The SEC is accusing investment advisory firm Gray Financial, its co-CEO Robert C. Hubbard IV, and president/founder Laurence O. Gray with fraud. The regulator claims that the three of them of breached their duty to clients by directing certain pension funds to invest in a firm-offered alternative investment even while knowing that the investments were not in compliance with Georgia law.
The SEC’s order said that Gray Financial made the inappropriate recommendations to Atlanta's:
• Firefighters’ Pension Fund
• Police Officers’ Pension Fund
• General Employees’ Pension Fund
• MARTA/ATU Local 732 Employees Retirement Plan
The firm purportedly advised the pension funds to put their money in in the firm’s Greco Alternative Partners II. In the process, the firm collected over $1.7M in fees from these clients for these purportedly improper investments.
According to the Enforcement Division, the investments were in violation of state law because:
• The investments of Georgia public pension funds cannot be 20% greater than the capital found in the alternative fund. With the Gray fund, the investments of two of the pension funds exceeded that limit.
• When a Georgia public pension fund invests in an alterative fund there must a minimum of four investors, which was not the case when these investments were made.
• When a Georgia public pension fund invests in an alternative fund the latter has to have a minimum of $100M in asset. This was never the case with Gray’s alternative investment.
The SEC claims that Gray Financial and Gray made material misrepresentations regarding whether the investments complied with the law. Also, they purportedly did provide the correct information regarding the identity and number of previous fund investors.
The firm and Gray are accused of violating sections of the:
• Exchange Act of 1934
• The Securities Act of 1933
• Rule 10b-5, the Investment Adviser Act of 1940
• Rule 206(4)-8.
Hubbard, who is accused of involvement in the violations committed by Gray and Gray Financial, is charged with violating:
• Other sections of the Securities Act of 1933
• Section 10B
• The Exchange Act
• Other rules. He is
The attorney for Gray & Co, Hubbard, and Gray claims that the SEC’s case lacks merit. The Commission’s Atlanta Regional Office Director, Walter Jospin, however, is adamant that Gray Financial and its top executives placed their own interests before that of clients.
Alternative Investment Funds
These types of funds offer unique benefits by diversifying exposure to different opportunities. Their strategies tend to take investors away from traditional asset classes while providing different investment strategies and kinds of investments.
Alternative investments can lead to above-average returns. However, there are risks involved. They tend to be less liquid than other investments, especially when there is stress in the market. They can also bring complex tax implications.
Because a lot of alternative investment funds are newer products, their performance history can be limited. They also may have higher operating costs and fees.
Read the SEC Order (PDF)
More Blog Posts:
Gray Financial Group Sues the SEC for Using Administrative Law Judges, Institutional Investor Securities Blog, February 23, 2015
Texas Pension Fund Sues Tesco For Securities Fraud, Stockbroker Fraud Blog, November 5, 2014