Atlanta pension adviser didn’t disclose liens, settlement

Gray says disclosures weren’t required

Atlanta investment adviser Larry Gray has locked in lucrative revenue by urging public pensions his firm advises to sink millions into its own funds. But while making his pitch, Gray has been paying off $425,000 in federal tax liens and a $1 million settlement of a lawsuit that accused him of fraud, an Atlanta Journal-Constitution investigation has found.

Gray failed to disclose those personal financial problems to federal and state regulators. In most circumstances, investment advisers are required to disclose unpaid liens and certain legal settlements. That’s so clients have a true picture of the people they rely upon for advice on investments that often amount to millions of dollars.

While Gray says he has done all that is required, his latest disclosure filing, in January 2012, doesn’t reveal that he has been making payments to the Internal Revenue Service for eight years to resolve tax liens on his Roswell home. The liens stem from payroll tax liabilities at his firm, the newspaper found.

Likewise, Gray failed to disclose his legal settlement with former Tulane and University of Miami basketball coach Perry Clark, finalized in March 2012, even though state and federal regulations require that disclosure forms be updated within 30 days of a change.

Gray & Co. is the adviser for 10 publicly-funded pensions and a college fund in metro Atlanta that invest $3.6 billion on behalf of tens of thousands of employees and retirees. The firm also advises 21 other systems around the country, most of which are public and invest tax dollars.

Gray, 52, acknowledged in an interview that he’s still making payments to both Clark and the IRS.

Gray said he was not required to disclose the settlement with Clark, his friend of 20 years, because he was not providing official financial advice to him. He made that statement despite acknowledging in his response to the lawsuit that he was paid for advice he gave Clark, and that he had check-writing authority over one of Clark’s bank accounts.

“When I met Mr. Clark, I was with another company,” Gray said in an interview. “So the agreements were with that company early on. Did he pay me privately to advise him here or there? Yes. But you will not find any formalized agreements. Therefore, he was not a client of Gray & Company.”

Gray said he has $45,000 left to pay on the liens, which he said resulted from poor tax advice during a rough patch at his firm after a key financial backer died.

Gray said he told his lawyers and compliance specialists about the liens and settlement, and they assured him those issues did not have to be disclosed. He declined to name his advisers or talk substantively about their rationale, but said they are outside consultants of national prominence.

“We pay these people an enormous amount of money for what I consider good legal and regulatory support,” Gray said. “They’re telling me … everything is proper, everything is appropriate and that should be (my) public response. I didn’t ask for a legalese explanation.”

Industry experts disagree and say that Gray may have violated federal and state law by failing to make the disclosures.

The Georgia Securities Act requires investment advisers to regularly update a registration form that includes questions about liens against their personal property and their involvement in certain investment-related disputes and settlements.

Likewise, investment firms are supposed to report in annual filings with the U.S. Securities and Exchange Commission certain legal disputes and other facts that would be material to a client’s evaluation of the company or the integrity of its management.

Regulators make information from both sets of documents available online.

Financial consulting is an industry built on trust and reputation, and pension board members need to know advisers are putting the needs of recipients first, said Ronald Hagan, chief executive of Roland/Criss, a Texas firm with expertise in pension trustees’ financial duties.

“He’s in troubled water there,” Hagan said of Gray’s lack of disclosure. “It’s an incredibly serious issue. Disclosure is the underpinning of all kinds of laws when you’re dealing with other people’s money.”

Andrew Ekonomou, Georgia’s assistant securities commissioner in the 1990s, said the state can impose criminal and civil penalties on advisers who make material false statements or fail to disclose information on those forms. Sanctions can include censure, suspension and license revocation, with civil fines up to $500,000 for multiple violations.

Ekonomou said he thinks Gray’s settlement and the liens should have been disclosed.

“Would a reasonably prudent investor want to know that before getting involved in an investment?” Ekonomou said. “If the answer is yes, tell it.”

“A business decision”

Gray took extraordinary legal measures to try to make sure nobody could find out about the lawsuit Clark filed against him in Fulton County Superior Court two years ago.

The suit claims Gray managed Clark’s finances from 1994 until 2009, and that Clark couldn’t get an accounting for at least $700,000 paid out as consulting fees, loans and investments. Clark, an assistant to Bobby Cremins at Georgia Tech in the 1980s, alleges his funds were “so commingled” with Gray’s that he couldn’t tell exactly how much was missing.

The lawsuit also alleges that Gray borrowed $300,000 from Clark, invested it in his own companies, then sold major shares of those companies without giving Clark a stake. The suit claims Gray used the sale proceeds to pay off the mortgage on his Roswell home and buy his Buckhead condo.

The suit, filed at a time when Clark was out of coaching, names both Gray and his firm as defendants.

One day after Clark sued, Gray sought a temporary restraining order and an injunction in an attempt to stop the proceedings based on the argument that he didn’t have a business relationship with Clark. He also tried to have the court records sealed, arguing that the suit’s allegations would “essentially eliminate several current and sensitive business agreements” under negotiation.

Judge Ural D. Glanville didn’t agree.

“The court is unpersuaded that it should deny (Clark) the right to access the courts,” Glanville wrote.

Gray settled the suit a few months after the judge’s ruling. Two security agreements filed in Fulton County in April 2012 say that ownership of Gray’s house and condo will transfer to Clark, currently an assistant coach at the University of South Carolina, if $1 million isn’t paid by Dec. 31, 2014. The agreements also say all tax liens against the properties must be paid in full.

In his interview with the AJC, Gray said “98 percent” of Clark’s lawsuit is untrue. He called the settlement a “business decision” to avoid high legal fees and said he put up his home and condo as collateral because “I can’t just write a million-dollar check.”

Explaining why he wanted the court records sealed, Gray said, “The last thing you want if you’re trying to do a credible job in the public eye is that kind of thing.”

Neither Clark nor his attorney would comment for this story.

Dual roles at issue

This isn’t the first time Gray has run into questions about his lack of disclosure.

The AJC reported in July that Angela Green, a member of Atlanta’s General Employees pension board, filed an SEC complaint alleging that Gray advised the board to invest $28 million into one of his firm’s funds without disclosing its financial stake in the deal. Gray has said he made proper disclosure.

As the pension board’s investment consultant, Gray’s firm is paid $157,000 a year to give advice on the best places to invest money. The board also pays Gray & Co., as general partner for the firm’s fund. In that role, the firm gets a $280,000 annual fee plus 10 percent of the profit from the investment, beyond an initial 8-percent return — an aspect of the deal potentially worth millions of dollars more.

Gray’s firm also advises pension systems for Atlanta’s police, firefighters and MARTA’s unionized employees. Combined, those three systems invested $54 million in the fund. That’s an additional $540,000 in annual fees plus a slice of the profits for the lifetime of the investments, a minimum of 10 years.

Critics say the firm’s dual roles of adviser and general partner of the fund are a conflict of interest because Gray’s company is profiting from the advice it provides as a consultant.

Green said for that reason it would have been important for her board to know about the financial pressures Gray was under when pitching the investment.

“That tells volumes,” she said.

Neither Atlanta Mayor Kasim Reed nor the city’s Chief Financial Officer Jim Beard, who is a member of all three of the city’s pension boards, would comment for this story.

Not everyone is a critic.

All told, two investment funds created by Gray’s firm have $108 million in pension and college foundation commitments, documents show. At least six of the eight systems invested in them are publicly funded.

MARTA’s pension board praised Gray’s work and voted unanimously in August to invest an additional $5 million in one of the firm’s funds, saying they believe it will reap big returns. And in New Haven, Conn., the police and firefighters’ pension invested $10 million even though the then-police commissioner said he didn’t think Gray’s firm should be both consultant and principal.

Others rejected the investment because of that conflict.

The pension systems for Fulton County Schools and Grady Hospital said they would need an outside party to evaluate the proposed investment, a cost they were unwilling to bear.

Kristina Jones, attorney for the Grady pension plan, also said that Gray & Co. didn’t fully disclose the conflict, and the pension committee backed out after initially agreeing to invest. However, officials noted that Gray’s firm received high marks in a management review.

Houston’s transit workers also opted out because of Gray’s conflict of interest, a spokeswoman said.

There was a contentious debate over the conflict when Gray pitched one of his funds to the General Employees Retirement board in Pontiac, Mich., according to minutes of a December 2011 meeting.

The board ultimately invested $6 million in it, with board member John Naglick, the city’s finance director, the lone dissenter.

“I did everything but stand on the table and say, `You’re our investment advisor and you’re touting your own fund?’” Naglick said.

Naglick said he would have liked to have known about the liens and settlement when he was arguing against the investment.

“Had I known … it would have led me to say, `Hey, board members, here’s a potential reason he’s pushing this so hard,’” said Naglick, a CPA and college accounting teacher.

From rural Georgia to high finance

Gray & Co.’s funds involve so-called alternative investments, such as hedge funds, real estate, distressed businesses and the like. They are more expensive and risky than traditional stocks and bonds but can bring higher returns.

Georgia legislators cracked the door open to alternative investments with a pilot program in 2011, then last year passed a law allowing most public pensions to invest up to 5 percent of their portfolios.

Gray started the firm’s first fund as Georgia experimented with allowing public pensions to enter that world and created the second fund last year.

Gray said he realized he needed to expand the firm beyond consulting after he lost a bid to advise a city pension in Louisiana to a rival offering alternative investments.

He said the idea was to pitch his funds to existing clients, develop a track record and then market them “to the rest of the world – literally the world.” He said he saw in alternative investments his chance to build a company he hopes will someday rival firms like Atlanta-based Invesco, which manages roughly $700 billion.

“Why can’t a guy from rural Georgia do the same thing?” Gray said. “Why can’t I be the next Invesco? So that’s my mindset.”

Gray grew up on a dirt road in Thomaston with “chickens, pigs and cows.” That upbringing still drives and motivates him today, he said.

Gray said he doesn’t consider the dual roles a problem if they are disclosed. He attributed some of the controversy to internal politics and misunderstandings on the pension boards.

But he acknowledges that he could have done a better job of making sure each board member understood how his investment funds work.

The resulting controversy has cost his 37-employee firm heavily, Gray said, stalling efforts to pitch his alternative investment funds and consuming time and money he has had to expend traveling the country to discuss clients’ concerns.

“Are we perfect? No. Have we hit some bumps in the road? Yes. But over my … 33-year career in the industry, I’m still under the impression that I can do this above-board with honesty,” he said.

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