WASHINGTON – The Securities and Exchange Commission and three defendants allegedly involved in a pay-to-play scheme to steer billions of dollars of business from a New York pension fund to certain firms have agreed to ask a federal court to put on hold civil charges while two criminal cases moves forward.
The SEC filed the motion to stay the civil proceedings with the U.S. District Court for the Southern District of New York in Manhattan. The SEC charged Navnoor Kang, the former director of fixed income for the New York State Common Retirement Fund, as well as Deborah Kelley and Gregg Schonhorn, two brokers the SEC says were involved in the pay-to-play scheme.
Kang is alleged to have used his position to direct up to $2.5 billion in state pension business to Kelley and Schonhorn in exchange for gifts like expensive watches, vacations, concert tickets, cocaine, and prostitutes.
The temporary halt, or stay, of the civil case is necessary to prevent the defendants from getting around the more limited scope of criminal discovery through the civil discovery process as well as to preserve the court's resources because many of the issues presented by the civil action will be resolved in the criminal cases, the SEC said.
Kang was indicted on six criminal counts related to securities fraud, honest service wire fraud and obstruction of justice. Kelley was indicted on five criminal counts; including four related to securities fraud and honest services wire fraud and one on conspiracy to obstruct justice. Schonhorn pled guilty and admitted his participation in the scheme. He was not named in the indictment and is named in a separate case.
The SEC argued that a stay is also in the defendants' best interests because it will save them from having to choose between using their Fifth Amendment rights regarding self-incrimination and risking "an adverse inference" for purposes of the civil case, or not asserting their rights and being prejudiced in the criminal cases.
The SEC asked the court to consider six factors when evaluating whether to grant the stay. The factors are: the extent to which the issues in the criminal case overlap with those presented in the civil case; the status of the cases, including whether the defendants have been indicted; the private interests of the plaintiffs in proceeding expeditiously weighed against the prejudice to plaintiffs caused by the delay; the private interests of and burden on the defendants; and the interests of the court and public.
The actions that led to the SEC and Department of Justice charges began around 2010 when Schonhorn was introduced to Kang, who was working for an asset management firm. Kang later moved to another asset management firm where he had a business relationship with Kelley and accepted an $8,000 Rolex watch from Schonhorn. He was eventually fired from his asset management job for failures to report benefits and entertainment he received, according to the SEC.
With the help of Schonhorn and Kelley, Kang was hired at NYSCRF as its director of fixed income in 2014 after lying about his reasons for being fired from the asset management firm, the SEC said. He was responsible for about $50 billion of the fund's assets.
Soon after taking the job, Kang began receiving more gifts and entertainment from Schonhorn and Kelley. The gifts included a trip to Montreal with Schonhorn as well as an October 2014 trip to New Orleans and a subsequent trip to Park City, Utah with Kelley. Schonhorn paid the expenses associated with his gifts out of pocket while Kelley falsely filled out expense reports to hide that Kang was involved, the SEC said.
In exchange for the gifts, Kang initially worked through a fund-approved broker to direct business to Schonhorn and Kelley's firms before taking steps to get the two dealers' firms on the list of the fund's approved brokers, according to the SEC. In the period of time when the NYSCRF was soliciting applications for brokers to become part of the approved list, Schonhorn spent more than $38,000 on dinner, drinks, concert and sports tickets, illicit drugs, and prostitutes for himself and Kang, the SEC said.
In total, Kang was able to direct $2.38 billion in fixed income securities trades to Schonhorn's firm during his tenure with the pension fund and nearly $1 billion to Kelley's firm. Both Schonhorn and Kelley received large commissions because of the business, according to the SEC.
The fund eventually fired Kang in February 2016. Kang had been talking with Kelley and Schonhorn about how they could cover up their past activity both before and after he was fired according to the SEC.
