Bribes + NY State Pension Fund = Millions In Profits For Financial Companies


Two financial firms raked in billions of dollars of business from the New York State Common Retirement Fund, the $184-billion retirement fund serving many state employees, after their agents bribed one of the pension fund’s employees with cash, watches, travel, bottle-service, cocaine, strippers, prostitutes, and Paul McCartney tickets, according to indictments announced today by Preet Bharara, United States Attorney for the Southern District of New York.

The two indictments announced today only cover three people: Navnoor Kang, 38, the director of fixed income and security for the $185 billion New York State Common Retirement Fund; Gregg Schonhorn, 45, the vice president of fixed income sales at FTN Financial Corp; and Deborah Kelley, 58, at the time the managing director of institutional fixed income sales at Sterne Agee. Kang, who worked for the fund, was considered a public officer under the law.

In exchange for plying Kang with drugs, women, jewelry and vacations, the indictments allege, Kang directed more than $2 billion in business to FTN Financial and Sterne Agee. Initially, Kang did this through front companies, since FTN Financial and Sterne Agee were not approved brokers for the fund. Since both the front brokers and the actual brokers took commissions, the fund got soaked.

Later, in 2014, as the agents of FTN Financial and Sterne Agee continued to bribe him, Kang added the companies to the list of approved brokers, allowing them to do business with the fund directly.

A spokesman for the Southern District said no charges were brought against FTN Financial or Sterne Agee. Sterne Agee is now owned by INTL FCStone, but an employee of the company said today that what had been Kelley’s unit is now part of Stifel, which owned the company until this year.

“They were bad actors,” said US Attorney spokesperson Dawn Dearden said of Schonhorn and Kelley. The firms weren’t necessarily bad actors. It was individuals.” According to the indictments, both FTN Financial and Sterne Agee had in-house policies prohibiting bribes or kickbacks.

But while Schonhorn and Kelley allegedly made plenty of money through their commissions on the business they brought in for their companies, it’s the companies themselves that made the most out of the arrangement.

Neither company was getting any business from the pension fund in 2013, before the alleged bribery began, according to the indictments. But by the 2016 fiscal year, Sterne Agee was doing bond transactions valued at $179 million. The figures are even more dramatic for FTN Financial, which by FY 2016 was making bond transactions valued at $2.4 billion for the fund, rising to become it’s third largest broker of domestic bonds and brokering eight percent of the total value of the fund’s domestic bond transactions.

At the height of the bonanza, FTN Financial was making more than $1 million a month in commissions from the pension fund. If either company had any concern that all that money might have come illegally and at the expense of New York’s pensioners, there’s nothing in the indictments to show it.

A spokesperson for FTN Financial told the Voice today that the company only learned of the bribery “at the same time everyone else did,” and that as of today, Schonhorn was no longer employed by the company. Asked if FTN Financial had any intention of returning the money it had made off of the business brought in illegally by Schonhorn, the spokesperson answered, “No comment.”

Asked the same question, a spokesman for Stifel, which bought Sterne Agee last year, said he’d look into the question, but stressed that in so doing he was not conceding Stifel had any financial responsibility for the profits Kelley generated.

So far neither the US Attorney’s office nor the Securities and Exchange Commission, which today announced its own civil suits against Kang, Schonhorn, and Kelley, are going after the companies that employed the bribers and benefited the most from the bribery.

But there’s more blame to go around yet. According to the indictment, Kang had been taking bribes from Schonhorn even before he started working at the pension fund, back when he was in the private sector.

In 2012, Kang allegedly accepted an $8,000 Rolex in exchange for Kang directing some of his private investment firm’s business towards FTN. The firm fired Kang for failing to report gifts he’d received. Kang lied about the episode when was seeking a job with the pension fund, and evidently no one was sufficiently concerned about the guy to whom they were entrusting $50 billion in New Yorkers’ retirements to throughly check his references.

State Comptroller Tom di Napoli acts as the fund’s trustee, according to the NSCRF website, and “has the responsibility to protect the interests of the Fund.”

The Voice asked the Comptroller’s office if had any accounting for how much money from New York employee’s retirements were lost as a result of these alleged crimes, how Kang came to be hired in the first place, whether there were any plans to try to recoup the money from FTN Financial and Sterne Agee, and if anyone at the Fund or the Comptroller’s office was expected to lose their job over what has happened. The comptroller’s office did not immediately respond, we’ll update the post when we do.

In the meantime, the Comptroller issued a statement today, stating in part, “We are outraged by Mr. Kang’s shocking betrayal of his responsibilities.”

UPDATE: A spokesperson for the Comptroller’s office answered several of our questions: “Mr. Kang lied about his past history,” the spokesperson wrote, in response to questions about how Kang came to be hired by the Fund even after a professional history of accepting bribes. “We are currently doing a thorough review of his hiring process. In this case, the SEC’s filing requirements flagged this wrongdoing and action was immediately taken. Clearly we are evaluating our processes and working with federal officials to see what could prevent this behavior.

As to how much business FTN Financial and Sterne Agee brought in as a result of the bribery, how much they made in commissions, how much the Fund lost as a result, and whether any effort would be made to claw that money back from the companies, the spokesperson said that these questions are “currently under review.”

Asked whether anyone at the Fund or the Comptroller’s Office was going to lose their jobs over this incident, the spokesperson responded that “We cannot answer this question at this time.”