The Securities and Exchange Commission (SEC) announced fraud charges against an Atlanta-based investment advisory firm and two executives accused of selling unsuitable investments to pension funds for the city’s police and firefighters, transit workers and other employees.
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 steering these public pension fund clients to invest in an alternative investment fund offered by the firm, despite knowing the investments did not comply with state law. Georgia law allows most public pension funds in the state to purchase alternative investment funds, but 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.
According to the 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 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 LP 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 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.