On December 21, 2016, the SEC charged the former Director of Fixed Income for the New York State Common Retirement Fund (the "NYSCRF") with allegedly steering billions of dollars of NYSCRF assets to two broker-dealers in exchange for hotel room stays, restaurant outings, jewelry, concert tickets and vacations. In total, according to the SEC, the former Director allegedly received $180,000 in undisclosed gifts. The SEC alleged violations of Section 10(b) of the 1934 Act and Rule 10b-5 thereunder and Section 17(a) of the 1933 Act. While differing from one another in certain respects, both Sections encompass anti-fraud provisions. The two broker-dealers are also charged in the same action.
According to the complaint, the former Director had investment responsibility for approximately $50 billion of NYSCRF assets. The NYSCRF is the third-largest public pension fund in the United States, and as of March 31, 2016, had approximately $178 billion in assets held in trust for pension benefits.
At the time the former Director arrived at the NYSCRF, according to the complaint, neither broker-dealer was executing trades on behalf of the NYSCRF. However, the SEC alleged that, within three months, trade- execution business with both broker-dealers increased significantly. The SEC alleged that by the end of the 2016 fiscal year, $2.38 billion and $1 billion in fixed-income trades were executed by the two broker-dealers, respectively. The increase in business (and the associated brokerage commissions), according to the SEC, coincided with the lavish gifts allegedly given to the former Director.
For background on the application of pay-to-play to investment advisers, see our earlier post.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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