SEC Levels Fraud Charges at Advisors over Alts Investments

The US regulator has charged an advisory firm and two of its executives with fraud, claiming they sold unsuitable investments to public pension funds.

The Securities and Exchange Commission (SEC) filed the charges yesterday, alleging that Gray Financial Group, its founder Laurence Gray, and its co-CEO Robert Hubbard “breached their fiduciary duty” by persuading public pension funds for the city of Atlanta, Georgia to invest in an “alternative investment fund” in breach of state law.

Gray Financial Group—which operates as Gray & Company and manages more than $10 billion—collected “more than $1.7 million” in fees from pension funds for firefighters, police, and other public sector workers, the SEC’s statement said.

“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 advisors.”

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“The claims and arguments in the SEC’s filing are without merit,” said Terry Weiss, a lawyer at Greenberg Traurig representing Gray Financial Group, Gray, and Hubbard.

Georgia state law was changed in 2012 to allow pension funds to allocate to “alternative investments”, subject to strict limits.

When Gray Financial Group advised the pension funds to invest in its own GrayCo Alternative Partners II fund, there were fewer than four other investors and less than $100 million in total assets in the fund, the SEC alleged—both breaches of Georgia law. In total four pensions invested $77 million in the fund, the SEC said.

Public pensions in the state must limit their investments to a maximum of 20% of a fund’s capital, but the SEC said two pension funds exceeded this limit.

The SEC’s filing alleged that the company, Gray, and Hubbard had “recommended, offered, and sold” investments in the GrayCo Alternative Partners II fund “despite the fact that they knew, were reckless in not knowing, or should have known that these investments did not comply with the restrictions on alternative investments imposed by Georgia law”.

“Additionally, in October 2012, when recommending GrayCo Alt. II to one of these clients, Gray Financial and Gray made specific material misrepresentations concerning the investment’s compliance with the Georgia law and the number and identity of prior investors in the fund,” the SEC said.

“The SEC is once again bringing its charges in an unconstitutional and home-cooked administrative proceeding rather than trying a case before an impartial US district court and a jury of one’s peers,” Weiss said, according to Reuters. He added that the company would “vigorously defend itself”.

Source: Securities & Exchange Commission Breakdown of investments in the GrayCo Alternative Investment Partners II fund. Source: SEC

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Canadian pension funds have a stronger appetite for infrastructure investments than their US peers, with nearly six times more capital allocated, according to Preqin.

Nearly 70 private and public plans in the Great White North—with an average of $14.6 billion in assets under management—reported a current average allocation of 5.3%, or $1.08 billion, of total assets to infrastructure. Some 61% said they invested at least 5% of their total assets.

This figure was slightly lower than the average target allocation of 8.4%, or $1.17 billion.

US funds, on the other hand, only had an average exposure of 2% to infrastructure, leaving room to meet the target allocation of 4%. The current average allocation was just $172 million from an average of $17.6 billion of total assets. The vast majority—80%—of US funds allocated less than 5% of their portfolio to infrastructure.

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While an overwhelming majority—97% of Canadian and 93% of US funds—chose unlisted funds, there was a significant portion (35%) of Canadian plans directly investing in infrastructure. Only 1% of US funds directly invested, Preqin found.

The way infrastructure allocations were reported was also markedly different north of the border: Three-quarters of Canadian plans had separate infrastructure allocations, while US funds largely preferred to invest through broader private equity and real assets allocations.

Notable US and Canadian infrastructure investors
The California Public Employees’ Retirement System this week made its first venture into Asia-Pacific infrastructure, with Australian manager QIC running an A$1 billion (US$764 million) mandate.

This deal will push the pension fund’s total real assets allocation beyond $30 billion, or nearly 10% of total assets.

Meanwhile, the C$215 billion ($179.5 billion) La Caisse de dépôt et placement du Québec also inked a deal with the province’s government this year to fund “major infrastructure projects” upwards of $4 billion.

The agreement “will allow us to increase our exposure to infrastructure while concretely putting our expertise to work for Quebec’s economy,” Michael Sabia, president and CEO of a Caisse, said in January. “These investments will generate returns that help to secure Quebecers’ retirement for the future. It’s a win-win partnership that benefits everyone.”

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