SEC charges firm that sued to block in-house case

Gray Financial Group has been accused of defrauding investors and will go before the SEC’s in-house court despite its pending lawsuit claiming the regulator’s proceedings are unconstitutional.

The US Securities and Exchange Commission (SEC) has charged Atlanta-based investment advisory firm Gray Financial Group and its executives with defrauding investors. Gray will go before the SEC’s in-house court for raising capital for its fund of funds vehicles in violation of Georgia state law.

The charges come three months after Gray sued the SEC over the use of its internal administrative proceedings, arguing that they are unconstitutional because the US President is unable to remove administrative law judges (ALJs), a violation of executive power, according to the lawsuit.

Gray primarily provides consulting services to pension plans, but expanded its business to manage funds of funds in 2011. In 2012, Georgia enacted a law that authorized state public pension plans to invest in alternative assets, provided that: the investment did not exceed a certain percentage of the overall fund, the fund raised at least $100 million and at least four other investors committed to the vehicle.

When marketing GrayCo Alternative Partners II, Gray, in its consulting capacity, recommended that its clients invest in the fund, even though the investments did not fulfill the requirements of the Georgia law. The SEC claims that Gray founder Laurence Gray “knew, was reckless in not knowing, or should have known” that these investments were illegal and breached the firm’s fiduciary duty.

The SEC’s Division of Enforcement claims that Gray has collected more than $1.7 million in fees from the pension fund clients as a result of the improper investments.

“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 director of the SEC’s Atlanta regional office Walter Jospin in a statement.  “Public pension funds and their beneficiaries deserve better from their advisers.”

The matter is scheduled for a public hearing before an ALJ for proceedings to adjudicate the SEC’s allegations and determine what, if any, remedial actions are appropriate.

Gray is attempting to stop those proceedings before they begin with its lawsuit against the SEC in the US District Court of Northern Georgia. Gray’s complaint is quite similar to one recently made by outspoken Patriarch Partners founder Lynn Tilton, who is also being charged with fraud by the SEC. Both suits claim the commission’s administrative enforcement proceedings violate Article II of the US Constitution. Tilton is due to appear before an ALJ later this month.