Pension funds for Atlanta police, firefighters, transit workers and other employees were defrauded by their investment advisory firm, the U.S. Securities and Exchange Commission alleged Thursday in order triggering an administrative action.
The agency is accusing Atlanta-based Gray Financial Group, and its two top executives — founder and president Larry Gray and co-CEO Robert Hubbard — of selling unsuitable investments to the pensions.
The company and executives breached their fiduciary duty by steering pension fund clients with the city of Atlanta and MARTA to invest in products owned by the company that did not comply with state law regulating such investments, the SEC said in a prepared statement.
“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,” Andrew J. Ceresney, director of the SEC’s Enforcement Division, said in the statement. “To make matters worse, the firm profited handsomely from this alleged failure.”
A 2013 investigation by The Atlanta Journal-Constitution found that Gray’s company convinced four public pension plans to invest a combined $80 million in funds owned by the Gray Financial. Those investments guarantee the company a 1-percent annual management fee for a minimum of 10 years.
Those fees are in addition to the money paid to the company as a consultant to the pension systems. That arrangement raised concern about the apparent conflict of interest in the company advising the pensions to invest in products that it owns and from which it profits, the newspaper found.
The newspaper also found that Gray didn't disclose $425,000 to the pension systems that he was paying off $425,000 in federal tax liens and a $1 million settlement of a lawsuit that accused him of fraud at the time he was pitching his company's funds.
According to the SEC’s order, Gray Financial Group recommended investments in its fund, called GrayCo Alternative Partners II, to pension systems for the city’s firefighters, police, general employees as well as MARTA. The SEC says those investments violated Georgia law by:
- Public pension investment is limited to no more than 20 percent of the capital in an alternative fund. Atlant's general employees' fund and the police funds surpassed that limit, according to the SEC.
- The law requires at least four other investors in an alternative fund at the time of a Georgia public pension's investment. There were fewer than four other investors in GrayCo Alternative Partners II at the time of these investments.
- There must be at least $100 million in assets in an alternative fund at the time of a Georgia public pension invests. GrayCo Alternative Partners never reached that amount.
All three of those issues were identified in the AJC investigation.
The SEC further alleges that Gray Financial Group and Gray made material misrepresentations to at least one client when asked specifically about the investments’ compliance with state law. They also misrepresented the number and identity of prior investors in the fund, according to the SEC.
The SEC’s Enforcement Division alleges that Gray Financial Group collected more than $1.7 million in fees as a result of the improper investments.
“We allege 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,” Walter Jospin, director of the SEC’s Atlanta regional office, said. “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 allegations. The SEC’s administrative law judges can order sanctions and other relief.
Gray's company in March filed a federal lawsuit against the SEC, trying to have the matter decided in federal court, rather than in front of the agency's Office of Administrative Law Judges.
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