In the Latest Pension-Fund Corruption Scandal, Everyone’s Paying but Wall Street
Illustration by Justin Francavilla
The intricacies of pension fund malfeasance are not always the stuff that tabloid writers dream about, but the unveiling of the indictment of a director of New York's largest public retirement fund just before Christmas was an exception. Navnoor Kang, a former tennis pro turned portfolio manager for the New York State Common Retirement Fund, is charged with accepting bribes in exchange for directing billions of dollars of the fund's trading business to two broker-dealers, FTN Financial and Sterne Agee. Coordinating payments through the smartphone app WhatsApp, Kang received luxury watches, travel, bottle-service, cocaine, strippers, prostitutes, and — wait for it — tickets to a Paul McCartney concert. "Drug-fueled pay-to-play scheme," shouted a New York Post headline.
When Kang allegedly started taking the bribes from Gregg Schonhorn, an employee of FTN Financial, and Deborah Kelley, an employee of Sterne Agee, neither company was doing any business with the pension fund at all. They weren't even on the fund's list of approved broker dealers, so Kang had to launder their business through other companies, meaning New York's public employees were paying double commissions on every one of those trades. Kang eventually managed to get the companies on the fund's whitelist, however, and by last year, Sterne Agee and FTN Financial had gone from $0 in annual business with the fund to $179 million and $2.4 billion, respectively. FTN Financial alone was making $1 million per month in commissions on its trades for the fund.
The episode is hardly unique. With billions and billions under management, and in many instances spotty oversight, public pension funds can look like the juiciest wildebeests on the veldt to financial predators. Last June, Norman Seabrook, the president of the New York Correction Officers' Benevolent Association, the group's union, was charged with accepting a Ferragamo bag full of $60,000 in cash in exchange for steering $20 million from the New York City Correction Officers' pension fund to Platinum Partners, a spectacularly dodgy hedge fund with ties to both a Florida Ponzi scheme and a plan to illegally profit off the deaths of terminally ill patients.
In this instance, it makes sense that the focus of the outrage in the wake of the indictment is on Kang, the man who allegedly sold off his duty to elderly pensioners and hard-working public employees. It also makes sense that Tom DiNapoli — who as state comptroller oversees the New York State Common Retirement Fund, and who came into office pledging to purge this kind of corruption — is taking heat. His predecessor, Alan Hevesi, pleaded guilty in 2010 to steering a quarter billion dollars in investments from the same fund toward one company in return for nearly $1 million in travel, fake consulting fees, and campaign donations.
But there is an asymmetry here. The only parties so far to emerge from the scandal unscathed are the companies themselves.
"The firms weren't necessarily bad actors," Dawn Dearden, a spokesperson for the U.S. Attorney's Office of the Southern District of New York, told the Voice when asked why the companies weren't facing any repercussions. "It was individuals." True, both Schonhorn and Kelley were indicted, as individuals, alongside Kang; and true, both FTN Financial and Sterne Agee had in-house policies against bribery. But both of their Wall Street firms will walk away from this smoldering trainwreck intact, carrying the millions they made with them.
"If the bribery scheme is not just to personally profit a number of brokers, but they're doing it in a way that their employer is gaining from the business, it's logical to think about whether the entity ought to be liable," said Brandon Garrett, a professor at the University of Virginia School of Law and the author of Too Big to Jail: How Prosecutors Compromise with Corporations. "A company shouldn't be allowed to profit from an illegal scheme."
And though the companies may have had internal rules on the books against employees engaging in bribery, that isn't necessarily enough to get them off the hook, says John Coffee, a professor at Columbia Law School who specializes in securities regulation and white-collar crime. "These bribes were paid to get business for the corporations," he said. "There is at least legal liability here. You could have a bylaw that says you may not pay a bribe — it has no legal effect."
The Securities and Exchange Commission, which generally files parallel civil suits alongside Justice Department prosecutions of financial crimes, has the power to compel companies — even without blaming them for what happened — to "disgorge" any money made wrongfully, returning it to its rightful owners. "That doesn't punish the company, but it should be a bare minimum," Garrett said. "The company should have to give up its illegal gains."
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The SEC has indeed filed its own civil suit, and is seeking disgorgement of "ill-gotten gains," but its only targets are Kang, Schonhorn, and Kelley. The companies could always return their illegally procured profits to New Yorkers voluntarily, of course, but they don't seem to be leaping at the opportunity. "No comment," was the reply from an FTN Financial spokesperson to the Voice when asked about it. "I'll get back to you," said a spokesman for Kelley's former employer.
It's possible that the senior management of FTN Financial and Sterne Agee had no idea that their employees were paying bribes. It's possible that they believed that the billions of dollars in pension fund business was simply the reward for honest hustle. The white faces of managerial rectitude smiling out from these companies' "About Us" pages may have committed no crimes at all. And New York's public employees can reasonably hope that their pension funds will take steps to tighten their anticorruption protocols and strengthen oversight.
But as it stands, the two enterprises have profited from crimes, and in a culture ruled above all by the iron law of rational self-interest, there seems to be little disincentive for them or their fellows to continue profiting from the corruption of public officials charged with safeguarding the retirements of firefighters, civil servants, and school cafeteria workers. From the mortgage crisis and financial collapse to Wells Fargo's scheme to fraudulently open accounts for its unwitting customers, the last decade has been a bonanza of financial malfeasance, but when it comes to accountability, and the kind of penalties that might provide meaningful deterrence, prosecutors and regulators have left Americans in the lurch. With a new federal administration packed with Goldman Sachs alumni and an SEC nominee who's spent a career representing such Wall Street giants, it hardly looks like that's going to change.
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