SEC Charges Atlanta Broker With Defrauding Public Employee Pension Funds

Millions of state and local government employees depend on public pension systems to safeguard their retirement. Florida itself operates the fourth-largest public pension system in the country. And when unethical investment advisers try to take advantage of public pension systems by recommending unsuitable uses for pension funds, workers and retirees may be put at risk.

In the Matter of Gray Financial Group, Inc.

The U.S. Securities and Exchange Commission recently filed an administrative complaint against Atlanta-based Gray Financial Group, Inc., its president, Laurence O. Gray, and one of its employees, Robert C. Hubbard, IV. Gray Financial provides investment advice to public pension funds throughout the country, and of relevance here, to four public pension funds in Georgia. These include the City of Atlanta Firefighters’ and Police Officers’ pension funds.

The Georgia legislature amended the state’s public pension rules in 2012, authorizing pension funds to invest in “alternative investments” that met certain criteria. According to the SEC, Gray Financial took advantage of this new law to advise its Georgia pension fund clients to invest in an alternative investment fund operated by Gray itself. This fund, known as GrayCo Alternative Partners II, LP, was controlled by Laurence Gray and Hubbard, his co-CEO.

The SEC alleges GrayCo did not meet the legal requirements set forth by the 2012 Georgia law. First, an eligible alternative investment fund must have at least $100 million in assets. The SEC said GrayCo only had $78 million in capital. Second, no individual public pension fund may provide more than 20% of an alternative investment’s capital. Here, according to the SEC, two funds—those representing Atlanta police and general city employees—exceeded this threshold. Finally, Georgia law forbids a public pension fund from buying into an alternative investment until it has at least four shareholders not affiliated with the issuer. Here, all of GrayCo’s non-affiliated shareholders were public pension funds advised by Gray Financial.

The SEC said this all adds up to a breach of Gray Financial’s fiduciary duty to its pension fund clients. The Commission charged Gray Financial, and Laurence Gray and Hubbard individually, with committing “fraudulent conduct in connection with the purchase and sale of securities.” This is an administrative complaint, which means the case will be heard by an SEC-appointed administrative law judge. The SEC itself may then review the administrative law judge’s initial decision before issuing a final order.

Dealing With Unethical Investment Advisers

Although this case deals with a particular Georgia law governing pension funds, the larger issue of investment advisers and their fiduciary duty to clients affects all investors. Under federal law, an investment adviser has an affirmative duty not to engage in any “fraudulent, deceptive or manipulative conduct.” Among other things, this means an investment adviser must not lie to a client about the law or their own potential conflicts of interest. If you believe you have been misled or defrauded by an unethical investment adviser and need legal advice on how to proceed, contact Florida securities fraud attorney Gregory Tendrich, P.A., right away.