The Securities and Exchange Commission has obtained a judgment against a former manager at a broker-dealer for his part in a pay-to-play scheme that involved a New York State pension fund with more than $200 billion in assets, the SEC announced yesterday.
Following a three-day bench trial that was held virtually, a final judgment was obtained against John A. Paulsen for aiding and abetting the strategy that involved the fixed-income assets of the New York State Common Retirement Fund, which is a public pension plan for New York State government employees. Judgments against others involved in the scheme were obtained by the SEC earlier.
On Oct. 23, Judge Paul G. Gardephe of the U.S. District Court for the Southern District of New York found that Paulsen, a resident of Park Ridge, N.J., who was a managing director and fixed income research analyst at a registered broker-dealer, helped advance the pay-to-play enterprise, the SEC said.
The court found that, from early 2014 until February 2016, Paulsen and Deborah D. Kelley, a registered representative at the broker-dealer, dealt with Navnoor S. Kang, the pension fund’s director of fixed income, who had responsibility for approximately $50 billion of the fund's assets. Kang used his position at the fund to solicit and receive an $11,000 trip to Park City, Utah, from Paulsen and Kelley, the SEC said. In exchange, Kang directed a significant amount of state business to the broker-dealer, generating sizable commissions for Paulsen and Kelley. The SEC did not say how much the commissions amounted to.
Kang had told Paulsen and Kelley that the fund had very strict rules that prohibited him from accepting anything from them. However, Paulsen and Kelley proceeded to spend the money on Kang and his girlfriend. Paulsen and Kelley then sought reimbursement of those expenses from the broker-dealer and submitted false expense reports that concealed the fact they had entertained Kang, according to the complaint.
When the broker-dealer discovered inconsistencies in the expense reports and began an internal investigation, Paulsen and Kelley lied to the broker-dealer's internal investigators, the SEC said. The SEC is seeking a permanent injunction barring Paulsen from the financial industry and civil penalties. The SEC previously obtained judgments against Kang, Kelley.