One of the causes of the public pension crisis is on display in New York State. A pension fund manager there took “gifts” that included cash for cocaine, prostitutes, expensive jewelry, nights at the strip club, vacations and Paul McCartney concert tickets from brokers.
Navnoor Kang may have steered $2.378 billion in bond trades to two brokers in exchange for $100,000 to $180,000 in bribes, the Associated Press and Bloomberg reported. Kang worked as a fixed-income asset manager for the New York State Common Retirement Fund until February 2016.
Federal prosecutors indicted Kang on charges of wire fraud, securities fraud and conspiracy, the AP reported. Kang was arrested in Portland, Oregon, during the week before Christmas.
The Fox was running the Hen House
Also indicted were broker-dealers Deborah Kelley and Gregg Schonhorn, the AP reported. Kelley and Schonhorn were old “friends” of Kang, after he was fired from Guggenheim Partners; an investment bank, for accepting gifts from brokers in 2012. The two helped him find a new job at the Common Retirement Fund; the third largest pension fund in the United States, which had $178.6 billion in assets in March 2016.
Schonhorn has pleaded guilty and is cooperating with federal prosecutors in an attempt to avoid prison time, Bloomberg Markets reported. Kang and Kelley have pleaded innocent and are planning to fight the charges according to their lawyers.
So the fox was not just watching the hen house he was running it. Disturbingly one of the references Kang used to get his job at the Common Retirement Fund in 2013 was Kelley. At the Fund Kang was a director of fixed income and head portfolio strategy in charge of $53 billion worth of fixed-income securities.
Kang’s idea of portfolio strategy included accepting such gifts as a trip to Montreal, a ski trip to Park City, Utah, airline tickets and cash he used to buy cocaine. The two also gave Kang a $17,400 Panerai watch and a $4,200 Hermes bracelet for his girlfriend. There were also nights out at expensive restaurants and tickets to a Paul McCartney concert in New Orleans.
Pay for Play at the State Pension Fund
One person not amused by those shenanigans was US Attorney Preet Bharara who described the behavior as “an age-old and classic tale of quid pro quo corruption.”
“Pay-to-play is back at the New York State Common Retirement Fund,” Bharara told reporters. Bharara was referring to former New York State Controller Alex Hevesi who served 20 months in prison for taking $1 million in bribes from an investor. In exchangefor the bribes Hevesi’s accomplice received $250 million in pension-fund business.
Hevesi left office in 2006 after pleading guilty to charges that he had abused state resources. In a bit of poetic justice Hevesi is receiving a $105,000 government-pension which is presumably managed by “experts” like Kang.
Pay for Play is Profitable: $180,000 in Bribes netted $2 billion in Business
The biggest spender in the scandal was Schonhorn who allegedly spent around $160,000 bribing Kang. The bribes included $50,000 for hotel rooms, $25,000 to cover bar tabs and $25,000 in restaurant bills. An unspecified amount was spent on drugs, strippers and prostitutes. The money earned Schonhorn hundreds of thousands in commissions, federal prosecutors alleged.
Kelley gave Kang $6,000 for VIP for four VIP tickets to a Paul McCartney concert, $8,000 for meals and an $11,000 ski trip to Utah. In exchange Kang steered more than $2 billion in business to the firms Kelley and Schonhorn worked for.
Disturbingly the scheme was only uncovered by an investigation by Kelley’s employers at Sterne Agee when somebody asking about the $11,000 ski trip which appeared on an expense report. Nobody at the Common Fund seemed to realize what was going on until the Sterne Agee investigation.
Does Pension Pay for Play Extend Beyond New York?
Those asleep at the wheel include current New York State Comptroller Thomas DiNapoli who told reporters that he was outraged by Kang’s actions and claimed Kang had “secretly circumvented our rigorous ethical standards and policies.”
That will be small consolation to the one million people that depend on the Common Fund for retirement income. Perhaps they should consider alternative sources of income such as rental property or direct investment in stocks. With managers like Mr. Kang on watching over their nest eggs they will certainly need another source of income.
One has to wonder if pay for play is taking place at other state pension funds. It might explain why the California Public Employees Retirement System (CalPERS) had a return of .61% for the fiscal year that ended on June 30, 2016.
CalPERS members would be better off putting their money in a high-yield savings account. At least those are FDIC Insured and some of them pay a return of 1% according to Nerd Wallet. Savers also don’t have to worry about Pay for Play on the part of so-called investment managers.
It looks as if the public pension system is not only in crisis, it is corrupt. Massive reforms are needed now to protect the retirement of our dedicated and hardworking civil servants from the people who are supposed to be looking out for their money.