Former Director Of Fixed Income And Head Of Portfolio Strategy At New York State Common Retirement Fund Is Sentenced To 21 Months For “Pay-To-Play” Bribery Scheme
Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced that NAVNOOR KANG, the former Director of Fixed Income and Head of Portfolio Strategy at the New York State Common Retirement Fund (“NYSCRF”), was sentenced today in Manhattan federal court to 21 months in prison for participating in a massive “pay-to-play” bribery scheme involving the nation’s third largest public pension fund. KANG pled guilty to conspiracy to commit securities fraud and conspiracy to commit honest services wire fraud on November 8, 2017, before U.S. District Judge J. Paul Oetken, who also imposed today’s sentence.
U.S. Attorney Geoffrey S. Berman said: “Combining public corruption with securities fraud, Navnoor Kang betrayed his duty to safeguard public retirement money, bought off with jewelry, cash, drugs, strippers, and prostitutes. His crimes have bought him a prison sentence.”
According to the Indictment charging KANG, other filings in Manhattan federal court, and statements made during the sentencing proceeding:
The NYSCRF is a pension fund administered for the benefit of public employees of the State of New York. From January 2014 through February 2016, KANG served as Director of Fixed Income and Head of Portfolio Strategy for the NYSCRF. In that capacity, KANG was responsible for investing more than $53 billion in fixed-income securities and was entrusted with discretion to manage those investments on behalf of the NYSCRF. KANG owed a fiduciary duty to the NYSCRF and its members and beneficiaries, and was required to make investment decisions in their best interests and free of any conflict of interest. New York State law and NYSCRF policies prohibited KANG and other NYSCRF employees from receiving any bribes, gifts, benefits, or consideration of any kind.
KANG’s Scheme to Steer NYSCRF Fixed-Income Business in Exchange for Secret Bribes
From 2014 through 2016, KANG and others participated in a scheme to defraud the NYSCRF and its members and beneficiaries, and to deprive the NYSCRF of its intangible right to KANG’s honest services. The scheme involved, among other things, an agreement among KANG, Deborah Kelley, a managing director of institutional fixed income sales at a New York-based broker-dealer (“Broker-Dealer-1”), and Gregg Shonhorn, a vice president of fixed income sales at a New York-based broker-dealer (“Broker-Dealer-2”), to pay KANG bribes – in the form of entertainment, travel, lavish meals, prostitutes, nightclub bottle service, narcotics, tickets to sports games and other events, luxury gifts, and cash payments for strippers and KANG’s personal expenses – in exchange for fixed-income business from the NYSCRF. Such bribes – which totaled more than $100,000 – were strictly forbidden by the NYSCRF, and were paid secretly and without any disclosure to the NYSCRF and its members and beneficiaries concerning the conflicts of interest inherent therein.
In exchange for the bribes paid by Kelley, Schonhorn, and others, KANG used his position as Director of Fixed Income and Head of Portfolio Strategy at the NYSCRF to promote the interests of Kelley, Schonhorn, and their respective brokerage firms. KANG steered more than $2 billion in fixed-income business to Broker-Dealer-1 and Broker-Dealer-2, from which Kelley, Schonhorn, and their respective employers earned millions of dollars in commissions from the NYSCRF. In so doing, KANG, with the knowledge and approval of Kelley and Schonhorn, breached his fiduciary duty to make investment decisions in the best interest of the NYSCRF and its members and beneficiaries, and free of conflict, and deprived the NYSCRF of its intangible right to KANG’s honest services.
As the bribes paid by Schonhorn to KANG increased, so too did Broker-Dealer-2’s fixed-income business with the NYSCRF. The value of the NYSCRF’s domestic bond transactions with Broker-Dealer-2 skyrocketed from zero in the fiscal year ending March 31, 2013, to approximately $1.5 million in the fiscal year ending March 31, 2014, to approximately $858 million in the fiscal year ending March 31, 2015, and to approximately $2.378 billion in the fiscal year ending March 31, 2016. Broker-Dealer-2 became the third largest broker-dealer with which the NYSRCF executed domestic bond transactions for the fiscal year ending March 31, 2016, having not even been on the approved list in the fiscal year ending March 31, 2013. As the NYSCRF’s third largest broker-dealer in this asset class, Broker-Dealer-2 brokered approximately eight percent of the total value of the NYSCRF’s domestic bond transactions – a figure greater than that of all but two of the major international banks and brokerage houses on the list. Similarly, the value of NYSCRF’s domestic bond transactions with Broker-Dealer-1 increased from zero in the fiscal year ending March 1, 2014, to approximately $156 million in the fiscal year ending March 1, 2015, and to approximately $179 million in the fiscal year ending March 1, 2016.
KANG’s Obstruction of Justice
In late 2015, the Securities and Exchange Commission (“SEC”) opened an investigation into the entertainment and benefits that Kelley had provided KANG, and the SEC subpoenaed both KANG and Kelley for their testimony. In advance of their testimony, KANG and Kelley agreed to align their stories and each testified falsely under oath before the SEC about expenses Kelley had paid for KANG. Moreover, after a federal grand jury investigation was opened, KANG instructed Schonhorn to testify falsely before the grand jury, and KANG admitted that he had hidden relevant evidence.
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KANG, 39, of Los Angeles, California, was also sentenced to three years of supervised release, ordered to forfeit $ $78,716, and to pay restitution to the NYSCRF in the amount of $242,724.17.
Kelley and Schonhorn have each pled guilty for participating in the scheme. Kelley was sentenced by Judge Oetken to three years of probation.
Mr. Berman praised the investigative work of the Federal Bureau of Investigation. He also thanked the SEC, which filed civil charges against Kang, Kelley, and Schonhorn in a separate civil action, and the Office of Inspector General for the Office of the New York State Comptroller, for their assistance.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Edward A. Imperatore and Joshua A. Naftalis are in charge of the prosecution.