Commission Prevails in Pay-To-Play Case at Trial
The Commission prevailed following a bench trial in a case that was part of a series of pay-to-play actions involving pension funds. The action centered around bribes paid to an employee of a New York pension fund to secure business. SEC v. Paulsen, Civil Action no. 18-cv-6718 (S.D.N.Y.).
The facts presented centered on a pay-to-play scheme involving a New York broker-dealer where John Paulsen and Deborah Kelley were employed and New York State Common Retirement Fund. Navnoor Kang was 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, for example, on a ski trip. In return for the gifts Mr. Kang used his position to direct the fixed income business to the firm where Ms. Kelly and Mr. Paulsen were employed. 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 provided to those involved. 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.
From about 2014 through 2016 Mr. Kang, Ms. Kelly, and Mr. Paulsen 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. Ms. Kelley and Mr. Paulsen sought to conceal the scheme from their employer and its internal auditors. The records of the firm contained false entries regarding the payments made to Mr. Kang. The two brokers also lied to the internal auditors. Ms. Kelley eventually pleaded guilty in the criminal case as did Mr. Kang, and settled with the Commission. U.S. v. Kang, No. 1:16-cr-00837 (S.D.N.Y.); SEC v. Kang, Civil Action No. 16-cv-9029 (S.D.N.Y.).
Mr. Paulsen was charged by the Commission with violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Following trial, the Court found him liable under each Section. Remedies will be considered in the future.