The Commission and the Manhattan U.S. Attorney’s Office have brought a number of pay-to-play cases involving pension funds. In one involving the third largest public pension fund in the country uncovered by the SEC, Deborah Kelley, a former managing director of broker-dealer Sterne Agee & Leach, was sentenced after pleading guilty to serve three years probation, including six months of home confinement. Ms. Kelley was also directed to pay a fine of $50,000, forfeit $187,991.19 and to complete 1,000 hours of community service. Restitution will be determined in the future. U.S. v. Kang, No. 1:16-cr-00837 (S.D.N.Y.).
The action evolved from a Commission investigation into the relationship between Ms. Kelly and the Fund. The agency uncovered centered on a pay-to-play scheme involving the New York State Common Retirement Fund. Specifically, Ms. Kelley bribed Navnoor Kang, the Director of Fixed Income and Head of Portfolio Strategy of the Pension Fund. In that capacity Mr. Kang was responsible for investing over $53 billion in fixed-income securities on behalf of the Fund. Policies of the Pension Fund precluded him from receiving gifts, benefits or consideration of any kind.
Ms. Kelly met Mr. Kang prior to his employment at the Pension Fund. Following his employment at the Pension Fund she invited him on a ski trip. From about 2014 through 2016 Mr. Kang, Ms. Kelly, and others were alleged to have defrauded the Pension Fund, denying the Fund its right to honest services. During the period bribes were paid in the form of entertainment, travel, meals and other items to secure fixed-income business from the Pension Fund.
In return for the gifts Mr. Kang used his position to direct the fixed income business to Ms. Kelly’s firm. The broker-dealer’s Pension Fund business increased dramatically from $0 in the fiscal year ended March 1, 2014 to about $156 million in the next fiscal year. The subsequent year it increased to $179 million.
In late 2015 the SEC opened an investigation into the benefits Ms. Kelly provided to Mr. Kang. Both received subpoenas for testimony from the staff. Prior to the testimony Ms. Kelly and Mr. Kang agreed to align their stories and testify falsely to conceal the pay-to-play scheme. In late 2015 and early 2016 Ms. Kelley and Mr. Kang each falsely testified under oath before the SEC about the expenses that had been paid for Ms. Kelly. Ultimately Ms. Kelly pleaded guilty to one count of conspiracy to commit securities fraud and honest services wire fraud.