The SEC closed out 2016 with a bang

‘Twas the night after Christmas
December 20, 2016
Is the new Congress financial industry friendly?
January 11, 2017
Show all

The SEC closed out 2016 with a bang

Make a better resolution this New Year than this former NY state pension director and his broker allies did…

Regulatory compliance is not over…yet! The Securities and Exchange Commission (SEC) closed out 2016 with a bang, including bringing fraud charges against the former director of Fixed Income for the New York State Common Retirement Fund and two registered reps at two different broker-dealers.

The SEC accused former New York Pension official Navnoor Kang, and broker-dealer reps Gregg Schonhorn and Deborah Kelley of orchestrating a pay-to-play scheme to steer billions of dollars to certain firms in exchange for luxury gifts, lavish vacations, and tens of thousands of dollars spent on cocaine and prostitutes.

Was no one watching?

Apparently not.  Or maybe it was just because Kang was such a fast worker.

In just a tad over two years, Kang, who served the pension fund from January 2014 to February 2016, allegedly used his position to direct up to $2.5 billion in state business to Schonhorn and Kelley. In exchange for this lucrative business, which netted the two reps millions of dollars in commissions, the brokers provided Kang with tens of thousands of dollars in benefits, including:

  • More than $50,000 spent on hotel rooms in New York City, Montreal, Atlantic City, and Cleveland;
  • Approximately $50,000 spent at restaurants, bars, lounges, and on bottle service;
  • $17,400 on a luxury watch for Kang;
  • $4,200 on a Hermes bracelet for Kang’s girlfriend, at Kang’s request’
  • $6,000 on four VIP tickets to a Paul McCartney concert in New Orleans; and
  • An extravagant ski vacation in Park City, Utah, including a $1,000 per night guest suite.


Broker-dealers + public officials in the regulatory crosshairs?

Yep. This action, says Andrew Ceresney, Director of the SEC Enforcement Division, “demonstrates that the SEC will not tolerate public officials who abuse public pension funds to satisfy their own greedy and wanton desires.”

According to the SEC’s complaint, Kang, as a fiduciary to the Fund, failed to disclose his solicitation and receipt of the gifts and entertainment from Schonhorn and Kelley.  Schonhorn and Kelley knew Kang was not being forthcoming and took steps to keep the benefits a secret. Kang, in soliciting and accepting the benefits without any disclosure, violated the antifraud provisions of the Securities Act and the Exchange Act.  Schonhorn and Kelley participated in the fraudulent scheme and provided substantial assistance to Kang in concealing the scheme from the Fund, thereby violating the antifraud provisions and aiding and abetting Kang’s fraud.

Bad. Worse. Worst.

LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit, says the SEC alleges ” that rather than compete fairly for business from the New York State Common Retirement Fund’s $50 billion fixed income portfolio, Schonhorn and Kelley bribed their way in, lining their pockets with millions in commissions along the way. Moreover, they allegedly assisted Kang in covering up his misdeeds, with Kelley going so far as to help Kang obstruct the SEC’s investigation.”

The SEC is seeking an order of permanent injunction and disgorgement plus interest and penalties.  Additionally, the SEC is seeking a conduct-based injunction against Kang that would permanently enjoin him from participating in any decisions involving investments in securities by public pensions as a trustee, officer, employee, or agent.

Taking an additional step in a parallel action, the U.S. Attorney’s Office for the Southern District of New York also announced criminal charges against Kang, Schonhorn, and Kelley.

Consider a compliance resolution this year…

…because the penalty for noncompliance is still harsh, and costly (even without jail time!). And, if you were expecting less regulatory oversight, not more…SUPRISE! Just looking at the SEC, the Commission’s 2017 is asking for money to:

  • Increase examination coverage of investment advisers and other key entities who interact with retail and institutional investors;
  • Further leverage cutting-edge technology to permit the SEC to better keep pace with the entities and markets we regulate;
  • Protect investors by expanding our enforcement program’s investigative capabilities and strengthen our ability to litigate against wrongdoers;
  • Further bolster the SEC’s economic and risk analysis functions; and
  • Hire experts capable of permitting the agency to fulfill its expanded rulemaking and oversight responsibilities.

The SEC plans to increase its examination coverage of the expanding universe of registered investment advisers and investment companies. In 2017 alone, the Commission projects that there will be more than 12,500 investment advisors managing more than $70 trillion in assets. And it wants to ensure each one is operating compliantly. The additional funds, it says will help it address the challenges its examination staff face posed by the increased use of new and complex products by both investment advisers and broker-dealers, an increasing use of technology in operations that facilitate activities such as high-frequency and algorithmic trading, and the growth of complex “families” of financial services companies with integrated operations that include both broker-dealer and investment adviser affiliates.

The regulators are still coming. Will you be ready?

The regulatory bodies are not just going to ride off into the sunset. And the exposures are not limited to broker-dealers, but to RIAs, muni bond dealers, etc. We are all in the regulator sights.

Be prepared.

If you don’t have the bandwidth to be your own compliance, then outsource. When your compliance function is under pressure to do more with less, you have options? Patrina, for one, is offering a 90-day, FREE trial of its comprehensive 8-module compliance solution. And that’s just the tip of our iceberg!

Let’s talk (212-233-1155). Ask about Patrina’s comprehensive compliance solutions and compliant data capture and file storage, and compliant records archiving specifically designed for the financial services community.

Let’s talk.