The Securities and Exchange Commission today 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.

“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 J. Ceresney, Director of the SEC’s Division of Enforcement.  “To make matters worse, the firm profited handsomely from this alleged failure.” 

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’s Enforcement Division alleges the investments violated Georgia law in the following ways:

• A Georgia public pension fund’s investment is limited to no more than 20 percent 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 L.P. 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.

“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 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.

The SEC’s Enforcement Division alleges that Gray Financial Group and Gray violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 as well as Rule 10b-5, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 as well as Rule 206(4)-8.  Hubbard is charged with violating Section 17(a)(1) and (3) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5(a) and (c) as well as aiding, abetting and causing violations by Gray Financial Group and Gray. 

The SEC’s investigation, which is continuing, has been conducted by Michael Adler and supervised by Peter Diskin of the Atlanta office.  They work in the Enforcement Division’s nationwide Municipal Securities and Public Pensions Unit, and they were assisted by the following examiners in the Atlanta office: Gina Bailey, Lisa Cimino, Donna Esau, Eugene Mooring, Deloris Rankins, and Debra Smith.  The Enforcement Division’s litigation will be led by Kristin Wilhelm of the Atlanta office.