The SEC has charged an investment advisory firmand two of its executives with selling unsuitable investments topension funds for Atlanta’s police and firefighters, transit workers and otheremployees.

According to the agency, Gray Financial Group of Atlanta,Laurence O. Gray, its founder and president, and Robert C. HubbardIV, co-CEO, were charged with fraud after allegedly breaching theirfiduciary duty by steering public pension clients into alternativeinvestments that did not meet the requirements of Georgia state laweven while they knew the investments were unsuitable.

After recommending investments in its fund called GrayCoAlternative Partners to the city of Atlanta’s Firefighters’ PensionFund, General Employees’ Pension Fund, and Police Officers’ PensionFund as well as the MARTA/ATU Local 732 Employees Retirement Plan,Gray Financial Group has collected more than $1.7 million in feesfrom the pension fund clients as a result of the improperinvestments.

Georgia state law does allow most public pension funds in thestate to buy alternative investment funds, but there are certainrestrictions that must be met before they can do so. The Georgia public pension fund may not exceedmore than 20 percent of the capital in an alternative investmentfund, but two of the pension funds’ investments failed to meet thatcondition.

In addition, at the time of a Georgia public pension fund’sinvestment in an alternative fund, there must be at least fourother investors in the same fund, and there must also be at least$100 million in assets in an alternative fund at that time. GrayCoAlternative Partners met neither of these conditions.

At least one client asked specifically about the investments’compliance with Georgia law, and the SEC’s Enforcement Divisionalleged that Gray Financial Group and Gray made materialmisrepresentations to cover up noncompliance. They alsomisrepresented the number and identity of prior investors in thefund.

A public hearing will be scheduled before an administrative lawjudge. The SEC’s investigation is ongoing.