Embattled Financial Adviser Quits

Pursued by the feds for alleged fraud, and under fire for conflict of interest, a hedge fund manager has stepped down from his role as adviser to New Haven’s police and fire pension fund.

The Police and Fire Pension Fund Retirement Board voted Monday to accept the resignation of the manager, Larry Gray, as the chief financial adviser to the $330 million fund.

The board still has $7 million invested in a hedge fund that Gray’s company manages, according to Chairman Jimmy Kottage.

The resignation comes amid mounting legal trouble for Gray, president and founder of the Atlanta-based Gray & Company. The federal Securities and Exchange Commission (SEC) has launched an investigation into Gray’s firm for allegedly steering $64 million in Atlanta pension money to his own hedge fund, according to WABE, an Atlanta-based National Public Radio affiliate.

New Haven’s Police and Fire Pension Fund board has been subpoenaed by the feds in connection to the Atlanta probe, according to a report compiled by the DeStefano administration for the incoming Harp administration. Gray has also ​“encountered personal financial difficulties in recent months,” the report reads. ​“He has had liens totaling $425,000 filed against his home by the IRS, and owes $1 million after settling a lawsuit that accused him of fraud.”

Gray’s firm has been advising New Haven’s pension fund since 1999. In December 2011, the pension fund board voted to ​“invest up to $10 million in a hedge fund” called GrayCo Alternative Partners I, created and managed by Gray’s firm. That put the firm in a dual role as adviser and investment manager — just as it was in Atlanta (until Gray resigned last month). New Haven’s pension fund now has $7 million invested in the GrayCo hedge fund, according to Kottage.

The pension board has been reviewing its relationship with Gray in light of his recent troubles. (Click here to read a previous story on the topic by the New Haven Register’s Mary O’Leary.)

After a discussion Monday, commissioners voted unanimously to end Gray’s contract as financial adviser.

Here’s what happened, according to an audio recording of the meeting:

Kottage, the fire union president, apologized that Gray couldn’t be there to give his side. He said there was some ​“miscommunication about inviting him” to the meeting.

Frank Lombardi, a police representative on the board, said he had received a call from Gray offering his resignation.

Gray wrote a letter to the board on Nov. 22 offering to step down.

“We would like to formally offer for your consideration and approval our resignation as your investment consultant,” Gray wrote. He wrote that he ​“offer[s] this resignation as a way to assist you in managing any issues that may have surfaced as a result of Gray & Company serving your Fund in a dual role.” He vowed to stay on long enough to help with a transition.

The letter followed a previous one from Gray’s firm, dated Oct. 9. ​“Recent media coverage has focused on Gray & Company serving in a dual capacity” as an adviser and investment manager for certain clients, ​“especially the city of Atlanta,” the letter reads. The firm couched the arrangement as a benefit, a ​“full service approach.” But given the ​“media coverage,” the firm wrote, some clients may be reconsidering keeping Gray & Company on in both roles. The letter sought New Haven’s input on how to proceed.

The trustees on the pension fund board discussed the matter at a meeting on Oct. 28 and made no decision.

On Monday, most of the trustees — most forcefully, Board of Aldermen President Jorge Perez, who was filling in for vacationing Mayor John DeStefano — felt ready to act.

Before the vote, Kottage (pictured) defended Gray.

“Larry’s been our consultant for over 12 years,” Kottage said. ​“He’s done a wonderful job.” Kottage said unlike in Atlanta — where Gray is accused of failing to disclose that he was using his position as Atlanta’s financial adviser to funnel money into his own financial products — Gray disclosed the dual role in New Haven.

City officials knew about the dual role from the start, according to DeStefano’s report: When the fund decided to invest in Gray’s hedge fund, ​“there was considerable concern voiced by one trustee, and by the Finance Department about this decision, as it leaves the trustees with no independent adviser to oversee the hedge fund investment,” the report reads.

But the city does not control the decisions of the pension board. The pension board decided to go ahead with the investment.

“What’s happening down in Atlanta isn’t the same thing,” said pension board Chairman Kottage. Plus, he added, ​“the investment is making money.”

The $330 million pension fund has risen 16.85 percent since January, and 19.44 percent over the past 12 months, according to Kottage. He said that’s better than the endowments at Princeton, Harvard and Yale.

“We’re having a great year,” he said.

Kottage said such dual roles are common in the industry. The city government, for instance, hires an actuary who also does investing and consulting, he said.

Wendy Mongillo, a fire commissioner who sits on the pension fund board, called Monday for letting Gray go. ​“It’s in the city’s best interest to get an RFP” for a new financial adviser, she said.

George Longyear, a fire commissioner who also sits on the pension fund board, also came to Gray’s defense. He suggested holding off on terminating Gray’s contract until trustees figure out whether he was guilty.

“It sees like we’re acting too soon,” Longyear protested. ​“Don’t you think someone in Atlanta” could tell New Haven officials if Gray is guilty?

Perez countered that that determination must be made by a judge. He explained why he was at the meeting: DeStefano was on vacation, and he was filling in as acting mayor. Perez said he isn’t jumping to conclusions about whether Gray is guilty in the SEC probe. But he strongly objected to what he called a conflict of interest in Gray’s double role.

“Why would you have someone be adviser and also manage the fund?” he asked. He suggested the board draft a new policy against investing in financial products managed by the fund’s adviser.

“It does not make sense to me that the fox determines what alarm system that we put in the hen house,” he said.

Kottage again defended Gray: ​“A lot of other consultants in the business are doing the same thing,” he said. ​“They’re doing both sides.” He said ​“the bigger companies” such as Merrill Lynch ​“can get away with it,” because they have more legal entities to obfuscate what’s going on.

Lombardi countered that the evidence against Gray is more than ​“allegations,” but factual information that should make New Haven wary about continuing its relationship with him.

Perez said he wasn’t taking a stance on the allegations against Gray. He just felt strongly that Gray has a problematic conflict of interest.

Perez suggested a motion to accept Gray’s resignation letter, and to issue a Request for Proposals for a new financial adviser. The motion called for Gray to stay on for a transition period of 30 days after a new adviser gets hired.

The board ended up approving it unanimously.

Kottage later explained his vote this way: ​“Larry’s been our adviser for the past approximately 15 years. The fund has performed very well under his advice.” But ​“in the view of the present circumstances, inclusive of the investigation with the SEC, it’s time to make a change.”

$7 Million On The Line

During the discussion, Perez also raised a bigger question: What about the $7 million New Haven has invested in Gray’s hedge fund? ​“This could also be that the investment is at risk here,” he warned.

Reached after the meeting, Kottage said he is ​“absolutely not” worried about the money the fund has invested in GrayCo. That product has risen by 12 percent in the past year, Kottage said.

“The investment with his fund is a good, prudent investment that we’re expecting good results from,” Kottage said. He is ​“not expecting a pullout of his fund.”

Kottage also suggested that the pension fund board issue a new RFP for all of its longstanding contracts, including the attorneys, actuaries, and the bank that cuts pension checks for cops and firefighters.