NY pay-to-play plot fueled by bribes, US says

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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 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. Kelley, 58, declined to comment when contacted at her office in California. Kang, 37, couldn’t immediately be contacted. Court papers don’t identify their employers.

The three were also sued Wednesday by the 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.

According to the government, Kang was responsible for investing more than $53 billion in fixed-income securities and managed those investments for the fund. Since 2014, he steered more than $2 billion in fixed-income business to Kelley’s and Schonhorn’s employers, earning them millions of dollars in commissions, according to court papers.

In exchange, Kang accepted bribes including October 2014 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.

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.

In February 2014, Kang told Schonhorn that 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.

After Kelley took Kang to New Orleans in October 2014, she attempted to expense the trip to her employer, omitting Kang’s name, according to court papers.

At the start of the scheme, Kelley’s and Schonhorn’s employers weren’t on the approved list to do business with the pension fund. Kang 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 U.S. said.

Kang later arranged for Kelley’s and Schonhorn’s employers to be approved to do business directly with the pension fund, at which time the bribes “escalated,” prosecutors said. At the same time, the value of business to the two firms skyrocketed, they said. Schonhorn’s firm became the third-largest broker dealer with which the pension fund executed transactions in domestic bonds.

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 SEC joined the probe.

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 New York state’s pension fund.

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.

Hevesi’s successor, Thomas DiNapoli, in 2007 adopted rules 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.