SEC Charges Investment Advisor, Execs Over Illegal Pension Investments

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WASHINGTON - The Securities and Exchange Commission on Thursday charged an Atlanta-based investment advisory firm and two executives with fraud for allegedly selling investments to pension funds for the city's police and firefighters, transit workers, and other employees that were illegal under state law.

Gray Financial Group, its founder and president Laurence Gray, and its co-chief executive officer Robert Hubbard, 4th, violated federal securities laws and breached their fiduciary duties by steering the public pension funds to invest in a fund offered by the firm despite knowing the investments did not comply with state law, according to the SEC's enforcement division.

An SEC administrative law judge will hear the case within two months. The SEC wants the ALJ to order Gray to cease and desist from violations of the laws and to determine any civil penalties and disgorgement that may be appropriate.

"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 enforcement division. "To make matters worse, the firm profited handsomely from this alleged failure."

The firm, which the SEC said had been providing investment advisory services to public pensions nationwide since at least 2006, allegedly began in 2012 to recommend to the four Georgia public pension systems that they invest in an "alternative" fund called GrayCo Alternative Partners II, LP.

Alternative funds invest in financial products other than stocks, bonds and cash such as hedge funds, commodities and real estate. The four pension fund systems invested a cumulative $77 million in the GrayCo fund, the SEC said. The firm collected more than $1.7 million in fees from the pension fund clients as a result of the improper investments, the SEC said.

However, a Georgia law enacted in 2012 that allowed public pensions to invest in alternative funds, placed limitations on that ability because of the riskier nature of those funds.

The Employees' Retirement System of Georgia Enhanced Investment Authority Act limits a pension system's investment to no more than 20% of the capital in an alternative fund. Two of the pension funds' investments surpassed that limit, the SEC said. The law also stipulated that there had to be at least four other investors in the alternative fund at the time of the Georgia public pension funds' investment. But the SEC alleged that there were fewer than four other investors in the alternative fund at the time of these investments.

The alternative fund additionally failed to hit the $100 million asset threshold that the law requires before a pension system invests, the SEC said. The commission alleged that Gray, 53, lied to pension fund trustees who asked him if the investments complied with the law.

"Gray knew, was reckless in not knowing or should have known, his claim was false, as the three relevant limitations of the Georgia Investment Act were not met at that time," stated the SEC order against him.

The SEC said Gray further misled the trustees by telling them that pension funds from Michigan, New York and Chicago had already invested in the fund, even though they never had.

"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," said Walter Jospin, director of the SEC's Atlanta regional office. "Public pension funds and their beneficiaries deserve better from their advisers."

The SEC said Gray's conduct violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities. The firm also violated provisions under the Investment Advisers Act of 1940, the SEC said. The SEC said Hubbard "willfully aided, abetted, and caused Gray Financial and Gray's violations."

The firm did not respond to a request for comment.

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