B/D Executive Pleads Guilty In Bribery Scheme Uncovered by SEC

A New York public pension fund was at the center of a pay-to-play scheme uncovered by the SEC. The inquiry ended with charges from the Manhattan U.S. Attorney’s Office against a former managing director of a registered broker-dealer that included obstruction of a Commission investigation. U.S. v. Kelly (S.D.N.Y.).

Named as a defendant is Deborah Kelly, former managing director of Sterne Agee & Leach. The charges center on a pay-to-play scheme involving the New York State Common Retirement Fund, the third largest public pension fund in the U.S. Ms. Kelley is alleged to have 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 positon 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 continued to increase 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, according to the charges. 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.

Ms. Kelly pleaded guilty to one count of conspiracy to commit securities fraud and honest services wire fraud. Sentencing is scheduled for September 15, 2017.