Chemical and Mining Company in Chile Paying $30 Million to Resolve FCPA Cases

The Securities and Exchange Commission today announced that Chilean-based chemical and mining company Sociedad Quimica y Minera de Chile S.A. (SQM) agreed to pay more than $30 million to resolve parallel civil and criminal cases finding that it violated the Foreign Corrupt Practices Act (FCPA).

According to the SEC’s order, SQM made nearly $15 million in improper payments to Chilean political figures and others connected to them.  Most of the payments were made based on fake documentation submitted to SQM by individuals and entities posing as legitimate vendors.  The payments occurred for at least a seven-year period.

“SQM permitted millions of dollars in payments to local politicians while failing for years to exercise proper oversight over a key discretionary account and internal controls,” said Stephanie Avakian, Acting Director of the SEC Enforcement Division.

SQM agreed to pay a $15 million penalty to settle the SEC’s charges and a $15.5 million penalty as part of a deferred prosecution agreement announced today by the U.S. Department of Justice.  SQM agreed to retain an independent compliance monitor for two years and self-report to the SEC and Justice Department for one year after the monitor’s work is complete.

The SEC’s investigation, which is continuing, is being conducted by William B. McKean.  The SEC appreciates the assistance of the Department of Justice Criminal Division’s Fraud Section.

Morgan Stanley Paying $13 Million Penalty for Overbilling Clients and Violating Custody Rule

The Securities and Exchange Commission today announced that Morgan Stanley Smith Barney has agreed to pay a $13 million penalty to settle charges that it overbilled investment advisory clients due to coding and other billing system errors.  The firm also violated the custody rule pertaining to annual surprise examinations.

The SEC’s order finds that Morgan Stanley overcharged more than 149,000 advisory clients because it failed to adopt and implement compliance policies and procedures reasonably designed to ensure that clients were billed accurately according to the terms of their advisory agreements.  Morgan Stanley also failed to validate billing rates contained in the firm’s billing system against client contracts, fee billing histories, and other documentation.

According to the SEC’s order, Morgan Stanley received more than $16 million in excess fees due to the billing errors that occurred from 2002 to 2016.  Morgan Stanley has reimbursed this full amount plus interest to affected clients.

“Investors must be able to trust that their investment advisers have put appropriate safeguards in place to ensure accurate billing.  The long-running deficiencies in those safeguards at Morgan Stanley resulted in 36 different types of billing errors that caused overcharges to customers,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. 

The SEC’s order further finds that Morgan Stanley failed to comply with the annual surprise custody examination requirements for two consecutive years when it did not provide its independent public accountant with an accurate or complete list of client funds and securities for examination.  Morgan Stanley also failed to maintain and preserve client contracts.

“The custody rule’s surprise examination requirement is designed to provide clients protection against assets being misappropriated or misused,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York office.  “Morgan Stanley failed in consecutive years to do what was required of it to give investment advisory accounts that important protection.”

Without admitting or denying the findings that it violated various provisions of the Investment Advisers Act of 1940 and related rules, Morgan Stanley consented to the SEC’s cease-and-desist order and agreed to the $13 million penalty, a censure, and undertakings related to its fee billing and books and records practices.

The SEC’s investigation was conducted by Ranah Esmaili, Kenneth Gottlieb, Nicholas Pilgrim, and Celeste Chase of the New York office, and the case was supervised by Sanjay Wadhwa.  The examination that led to the investigation was conducted by Heather Palmer, Jennifer Klein, and Anthony Fiduccia.

Michael J. Osnato Jr., Chief of Enforcement Division’s Complex Financial Instruments Unit, to Leave SEC

The Securities and Exchange Commission today announced that Michael J. Osnato Jr., Chief of the Enforcement Division’s Complex Financial Instruments Unit, is planning to leave the agency later this month.

For the past three years, Mr. Osnato led the specialized unit of 45 attorneys and industry experts in offices across the country that investigate potential misconduct related to complex financial products and practices involving sophisticated market participants.  In addition, Mr. Osnato has played a leading role in SEC programs, including the Enforcement Division’s national Cooperation Committee.

“Mike has been an insightful and innovative leader of the Enforcement Division’s unit dedicated to policing complex financial instruments and practices,” said Stephanie Avakian, Acting Director of the SEC’s Enforcement Division.  “As the financial crisis ebbed, Mike proactively refocused the unit toward instruments and practices that disadvantaged retail investors, and put a premium on smart and efficient investigative techniques.  The investing public is safer because of these efforts.”

Mr. Osnato said, “It has been a singular honor to serve alongside the talented staff of the Enforcement Division whose professionalism and commitment to fairness knows no equal.  I am particularly proud of my colleagues in the Complex Financial Instruments Unit, who have helped pave the way for the Division’s use of novel and streamlined investigative techniques and data analytics to root out the most sophisticated forms of misconduct in today’s markets.”

Under Mr. Osnato’s supervision, the SEC has brought enforcement actions that addressed a wide range of sophisticated misconduct:

• The SEC’s first three sets of charges involving issuers of structured notes, a complex financial product that typically consists of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices, against UBS AG, Merrill Lynch, and UBS Financial Services.
• The SEC’s actions against a Big Three credit rating agency against Standard & Poor’s for post-financial crisis misconduct arising from the rating of complex debt instruments.
• The SEC’s fraud charges against a high-frequency trading firm that used algorithmically-generated rapid-fire trades to manipulate the closing prices of thousands of NASDAQ-listed stocks.
• Charges against Merrill Lynch for violating the SEC’s Customer Protection Rule through usage of complex options trades that placed customer funds at risk, the settlement of which involved admissions of wrongdoing and hundreds of millions of dollars in monetary sanctions.  
• Charges against three Morgan Stanley entities for misleading investors in a pair of residential mortgage-backed securities (RMBS) securitizations that the firms underwrote, sponsored, and issued.
• The SEC’s charges against four veteran investment bankers at Credit Suisse Group for engaging in a complex scheme to fraudulently overstate the prices of $3 billion in subprime bonds during the height of the subprime credit crisis.

Mr. Osnato joined the SEC’s Enforcement Division in September 2008.  He was promoted to assistant regional director in the SEC’s New York Office in 2010.  Prior to his arrival at the SEC, Mr. Osnato worked at Shearman & Sterling LLP and later at Linklaters LLP in New York.  He earned his bachelor’s degree from Williams College and his law degree from Fordham Law School.

SEC Charges Government Contractor With Inadequate Controls and Books and Records Violations

The Securities and Exchange Commission today announced that L3 Technologies Inc. (formerly known as L-3 Communications Holdings Inc.), a contractor for U.S. and various foreign government agencies, has agreed to pay a $1.6 million penalty to settle charges that it failed to maintain accurate books and records and had inadequate internal accounting controls. 

An SEC investigation found that in December 2013, L3’s Army Sustainment Division (ASD) – part of L3’s Aerospace Systems segment – improperly recorded $17.9 million in revenue from a contract with the U.S. Army by creating invoices associated with unresolved claims against the U.S. Army that were not delivered when the revenue was recorded.  While certain employees immediately reported their concerns to L3’s ethics department, the subsequent ethics review failed to uncover the misconduct due, in part, to a failure by internal investigators to adequately understand the billing process.  In October 2014, following a subsequent investigation conducted by outside advisors, L3 concluded it had material weaknesses in its internal controls over financial reporting for the fiscal year ended Dec. 31, 2013 and for the first quarter of 2014.  L3 revised its financial statements from 2011 to 2014.

“Adequate internal accounting controls function as a critical safeguard against the type of improper revenue recognition that occurred at L3,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “L3 failed to have such controls in place, which rendered inaccurate its books and records.”

According to the SEC’s order, in or around August 2013, ASD executives developed a “Revenue Recovery Initiative” that identified approximately $50 million in work performed under a contract with the U.S. Army that had not been billed.  Because L3 and the U.S. Army had not reached any agreement on payment for the work performed, any revenue recognition for that work would have been improper under relevant accounting rules.  Nonetheless, in December 2013, a senior finance official at ASD requested that 69 invoices be generated – but not delivered – to the U.S. Army, which caused ASD to recognize almost $18 million in revenue.  Because of that revenue, ASD employees barely satisfied an internal target for management incentive bonuses.

The SEC’s order finds that immediately after the 69 invoices were generated, ASD employees internally reported to L3’s ethics department, but a subsequent internal investigation concluded that there was no improper revenue recognition and the issue was not promptly raised to the L3’s Audit Committee.  In June 2014, L3 retained outside advisors to conduct an internal investigation, which concluded that the revenue recognized on the undelivered invoices was improper.  This investigation uncovered additional accounting errors in L3’s Aerospace Systems segment from 2011 to 2014, which combined with the improper accounting associated with the 69 undelivered invoices had the effect of overstating the company’s pre-tax income by $169 million.

Without admitting or denying the findings, L3 agreed to pay the $1.6 million penalty and consented to the entry of the SEC’s cease-and-desist order finding that it violated the books and records and internal controls provisions of the federal securities laws.  

The SEC’s continuing investigation is being conducted by H. Gregory Baker, David Oliwenstein, Christopher Mele, and Steven G. Rawlings of the New York Office, and the case is being supervised by Sanjay Wadhwa.

SEC: Port Authority Omitted Risks to Investors in Roadway Projects

The Securities and Exchange Commission today announced that the Port Authority of New York and New Jersey has agreed to admit wrongdoing and pay a $400,000 penalty to settle charges that it was aware of risks to a series of New Jersey roadway projects but failed to inform investors purchasing the bonds that would fund them.

The SEC’s order finds that the Port Authority offered and sold $2.3 billion worth of bonds to investors despite internal discussions about whether certain projects outlined in offering documents, including the Pulaski Skyway, ventured outside its mandate and potentially weren’t legal to pursue.  One internal memo noted, “There is no clear path to legislative authority to undertake such projects.” Another memo explicitly identified “the risk of a successful challenge by the bondholders and investors” in connection with the funding of the roadway projects.  But the Port Authority omitted any mention in its offering documents about these risks surrounding its ability to fund the projects.  Its offering documents stated that it issued bonds “only for purposes for which the Port Authority is authorized by law to issue bonds.”

“The Port Authority represented to investors that it was authorized to issue bonds while not disclosing significant known risks that its actions were not legally permitted,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Municipal bond issuers must ensure that their disclosures are complete and accurate so that investors can make fully informed decisions about whether to invest.”

The Port Authority is the first municipal issuer to admit wrongdoing in an SEC enforcement action.

The SEC’s order finds that the Port Authority violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  The SEC’s order acknowledges the Port Authority’s cooperation and prompt remedial acts.  The projects at issue have proceeded as planned.

The SEC’s continuing investigation is being conducted by Osman Nawaz and Celeste Chase of the New York office.  The case is being supervised by Sanjay Wadhwa.     

SEC Charges Two Brokers With Defrauding Customers

The Securities and Exchange Commission today charged two New York-based brokers with fraudulently using an in-and-out trading strategy that was unsuitable for customers in order to generate hefty commissions for themselves.

The SEC’s complaint alleges that Gregory T. Dean and Donald J. Fowler did no reasonable diligence to determine whether their investment strategy involving frequent buying and selling of securities could deliver even a minimal profit for their customers.  Their strategy, which generally involved selling the securities within a week or two of purchase and charging customers a commission for each transaction, allegedly resulted in substantial losses for 27 customers.

“This case marks another chapter in the SEC’s pursuit of brokers who deploy excessive trading as a strategy in customer accounts to enrich themselves at customers’ expense,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office and Co-Chair of the Enforcement Division’s Broker Dealer Task Force.  “The allegations in our complaint are based on our examination of trading patterns across more than two dozen customer accounts, and this trading data shows that only the brokers stood to profit from this cost-laden in-and-out strategy.”

The SEC today issued an Investor Alert warning about excessive trading and churning that can occur in brokerage accounts. 

“Investors should be wary of unauthorized trading, frequent sales and purchases, or excessive fees in their brokerage accounts,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “If you do not know why a trade was made or why a fee was charged, ask your broker to explain it to you.”

The SEC’s complaint, filed in federal court in Manhattan, charges Dean and Fowler with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The SEC’s investigation was conducted by Kristin M. Pauley, David Stoelting, Barry O’Connell, Nathaniel I. Kolodny, Michael P. Fioribello, Leslie Kazon, and Thomas P. Smith Jr. in the New York office.  The litigation will be led by Mr. Stoelting and Ms. Pauley.  The case is being supervised by Sanjay Wadhwa.  The examination that led to the investigation was conducted by Jennifer A. Grumbrecht, Jeffrey Berfond, Glen Riddle, and Margaret Lett.

Chinese Traders Charged With Trading on Hacked Nonpublic Information Stolen From Two Law Firms

The Securities and Exchange Commission today charged three Chinese traders with fraudulently trading on hacked nonpublic market-moving information stolen from two prominent New York-based law firms, racking up almost $3 million in illegal profits.  The SEC also is seeking an asset freeze that prevents the traders from cashing in on their illicit gains.  The enforcement action marks the first time the SEC has charged hacking into a law firm’s computer network.

The SEC’s complaint alleges that Iat Hong, Bo Zheng, and Hung Chin executed a deceptive scheme to hack into the networks of two law firms and steal confidential information pertaining to firm clients that were considering mergers or acquisitions. 

According to the SEC’s complaint, the alleged hacking incidents involved installing malware on the law firms’ networks, compromising accounts that enabled access to all email accounts at the firms, and copying and transmitting dozens of gigabytes of emails to remote internet locations.  Hong and Zheng in particular coveted the emails of attorneys involved in mergers and acquisitions as they exchanged a list of partners who performed the work at one of the law firms prior to the hack at that firm.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges.

“We used enhanced trading surveillance and analysis capabilities that we developed over the last few years to identify the broad scope of the defendants’ alleged scheme, including the use of both U.S. and offshore accounts to carry it out,” said Stephanie Avakian, Acting Director of the SEC’s Enforcement Division.  “This action demonstrates our commitment and effectiveness in rooting out cyber-driven schemes no matter how sophisticated.”

“As we allege, the defendants’ ‘hacking to trade’ scheme involved numerous levels of deception as they gained broad access to the nonpublic networks of two law firms, stole confidential information and then used it for substantial personal gain,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement.  “This action marks the end of their alleged deception and serves as a stark reminder to companies and firms that your networks can be vulnerable targets.”

According to the SEC’s complaint, Hong, Zheng, and Chin used the stolen confidential information contained in emails to purchase shares in at least three public companies ahead of public announcements about entering into merger agreements.  The SEC alleges that they spent approximately $7.5 million in a one-month period buying shares in semiconductor company Altera Inc. in advance of a 2015 report that it was in talks to be acquired by Intel Corporation.  Within 12 hours of emails being extracted from one of the firms, Hong and Chin allegedly began purchasing shares of e-commerce company Borderfree so aggressively that they accounted for at least 25 percent of the company’s trading volume on certain days in advance of the announcement of a 2015 deal.  Hong and Zheng also allegedly traded in advance of a 2014 merger announcement involving InterMune, a pharmaceutical company.

The SEC’s complaint charges Hong, Zheng, and Chin with violating the antifraud provisions of the federal securities laws and related rules.  The SEC seeks a final judgment ordering them to pay penalties and disgorge ill-gotten gains plus interest and permanently enjoining them from violating the federal securities laws.  Hong’s mother is named as a relief defendant in the SEC’s complaint for the purpose of recovering ill-gotten gains in her accounts resulting from her son’s alleged illicit trading.

The SEC’s investigation is continuing, and is being conducted by Jennie B. Krasner, Devon Leppink Staren, and staff in the SEC’s Information Technology Forensics Group with assistance from Wendy Kong.  The case is being supervised by Ricky Sachar and Antonia Chion and the litigation is being led by Britt Biles.  The SEC appreciates the assistance of the U.S. Attorney’s Office for Southern District of New York, Federal Bureau of Investigation, Hong Kong Securities and Futures Commission, and Financial Industry Regulatory Authority.  

SEC Names Timothy Husson Associate Director in the Division of Investment Management’s Risk and Examinations Office

The Securities and Exchange Commission today named Timothy Husson Associate Director in the Division of Investment Management’s Risk and Examinations Office.

As Associate Director, Dr. Husson will oversee the management and operations of key data analysis and examination projects and initiatives related to the asset management industry and provide guidance on complex financial and quantitative issues as he leads the Division of Investment Management’s asset management monitoring program.

“Tim is an accomplished quantitative analyst and an insightful colleague who is focused on enhancing the use of data-driven analysis in policymaking and asset management industry oversight,” said David W. Grim, Director of the Division of Investment Management. “As a quantitative specialist, Tim will be a key and complimentary member of the senior management team in the Division of Investment Management.”

Dr. Husson said, “I look forward to continuing to work with the exceptional staff of the Risk and Examinations Office to implement enhanced data analysis and review and inform policy recommendations that promote a fair, efficient, and effective regulatory regime for investment funds and investment advisers.”

Dr. Husson has been a member of the SEC and Division of Investment Management since 2014, serving as Branch Chief, Quantitative Research Analyst (Financial Engineer) and Financial Analyst Fellow in the Division of Investment Management’s Risk and Examinations Office. Prior to his SEC service, Dr. Husson was a Senior Financial Economist at Securities Litigation & Consulting Group, where he provided quantitative analysis and drafted expert reports for arbitrations, state and federal court hearings, and regulatory proceedings.

Dr. Husson is a certified Financial Risk Manager (FRM) and holds a B.A. (with Honors) and Ph.D. in Computational Neuroscience from the University of Chicago, where his work focused on the development and applications of a novel neural imaging system.

SEC Names Sara P. Crovitz Deputy Chief Counsel in the Division of Investment Management’s Chief Counsel’s Office

The Securities and Exchange Commission today named  Sara P. Crovitz Deputy Chief Counsel and Associate Director in the Division of Investment Management’s Chief Counsel’s Office.

As Deputy Chief Counsel, Ms. Crovitz will assist the Chief Counsel in overseeing legal guidance under the Investment Company and Investment Advisers Acts of 1940. Ms. Crovitz also will focus on strategic collaboration between the Chief Counsel’s Office and other offices within the Division of Investment Management and in the Commission and plans to implement leadership initiatives that promote professional development among the staff.

“Sara has a proven track record of expertly handling complex legal matters and providing high quality guidance in an evolving market,” said David W. Grim, Director of the Division of Investment Management. “She also is committed to inspiring collaborative and people-oriented leadership. I know she will be a key voice on our senior team.”

“Sara is a resource throughout the Commission for regulatory knowledge and for promoting inclusive leadership,” said Doug Scheidt, Chief Counsel of the Division of Investment Management. “We all look forward to continuing to benefit from Sara’s counsel as she steps into this new role.”

Ms. Crovitz said, “I am honored to have this opportunity. Having served in the Commission for many years, I have seen the incredible talent and relentless dedication of the Division staff. I welcome the opportunity to work with the Division’s entire staff as we move forward together, dedicated to providing an appropriate regulatory environment in an ever-evolving market environment.”

Ms. Crovitz joined the Commission in 1996 as an attorney in the Office of General Counsel. In 1999, Ms. Crovitz joined the Division of Investment Management as a Senior Counsel in the Office of Investment Company Regulation; and later became a Senior Counsel, a Branch Chief, and an Assistant Chief Counsel in the Chief Counsel’s Office. Prior to her SEC service, Ms. Crovitz was an Associate with Steptoe & Johnson from 1994-1996. Ms. Crovitz received her law degree and bachelor’s degree from the University of Chicago.  Among other honors, Ms. Crovitz received the Chair’s International Award in 2014, the Chair’s Excellence in Leadership Award in 2011, and the Martha Platt Award in 2010.

SEC Issues Annual Staff Reports on Credit Rating Agencies

The Securities and Exchange Commission today issued two annual staff reports that demonstrate compliance and competition continue to increase among the credit rating agencies under SEC oversight as nationally recognized statistical rating organizations (NRSROs). 

“Dedicated oversight of credit rating agencies is a critical part of the SEC’s mission,” said SEC Chair Mary Jo White.  “I am pleased that the firms are advancing initiatives to address the staff’s recommendations, including responses to the comprehensive credit rating reforms adopted by the Commission in August 2014.”

The annual examination report, required by the 2010 Dodd-Frank Act, summarizes the staff’s findings from the most recently completed examinations of each NRSRO, including:

• Policies and procedures for determining, surveilling, or withdrawing ratings.
• Separation of analytical activities from sales and marketing.
• Development, documentation, or application of methodologies, criteria, or models.

The report notes that all of the staff’s findings from prior examinations have been appropriately addressed and their recommendations based on exam findings have identified areas for NRSRO improvement.  The staff found that NRSROs continue to integrate and enhance internal systems and processes to comply with their obligations as regulated entities, such as:

• Implementing IT systems to increase the efficiency, capacity, and accuracy of compliance tasks.
• Adding personnel and resources to anticipate and address risk management issues.
• Increasing the number and frequency of audits and other internal testing.

“As a result of our efforts, NRSROs are redoubling their focus on policy and procedure adherence to achieve enhanced transparency, quality, and integrity,” said Thomas J. Butler, Director of the SEC’s Office of Credit Ratings.  “The firms’ additional investments in information technology and personnel serve to bolster governance, risk, and compliance functions.”

The annual report, mandated by the 2006 Credit Rating Agency Reform Act, discusses the state of competition, transparency, and conflicts of interest at NRSROs.  The report notes that two NRSROs recently became registered in additional ratings categories and that smaller NRSROs continue to actively compete with more established rating agencies, particularly in the asset-backed securities rating category, and also are rating new types of issuances referred to as “esoteric” asset-backed securities. 

The following SEC staff contributed to the examinations and reports: Diane Audino, Michael Bloise, David Bobillot, Sondra Boddie, Rita Bolger, Patrick Boyle, Aaron Byrd, Roseann Catania, Matthew Chan, Leah Clague, Kristin Costello, Doreen Crawford, Scott Davey, Franco Destro, Jill Flory, Ilya Fradkin, William Garnett, Kenneth Godwin, Michael Gonzalez, Karen Healer, Barry Huang, Natalia Kaden, Julia Kiel, Russell Long, David Nicolardi, Sam Nikoomanesh, Kevin O’Neill, Harriet Orol, Abraham Putney, Smeeta Ramarathnam, Jeremiah Roberts, Mary Ryan, Charles Schiller, Andrew Smith, Alexa Strear, Warren Tong, Evelyn Tuntono, Chris Valtin, Kevin Vasel, Andrew Vita, and Michele Wilham.

G. Jeffrey Boujoukos Named Director of Philadelphia Regional Office

The Securities and Exchange Commission today announced that G. Jeffrey Boujoukos has been named Director of its Philadelphia Regional Office, where he will oversee enforcement and examinations in the Mid-Atlantic region.  His appointment will be effective following the departure of Sharon B. Binger, who is leaving the agency at the end of the year.

Mr. Boujoukos joined the SEC’s Enforcement Division in 2009 as Regional Trial Counsel in the Philadelphia office.  He has been Associate Regional Director for Enforcement in that office since March 2014.

As Associate Regional Director and Regional Trial Counsel, Mr. Boujoukos has participated in and supervised dozens of enforcement matters involving a variety of securities law violations, including:

• Charges against BP p.l.c. for misleading investors regarding the Deepwater Horizon oil spill by significantly understating the flow rate in multiple reports filed with the SEC.
   
• An investment advisory firm that failed to properly prepare clients for additional transaction costs beyond the “wrap fees” they pay to cover the cost of several services bundled together.
   
• Insider trading charges against two brokers who traded on inside information ahead of the $1.2 billion acquisition of SPSS Inc. in 2009 by IBM Corp. and a former BP employee.
   
• Charges against New York-based brokerage firm Linkbrokers Derivatives LLC for unlawfully taking secret profits of more than $18 million from customers by adding hidden markups and markdowns to their trades.

“Jeff’s knowledge, judgment and pragmatism make him an ideal leader of the Philadelphia office,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “He has led that office’s enforcement program to bring numerous important and impactful cases, and distinguished himself as a trial lawyer and strategic thinker.”

“Jeff has been a strong partner and advocate for OCIE in his previous positions with the SEC,” said Marc Wyatt, Director of the SEC’s Office of Compliance Inspections and Examinations.  “We look forward to his leadership of the exam program in the Philadelphia region and his contribution to the national program.”

Mr. Boujoukos said, “I am incredibly honored to lead the exceptionally talented and hardworking staff of the SEC’s Philadelphia office.  It is a privilege to come to work every day and collaborate with the office’s enforcement and exam staff who have dedicated their professional careers to protecting the nation’s investors and ensuring fair and orderly markets.”

Prior to joining the SEC staff, Mr. Boujoukos was an associate and later a partner in the litigation department of Morgan, Lewis & Bockius in Philadelphia.  He graduated from Lehigh University in 1989, and graduated with honors from Temple University School of Law in 1992.

SEC Charges Former New York Pension Official and Two Brokers in Pay-to-Play Scheme

The Securities and Exchange Commission today announced fraud charges against a former official of the nation’s third largest public pension fund and two brokers accused 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.

Navnoor Kang, who served as the director of fixed income for the New York State Common Retirement Fund from January 2014 to February 2016, allegedly used his position to direct up to $2.5 billion in state business to Gregg Schonhorn and Deborah Kelley, who were registered representatives at two different broker-dealers.  In exchange for this lucrative business, which netted Schonhorn and Kelley 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.
• An extravagant ski vacation in Park City, Utah, including a $1,000 per night guest suite.

“Kang owed a duty not only to the New York State Common Retirement Fund but to the more than one million public servants and beneficiaries that are served by the fund, including police and fire personnel who count on their pensions to take care of them and their families,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “This action 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, had a duty to disclose his solicitation and receipt of the gifts and entertainment he received from Schonhorn and Kelley but failed to do so.  Schonhorn and Kelley knew Kang was not disclosing his activities to the Fund, and they 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.

“We allege 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,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit.  “Moreover, they allegedly assisted Kang in covering up his misdeeds, with Kelley going so far as to help Kang obstruct the SEC’s investigation.”

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Kang, Schonhorn, and Kelley.

The SEC’s complaint charges Kang, Schonhorn, and Kelley with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Schonhorn and Kelley also are charged with aiding and abetting Kang’s violations.  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.

The SEC’s continuing investigation is being conducted by Public Finance Abuse Unit members Brian Fagel, Eric Celauro, and Jason Howard.  The SEC’s litigation will be led by John E. Birkenheier and Alyssa A. Qualls.  The case is being supervised by Ms. Gaunt and Timothy L. Warren, Associate Regional Director of the SEC’s Chicago Regional Office.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.