New York reforms pension fund hiring practices in wake of Navnoor Kang’s alleged fraud

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NEW YORK: In the wake of alleged fraud committed by New York state pension fund’s former director of fixed income and head of portfolio strategy Navnoor Kang, an Indian American, the state controller’s office is making reforms to its hiring practices and other policies.

Controller Thomas DiNapoli released a report Wednesday outlining the findings of an internal review he ordered after Kang was charged in 2016 by then-Manhattan U.S. Attorney Preet Bharara with accepting more than $100,000 worth of bribes.

Kang is accused of accepting cash, cocaine, prostitutes, fancy watches and trips from two brokerage firms that wanted to do business with the $184 billion state pension fund, reported the New York Daily News.

Kang had previously been fired from his last job for accepting gifts, according to the feds — something he misled hiring managers about and that the third-party company hired by the state to vet its employees, Korn Ferry, missed.

Going forward, all candidates will have to list all former employers, along with contact information for supervisors, provide three references including their most recent employers, and reference checks must be performed by a Common Retirement Fund staff member — not an outside company. Relevant employers over the last decade must be contacted and asked, among other things, if they’d hire the employee again, the report says.

Once that’s done, a third-party vendor can take over to perform a thorough background check.

The office will also set out rules for how to recruit and evaluate the brokers with which the pension fund does business, including requiring them to be re-authorized every five years and to be monitored by a consultant.

Kang was able to conceal his actions by creating new internal policies for recording and conducting trades — or by ignoring orders to create new guidelines for his department, something that eventually led higher-ups to halt trading until he’d done so, the report found.

As a result, the controller’s office reinstated trade reports that had been scuttled, instituted reports on each broker’s trade volume, required regular and annual review by higher-ups to look for trade spikes or anomalies and publication of broker usage data in the retirement system’s annual report.

The Wall Street Journal reported Kang steered millions of dollars in trading commissions to his preferred brokers. Some of the brokers had no prior bond-trading relationship with the New York State Common Retirement Fund, according to prosecutors and pension records. Two salespeople allegedly won the business by bribing Kang with cocaine, prostitutes and weekend getaways.

The New York pension fund fired Kang along with another employee connected to the case. Kang and one of the salespeople, Deborah Kelley, pleaded not guilty to the allegations; a second salesperson, Gregg Schonhorn, pleaded guilty and is cooperating with the government’s investigation.

Launching a formal search for brokers was one of dozens of changes recommended by an outside consultant following a “pay to play” scandal earlier this decade. By last year, the consultant said, 85% of the recommendations had been implemented.

In the prior case, then-New York Comptroller Alan Hevesi pleaded guilty to accepting nearly $1 million in travel and other benefits from a California money manager who won business from the fund. Hevesi’s successor, Thomas DiNapoli, introduced a raft of changes, including a ban on staff accepting gifts and the hiring of an ethics lawyer, reported the Journal.

Kang was hired in Jan., 2014 as director of fixed income and head of portfolio strategy, entrusting him with $53 billion in state employees’ retirement assets. Under Kang, the pension became a far more active bond trader.

Soon after joining the firm, Mr. Kang asked brokers to submit applications, according to the Securities and Exchange Commission’s civil complaint against the former pension manager. In November 2014, Mr. Kang wrote to the fund’s chief investment officer to recommend that eight additional brokers win formal approval to trade bonds with the pension fund.

The fund bought or sold $29.4 billion in U.S. bonds in fiscal 2016, which ended last March, according to the pension fund’s annual reports. That is up from $21.3 billion in fiscal 2015 and $14.8 billion in fiscal 2014. The fund’s business to Wall Street’s bond-trading desks blossomed as well.

Kang also rapidly expanded the number of firms that handled the fund’s trading, to 58 from 26. Several regional firms with little or no prior business with the fund emerged, alongside Wall Street giants Citigroup Inc. and Goldman Sachs Group Inc., according to the fund’s reports.