The Securities and Exchange Commission announced fraud charges Thursday against an Atlanta-based advisory firm and its executives for steering public pension fund clients into an alternative investment fund offered by the firm despite the fact the investments did not comply with state law.
The SEC’s Enforcement Division alleges that Gray Financial Group, its founder and president, Laurence O. Gray, and its co-CEO Robert C. Hubbard IV breached their fiduciary duty by selling unsuitable investments to pension funds for the city’s police and firefighters, transit workers and other employees—and deliberately hiding the fact that the investments were unsuitable.
The SEC states that while Georgia law allows most public pension funds in the state to purchase alternative investment funds, the investments are subject to certain restrictions that Gray Financial Group’s fund allegedly failed to meet.
In an order instituting an administrative proceeding, the SEC’s Enforcement Division alleges that Gray Financial Group has collected more than $1.7 million in fees from the pension fund clients as a result of the improper investments.
“As alleged in our order, Gray Financial Group breached a fiduciary duty to public pension fund clients by recommending investments it knew did not comply with legal requirements,” said Andrew Ceresney, director of the SEC’s Division of Enforcement, in a statement. “To make matters worse, the firm profited handsomely from this alleged failure.”
According to the SEC’s order, Gray Financial Group recommended investments in its fund called GrayCo Alternative Partners II LP to the city of Atlanta’s Firefighters’ Pension Fund, General Employees’ Pension Fund, and Police Officers’ Pension Fund as well as the MARTA/ATU Local 732 Employees Retirement Plan.
The SEC’s Enforcement Division alleges the investments violated Georgia law in the following ways:
- A Georgia public pension fund’s investment is limited to no more than 20% of the capital in an alternative fund. Two of the pension funds’ investments surpassed that limit.
- The law requires at least four other investors in an alternative fund at the time of a Georgia public pension fund’s investment. There were fewer than four other investors in GrayCo Alternative Partners II L.P. at the time of these investments.
- There must be at least $100 million in assets in an alternative fund at the time a Georgia public pension fund invests. GrayCo Alternative Partners II LP has never reached that amount.
The SEC’s Enforcement Division further alleges that Gray Financial Group and Gray made “material misrepresentations” to at least one client when asked specifically about the investments’ compliance with the law. They also misrepresented the number and identity of prior investors in the fund, the SEC states.
Walter Jospin, director of the SEC’s Atlanta Regional Office, said in the statement that Gray Financial Group and its senior officials “put their own interests ahead of their clients, and Gray deliberately misrepresented that the recommended investments were permissible under Georgia law. Public pension funds and their beneficiaries deserve better from their advisers.”
The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate, the SEC said.
— Check out SEC, FINRA Enforcement: Father, Son Used Golf Emails to Hide Insider Trading on ThinkAdvisor.