The city of Atlanta’s largest pension board on Thursday called for an audit of $10 million it has sunk into a fund created and managed by its investment adviser, amid an ongoing federal investigation involving that fund.
Atlanta General Employees’ pension board also wants Larry Gray, head of the advisory firm Gray & Co., to explain why he failed to tell regulators about $425,000 in federal tax liens placed against his Roswell home and his $1 million settlement of a lawsuit alleging fraud.
Finally, the board is slamming the door on any future advisers suggesting investment in their own funds. The board and the city’s other two pension plans agreed to invest $64 million in the Gray & Co. fund at Gray’s recommendation, despite concerns about a conflict of interest.
Jim Beard, Atlanta’s chief financial officer and a member of all three city pension boards, said the General Employees forensic audit is necessary to make sure money has been properly distributed to the investments Gray selected.
“Somebody has to look,” Beard said. “I’m indifferent as to who does the looking, so long as they are not affiliated with Gray & Co. We just need a third party.”
The actions come in the wake of a three-month investigation by the Atlanta Journal-Constitution. The AJC learned Thursday that the U.S. Securities and Exchange Commission has subpoenaed records from at least two pension boards where Gray & Co. serves as adviser. The firm advises 10 publicly-funded pensions and a college fund in metro Atlanta, along with more than a dozen other pension boards around the country.
Gray did not respond to multiple messages Thursday seeking comment. But an employee of his firm Wednesday distributed a two-page letter to a Michigan pension board the firm advises. The letter addresses issues raised in news accounts, saying Gray is “outraged” and calling the articles an “attack on my character.”
“The fact is that in my 33-year career, I have always been forthright and honest, placing the interests of my clients first…,” the letter says.
“There was never any intention to not disclose these matters mentioned in the newspapers,” he wrote. “We take great effort to always be in compliance and we invest significant resources in doing so.”
SEC spokeswoman Christina D’Amico said Thursday the agency can neither confirm nor deny the existence of investigations.
According to the SEC website, subpoenas are issued for witness testimony or other evidence when a formal investigation is ordered. Following such an investigation, the commission can file a civil case in federal court or bring an administrative action.
The AJC reported in July that some Atlanta pension board members were concerned that Gray did not adequately disclose his firm’s financial interest in the fund when he recommended it last year. General Employees board member Angela Green had filed a complaint with the SEC over the issue, saying he did not disclose the conflict.
Gray has said that he made the boards aware of it.
Then earlier this month, the AJC reported that Gray did not report the liens and settlement on documents he submitted to state and federal regulators. The liens were for unpaid payroll taxes. And the settlement came last year after college basketball coach Perry Clark filed a lawsuit accusing Gray of mismanaging his money.
Gray put up his Roswell house and Buckhead condo as collateral in the Clark settlement. In an earlier interview with the AJC, Gray has said that most of Clark’s allegations were false and that he settled only to avoid costlier legal fees.
Gray’s lack of disclosure means the city’s General Employees pension board members, who manage $1.1 billion, did not know about his personal financial issues while he was pitching his firm’s fund.
The investment in the Gray & Co. fund locks in lucrative revenue for the firm. Gray’s company earns nearly $400,000 a year as the financial consultant for the city’s three pension systems. But all told, the $64 million investment committed by Atlanta’s three pension systems guarantees the firm an additional fee of $640,000 a year.
The firm also gets 10 percent of the profit after the investment reaches a certain threshold. The pension boards’ investments are locked in for a minimum of 10 years.
Atlanta Mayor Kasim Reed was not available for comment Thursday. But he told WABE radio on Wednesday that, while he couldn’t comment on the SEC investigation, the city was cooperating.
“I’m never concerned about the federal government getting involved because, at the end of the day, I believe light is the best antiseptic,” Reed told the radio station.
The General Employees board this week also changed the rules for how it will work with financial advisers. They will no longer be allowed to offer their own funds for investment. They also must disclose to the board any personal or professional financial interest that could be a conflict of interest. Beard said the disclosure would include legal settlements and tax liens.
At this point, neither of Atlanta’s other two city pensions systems — for firefighters and police officers — has taken similar action.
A Michigan pension board advised by Gray & Co. did take steps this month for a fresh look at its investment in the firm’s fund.
The Pontiac, Mich. employees retirement system voted Sept. 18 to have a committee consider the hiring of an outside consultant to oversee its $6 million investment.
According to the Oakland Press, the board’s chairman, Charlie Harrison, said the outside consultant would provide “another layer of protection” for the investment.
“Based on all that’s going on publicly and in the media and what have you, it’s time that we do deal with this,” Harrison was quoted as saying.
The Pontiac board voted to invest in a Gray & Co. fund in December 2011 despite a contentious debate over the propriety of Gray directing money into his firm’s own fund.
The Atlanta Journal-Constitution in July first reported concerns about Atlanta investment adviser Larry Gray, whose firm recommends investments for public pension plans responsible for investing billions of dollars. Some board members complained that Gray hadn’t made clear his firm’s financial interest when he recommended investment in a fund his firm had just created.
Then in September, the AJC revealed that Gray has been paying off $425,000 in federal tax liens and a $1 million settlement of a lawsuit accusing him of fraud while pitching his firm’s fund and locking in lucrative revenue. That information was not included in disclosures that Gray filed with government regulators, although investment advisers in most circumstances must report unpaid liens and certain legal settlements.
That coverage prompted the pension board for the city of Atlanta’s largest fund on Thursday to call for an audit of the Gray & Co. investment, to adopt new rules preventing for advisers from recommending their own funds, and asking Gray to explain his lack of disclosure at a meeting next week. The AJC also confirmed that federal regulators have issued subpoenas for records related to the Gray & Co. fund.