fixed-income sales for a New York-based broker-dealer from 2012 to September 2015. The SEC complaint said she was dismissed after her firm conducted an internal investigation, adding that she is a registered representative for another unnamed broker-dealer.

The indictment identified Mr. Schonhorn as vice president of fixed-income sales for another unnamed New York broker-dealer from 2013 to 2016.

The broker-dealer firms had policies prohibiting paying for gifts or other benefits for clients, the U.S. attorney's complaint said. Mr. Kang signed a certification that knew of the New York pension fund's policy. Mr. Kang had been responsible for investing more than $53 billion in fixed-income securities for the pension fund.

The indictment illustrated how the scheme helped Mr. Schonhorn's firm. For the fiscal year ended March 31, 2013, it had no domestic bond business with the New York pension fund. It had $858 million for the fiscal year ended March 31, 2015, and $2.39 billion for the fiscal year ended March 31, 2016.

Ms. Kelley's firm had no domestic bond business with the New York pension fund for the fiscal year ended March 31, 2014. By the fiscal year ended March 31, 2016, it had approximately $179 million.

Attorneys for Mr. Kang, Ms. Kelley and Mr. Schonhorn were not immediately available for comment.