SEC Charges John Paulsen for Aiding & Abetting Pay-To-Play Scheme
On July 26, 2018, the Securities & Exchange Commission (“SEC”) filed a civil injunctive action against John A. Paulsen, a former managing director and fixed income research analyst at a registered broker-dealer, for aiding and abetting a pay-to-play scheme involving the New York State Common Retirement Fund.
As alleged in the SEC’s complaint, from early 2014 until February 2016, Navnoor S. Kang was the Fund’s Director of Fixed Income, with investment responsibility for approximately $50 billion of the Fund’s assets. According to the SEC’s complaint, Kang used his position at the Fund to solicit and receive improper entertainment from Paulsen and Deborah D. Kelley, a registered representative at the broker-dealer. In exchange, Kang directed millions of dollars in state business to the broker-dealer, generating sizable commissions.
The SEC alleges that Paulsen and Kelley planned a ski trip for the purpose of entertaining Kang and his girlfriend. The complaint alleges that Kang told Paulsen and Kelley that the Fund had very strict rules that prohibited him from accepting anything from Paulsen. Yet, according to the complaint, Paulsen and Kelley spent thousands of dollars entertaining Kang and his girlfriend. Paulsen and Kelley then sought reimbursement of those expenses from the broker-dealer and submitted false expense reports which concealed the fact they had entertained Kang on the trip. Later, when the broker-dealer discovered inconsistencies in the expense reports and began an internal investigation, Paulsen and Kelley conspired to lie, and did lie, to the broker-dealer’s internal investigators.
The SEC’s complaint charges Paulsen with aiding and abetting Kang and Kelley’s 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 thereunder. The SEC is seeking a permanent injunction and disgorgement plus interest and civil penalties.
The SEC previously charged Kang, Kelley, and another individual in the pay-to-play scheme:
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