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Advisory draws SEC heat for alleged violations in police, firefighter pensions
Regulator charges Atlanta firm with improperly recommending alternative investments

May 21, 2015

By Mark Schoeff Jr.<http://www.investmentnews.com/staff/mschoeff>

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The Securities and Exchange Commission charged an Atlanta investment advisory firm with violating suitability rules by putting pension funds for city workers into inappropriate alternative investments associated with the firm.

The SEC alleged that Gray Financial Group improperly sold investments in GrayCo Alternative Partners II LP to four Atlanta public pension funds for firefighters, police officers, city employees and transit workers.

The SEC asserts<http://www.sec.gov/litigation/admin/2015/33-9789.pdf> that the investment advisory firm's chief executive, Laurence O. Gray, and co-chief executive, Robert C. Hubbard IV, recommended the investments even though they violated provisions of a state law that governs how public pensions and retirement systems can invest in alternative funds.

The measure places restrictions on such investments. For instance, a public pension's stake in an alternative fund cannot represent more than 20% of the fund's capital. In addition, a pension cannot invest in a fund that has less than $100 million in assets, and cannot enter a fund that does not have at least four other investors.

The SEC alleged that the Gray Financial officials told the Atlanta pension funds that the investments were consistent with Georgia law, even though they did not meet the criteria outlined under the measure.

“The claims and arguments in the SEC's filing today are without merit,” Terry Weiss, a partner at Greenberg Traurig and a lawyer for Gray Financial as well as Mr. Gray and Mr. Hubbard, said in a statement.

From November 2012 through December 2014, the Atlanta public pensions paid Gray Financial $1.7 million in fees related to the alternative 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,” SEC director of enforcement Andrew Ceresney said in a statement. “To make matters worse, the firm profited handsomely from this alleged failure.”

The case will be heard before an SEC administrative law judge, putting the firm in a venue that it previously has claimed is unfair. In a separate case in federal court, the firm is challenging the SEC's use of its own administrative judges<http://www.investmentnews.com/article/20150220/FREE/150229992> rather than federal courts to try enforcement cases.

“The SEC is once again bringing its charges in an unconstitutional and home-cooked administrative proceeding rather than trying a case before an impartial U.S. district court and a jury of one's peers,” Mr. Weiss said in the statement.

In addition to pursuing the pension case against Gray Financial, Mr. Weiss asserted that the SEC is trying to stymie the firm's suit over hearing venues.

“In our previously filed action against the SEC in U.S. district court — in which we seek to stop this sort of over-reaching SEC administrative proceeding — the SEC is now trying to prevent us from ever obtaining legitimate discovery we are seeking into the constitutionality and fairness of its administrative law process,” Mr. Weiss said. “Gray Financial will vigorously defend itself and continue to fight the SEC in federal court as well as in these administrative proceedings.”

The SEC declined to comment about the accusations by Mr. Weiss.

Arlene Busch

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