What do the Foreign Corrupt Practices Act (FCPA) and the recent “pay to play” indictment of a former New York state pension system portfolio manager have in common? Plenty! The details of the indictments offer a window of how public officials can be corrupted and the steps taken to cover up the evidence.
This week Manhattan’s US Attorney, Preet Bharara, announced the indictment of Navnoor Kang, a former portfolio manager of the New York State Common Retirement Fund. The fund is the third largest pension fund in the nation with over $178 billion in assets. The fund’s money is used to pay retirement, disability and death benefits for New York cops and firefighters.
“Pay to Play” Bribery Scheme
Federal prosecutors say that Kang engaged in a traditional pay to play scheme. Investment houses consider state pension funds to be the crown jewel of clients. With billions of dollars in assets, investment managers can make tens of millions in profits and commissions. Competition for the business is fierce.
With millions of dollars of potential compensation, greed sometimes trumps integrity and common sense. That usually means bribes or kickbacks. If the allegations in this indictment are true, Kang took bribes to a new level. Cash. Prostitutes. Even crack cocaine.
The indictment claims that Kang steered $2 billion of public pension monies to brokerage firms FTN Financial and Sterne Agee. In return, brokers from each company plied Kang with tickets to the U.S. Open, trips, prostitutes, money, concert tickets, a $17,000 watch and even crack cocaine.
Pay to Play and Honest Services Fraud
Pension fund officials have a duty to what is best for the fund and the members it supports. By engaging in a pay to play scheme, Kang breached his fiduciary duty to the fund and deprived it of its right to his “honest services.”
Honest services fraud is a federal crime. It occurs when someone employs a scheme to deprive another of the intangible right of honest services. The law has been applied by federal prosecutors in cases of public corruption and sometimes in cases in which private individuals breached a fiduciary duty to another.
The NY pension fund scheme scheme originally came to light earlier this year. Kang was fired in February when the news first broke. Although the fund is privately owned, it is under the control of the state’s comptroller’s office.
This week New York Comptroller Thomas DiNapoli issued a statement saying that Kang was fired when the allegations first surfaced. He also said, “The New York State Common Retirement Fund has absolutely no tolerance for selfdealing, and we are outraged by Mr. Kang’s shocking betrayal of his responsibilities.”
Bharara said after the indictment was unsealed, “The hard-earned pension savings of New Yorkers should never serve as a vehicle for corrupt, personal enrichment. The intersection of public corruption and securities fraud appears to be a busy one, but it’s one that we are committed to policing.”
Hiding the Bribes
Pay to play schemes are obviously illegal. We know from the indictment that the bribes were paid by two brokers. Over $100,000 worth of goods and cash according to prosecutors.
In honest services fraud and illegal pay to play schemes, the payment of bribes is just as illegal as their receipt. (The two brokers were also charged.)
So how did the three keep their illegal dealings hidden?
Most high end investment managers have expense accounts. Taking a client out on the town isn’t illegal, unless the client works for a state or city pension fund. Normally, when a sales rep takes out a client, he or she files an expense report along with receipts. You can’t do that with pubic officials, of course. That would leave an easy paper trail for even the most novice auditor or prosecutor.
So what did the two brokers do? According to the Justice Department, they simply lied on their expense accounts. One of the brokers, Deborah Kelly, earned another charge for that alleged conduct, conspiracy to obstruct justice. She faces 85 years in prison. Because prosecutors say that Kang lied to a Grand Jury, he faces a total of 105 years.
The second broker, Gregg Schonhorn, pled guilty on December 15th for his role in the alleged scheme. The charges he pled to include: conspiracy to commit securities fraud; securities fraud; conspiracy to commit honest services wire fraud; honest services wire fraud; bank fraud; and conspiracy to obstruct justice in the SEC investigation. It appears that he is cooperating in the case against Kang.
WhatsApp Encrypted Messaging
After reading the indictment, even we learned a new trick. Encrypted text messages!
One of the brokers did more than lying on his expense sheets. Schonhorn and Kang allegedly used an instant messaging service called WhatsApp to communicate and coordinate the bribery scheme. WhatsApp is a popular instant message service that encrypts messages making it harder for law enforcement to intercept.
Pay to Play and Foreign Bribery
There isn’t much difference between pay to play bribery of US officials and officials outside the country. Both schemes rely on payments to public officials in exchange for influencing business decisions. Need a quick permit? Bribe an inspector. Want to avoid an audit? Bribe a tax official.
Whether foreign or domestic, pay to play schemes are usually uncovered by following the money. In this case, the brokers probably used the name of a different client to make their expense accounts appear legit. And Schonhorn used his own personal credit card to hide the watch purchase from his own compliance folks.
In many foreign bribery schemes we also see the use of intermediaries or “consultants.” Instead of making the bribe directly. Companies will use a third party to make the expense look legit. That third party will then take a cut and deliver the balance to the public official.
Foreign Bribery and Whistleblower Awards
If the bribery or influence peddling involves a foreign official, the actions may violate the Foreign Corrupt Practices Act. The FCPA extends to bribes paid by public companies who offer stock on U.S exchanges. That means if your company is listed on the New York Stock Exchange, it is probably subject to the FCPA. The law also extends to purely foreign companies if any part of the illegal transaction occurred on U.S. soil.
People with inside information about pay to play schemes involving foreign officials may be eligible for huge cash awards. Both the SEC and the Justice Department can prosecute the FCPA actions. The SEC’s whistleblower program can pay up to 30% of whatever the government collects from the company or person offering or paying the bribe. Million dollar awards are not uncommon.
Need more information? Please visit our FCPA foreign bribery page. Better yet, call us! All inquiries are protected by the attorney – client privilege and kept confidential. To speak with a lawyer, contact Brian Mahany directly at or at .
MahanyLaw – America’s SEC and FCPA Whistleblower Lawyers