Larry Gray, founder of Gray Financial, has been sanctioned by the U.S. Securities and Exchange Commission for intentionally defrauding Atlanta pension systems for transit workers, firefighters, police officers and general employees. Delane Rouse/Rouse Photography Group
Photo: Delane Rouse
Photo: Delane Rouse

Former Atlanta pension adviser suspended and fined by SEC

Larry Gray, a former adviser to some of metro Atlanta’s largest public pensions, has been suspended by the U.S. Securities and Exchange Commission for intentionally defrauding city of Atlanta and MARTA retirement systems.

An SEC order dated Nov. 22 suspends Gray from serving as or working for an investment adviser for two years, then he must apply to the SEC for reinstatement. He is also required to pay back $251,298 — the amount of profit he and his company, Gray Financial, made on $77 million in questionable investments sold to the pension systems in 2012. In addition, Gray was fined $150,000.

Gray Financial was also censured, and Robert Hubbard, the 42-year-old former chief executive of Gray Financial, is suspended for one year and fined $75,000.

The action arises out of 2012 investments the Buckhead-based firm sold to four Atlanta pension systems — for transit workers, firefighters, police officers and general employees — while it served as an investment adviser to those systems.

As a 2013 Atlanta Journal-Constitution investigation had found, Gray Financial’s fund did not meet legal requirements for public pension investments in so-called alternative funds: private equity, real estate and distressed or start-up companies.

The Legislature imposed restrictions on alternative fund investments because they are more expensive and riskier than standard stocks and bonds, though they also hold the promise of higher returns.

Those restrictions include prohibiting public pension investments unless the alternative fund has at least $100 million from at least four other investors. The law also bars any public pension from holding more than 20 percent of the alternative fund’s investment.

After years of investigating and litigating the matter, the SEC found that investments in Gray Financial’s alternative fund violated all three of those provisions and that the boards were intentionally misled to believe the investments were legal.

The order says Gray “knew or was reckless in not knowing” that his claim about the legality of the investments was false.

Gray, 56, declined to answer questions or comment on the judgment, saying that all parties are “prohibited from commenting.” His attorney declined to comment for the same reason.

Gray’s company has been purchased by Capital Consequent Management, which now manages the alternative investment fund. The city’s investment in the alternative fund is still bound by a 10-year contract.

The contract guarantees the company a 1 percent annual management fee for 10 years.

Doug Strachan, chairman of the city’s General Employees’ Pension Fund, said the board was “satisfied that justice has prevailed.” He said the board is working with Capital Consequent and is hopeful it can negotiate a better deal.

“We are grateful to the SEC for their helping to bring closure to this matter,” Strachan said.

Angela Green, a member of the general employees’ board, filed the initial SEC complaint against Gray for recommending investment in the alternative fund without properly disclosing his company’s ownership.

“I’m very happy,” Green said. “The only thing is, to me the punishment doesn’t fit the crime. It should have been more severe. Look at how many people’s money this affected.”

Atlanta’s General Employees’ Pension Fund was the largest investor at $28 million, making up 36 percent of the money in Gray’s fund. The police pension invested $21 million, or 26 percent of the fund. The other investments were $15 million from the firefighters pension and $13 million from MARTA.

Gray Financial invested $1 million. Those remain the only investments in Gray’s fund, which has never reached the $100 million minimum threshold for public pension investment.

Gray will repay the ill-gotten gains to the SEC, which will then reimburse the various pension systems on a proportional basis.

It is unclear exactly how the fund has performed, but Strachan said it “has not met expectations, relative to … what the (pension) could have achieved in other, established” investments.

The AJC’s investigation raised other questions about Gray that were not addressed by the SECs order, including the apparent conflict-of-interest in Gray serving as an adviser to the pension boards and urging them to invest in his own product.

The AJC also found Gray failed to disclose to state and federal regulators that he was was paying off a sizable federal tax lien and a $1 million lawsuit settlement that accused him of fraud while he served as an adviser to the pension boards.

Support real journalism. Support local journalism. Subscribe to The Atlanta Journal-Constitution today. See offers.

Your subscription to the Atlanta Journal-Constitution funds in-depth reporting and investigations that keep you informed. Thank you for supporting real journalism.