RIA Suing SEC Hit with Fraud Charges

RIA Suing SEC Hit with Fraud Charges

The Atlanta-based investment advisory firm who challenged the Securities and Exchange Commission’s use of internal administrative proceedings has been officially slapped with fraud charges by the regulator.

The SEC charged Gray Financial Group and two of its executives of fraud on Thursday, claiming it sold unsuitable products to pension funds and collected $1.7 million in fees in the process.

According to the SEC, Gray Financial founder Laurence O. Gray and co-CEO Robert C. Hubbard IV breached their fiduciary duty by steering public pension fund clients, including police, firefighters and transit workers, into an alternative investment fund offered by the firm, despite knowing the investments did not comply with state law. 

Under Georgia law, public pension funds can invest in alternatives, but the investments are subject to restrictions that the firm’s product allegedly failed to meet.

Additionally, the SEC claims Laurence Gray and his firm lied to at least one client regarding the investments’ compliance with the law. They also allegedly misrepresented the number and identity of prior investors in the fund.

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

Gray Financial, which manages almost $11 billion, was notified of the SEC’s investigation, but the firm challenged the regulator's plans to bring the case as an administrative proceeding, arguing that the forum was unconstitutional.

And they're not the only ones. The SEC’s increased used of its internal administrative court has come under fire recently, with the media, defense attorneys and even House Republications raising questions the proceedings' ability to maintain due process and objectivity.

"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," Terry Weiss, a partner with Greenberg Traurig representing Gray Financial, said in a statement.

The firm sued the SEC in Georgia federal court in February in an effort to halt the regulator from bringing a case against Gray as an administrative proceeding and to obtain more information regarding the process behind the venue selection. That case is ongoing, although the SEC has filed a motion to dismiss Gray’s suit.

The SEC said the fraud case against Gray Financial and its executives will be scheduled for a public hearing before an administrative law judge.

"Gray Financial will vigorously defend itself and continue to fight the SEC in federal court as well as in these administrative proceedings," Weiss said.

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