A former broker alleged to have participated in the New York State Common Retirement Fund bribery scandal appears headed to trial after a federal judge denied the Securities and Exchange Commission's motion for a summary judgment against him.
A judge for the United States District Court for the Southern District of New York last week denied the SEC's move for summary judgment against John Paulsen, a former broker at Sterne Agee. A summary judgment is a judgment entered for one party against another party without a full trial.
The SEC originally asked Judge Paul Gardephe for that summary judgment in July 2019. In denying the motion, Gardephe said there were material issues as to whether Paulsen acted with scienter — knowledge of wrongdoing.
Paulsen worked as a broker at Sterne Agee, before it became Stifel in 2015, from June 2013 to March 2015. He worked with fellow broker Deborah Kelley, who pleaded guilty to conspiracy to commit securities fraud and conspiracy to commit honest services wire fraud in connection with the case in which Paulsen is charged.
In February 2015, the SEC said, Paulsen and Kelley planned a ski trip to Park City, Utah to entertain Navnoor Kang, a director of fixed income and head portfolio strategist for the New York State Common Retirement Fund. As part of the trip, Paulsen and Kelley allegedly spent more than $11,000.
In exchange for those benefits, Kang steered the pension fund's business to the firm, the SEC alleged.
The SEC said Paulsen aided and abetted Kelley and Kang’s violations of multiple securities rules.
“While the SEC argues that this evidence ‘supports the conclusion that Paulsen . . . was reckless in not knowing that Kang and Kelley were violating the securities laws,’ the commission acknowledges that there is no evidence ‘that Kelley specifically told Paulsen about the flow of fixed income trades Kang was sending to Sterne Agee in exchange for entertainment,’” Gardephe wrote. “The SEC asks, however, ‘what else could Paulsen have thought was going on? There is no legitimate reason to lavish Kang with meals and then lie about it.’”
That question from the SEC implies issues of Paulsen’s knowledge and intent, which Gardephe said is an issue for juries.
Gardephe added that Paulsen’s decision to go on the ski trip doesn’t demonstrate that he understood the quid pro arrangement.
Paulsen had said that he went on the trip because he liked to ski and because it was consistent with his role as an analyst to support Kelley in developing client relationships, according to court documents.
“The Court concludes that a reasonable juror could find that Paulsen (1) went on the ski trip because he enjoyed skiing, and (2) did not view the ski trip as part of an illegal exchange by which Kelley offered Kang gifts and entertainment in exchange for Kang steering fund trades to Sterne Agee, but rather as a vehicle to strengthen the firm’s already existing relationship with the fund and Kang,” Gardephe wrote.
In December, the SEC opened an investigation into Jon Walker, a former managing director at Stifel for failing to reasonably supervise a registered representative. That investigation appeared likely to be tied to Kelley and the Kang scandal.
The SEC case against Kelley and Kang was closed in December 2019 when a federal judge
Kang’s order also bars him from “participating in any decisions involving investments in securities by public pensions as a trustee, officer, employee or agent.”
Kang and Kelley had already been convicted in a separate criminal proceeding, and Kang was sentenced to 21 months in jail.
Paulsen's trial is scheduled to begin on July 13. Paulsen’s lawyer declined to comment.
