Pension Adviser Under Fire For Personal Loan
by Melissa Bailey | Dec 3, 2013 9:04 am
Posted to: City Hall
A new wrinkle has emerged in an emerging New Haven pension scandal: The man at the center of a federal probe is facing new questions about a second possible conflict of interest involving a personal loan he obtained from a company that manages money in the police and firefighter fund he advises.
The adviser, Larry Gray, is the outgoing consultant to New Haven’s Policemen & Firemen’s Retirement Fund Board. As reported in the Independent last week, the fund’s board of trustees approved Gray’s resignation in the wake of a federal Securities and Exchange Commission (SEC) probe into his handling of municipal pension money in Atlanta.
The board still has an estimated $7 million invested in a hedge fund that Gray’s company manages.
The feds have subpoenaed New Haven’s Police and Fire Pension Fund board in connection to the Atlanta probe, according to a report compiled by the DeStefano administration for the incoming Harp administration.
Meanwhile, new questions are surfacing about Gray’s dealings in New Haven.
In addition to serving as a consultant to New Haven’s $330 million police and fire pension fund, Gray took out a loan from a company that manages some money in that fund, Houston-based Capital Point Partners, according to Jimmy Kottage, the fire union president and chairman of the pension fund board of trustees.
Capital Point serves as a “mezzanine lender” to New Haven’s pension fund. That means it takes some money from the fund and lends it out to small businesses and individuals, then returns the interest money to New Haven, helping to grow the fund, Kottage said. Mezzanine are riskier and command higher interest than do more conventional investments.
Kottage said Gray had taken out a personal loan from Capital Point. Kottage said he didn’t know how much money he borrowed; Gray did not return calls requesting comment for this story.
News of the loan first surfaced at last week’s pension board meeting, where aldermanic President Jorge Perez was filling in for vacationing Mayor John DeStefano on the board. Perez, a banker by trade, called for the board to end its consulting relationship with Gray.
“We should not have someone managing the fund and then borrowing from it,” said Perez (pictured).
Kottage defended Gray.
Gray “never borrowed from the exact fund,” Kottage replied, but from “a group of lenders.”
“Larry took out a line of credit from Capital Point Partners,” Kottage later explained. “My understanding is that his line of credit had nothing to do with the fund that we’re involved in.”
Reached Monday, Perez said Gray may not have borrowed directly from New Haven’s pension fund, but the news of the personal loan did not bode well for the financial adviser. “If you have a person who’s having financial problems the way that it appears he is, that should be a concern,” Perez said. Perez insisted that Gray’s loan—previously kept private by the board—be discussed publicly at last week’s meeting; Perez was sitting in as acting mayor for Mayor John DeStefano at the meeting because DeStefano was out of town.
The personal loan isn’t the only signal of financial trouble: Gray has “encountered personal financial difficulties in recent months,” according to the DeStefano administration’s report. “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.”
Perez said the personal loan also raises a potential conflict of interest, because it put the consultant in two conflicting roles: Borrowing money from a company, and advising the pension fund on whether to use that company to manage its money.
“As a consultant, he needs to disclose anything that could appear to be questionable,” Perez said.
Kottage said Gray did disclose the loan—in a conversation with Kottage. Kottage said he couldn’t remember exactly when; it was sometime in the past year. Kottage said he did not know the amount of the money.
Kottage said he did not take issue with Gray’s loan: “My understanding is it’s a normal, legal loan for expansion of business. ... I did not have any concerns concerning that.”
But he said the question remains as to whether Gray should have disclosed the loan earlier.
“We’re being told everything is completely legal,” Kottage said, “but this again reflects back down to Atlanta, saying that certain things have not been disclosed to them.”
The SEC is investigating allegations that Gray’s firm failed to disclose to Atlanta officials that he had steered $64 million in Atlanta pension money to his own hedge fund.
New Haven’s Policemen & Firemen’s Retirement Fund Board has been subpoenaed in that probe. Kottage said “we’ve complied with the SEC subpoena” and are now “waiting on the sidelines” to see how it ends up.
The Atlanta case bears a similarity to New Haven in that both cities were using Gray as a pension adviser, and both had invested pension money into Gray’s company’s hedge funds. New Haven’s Policemen & Firemen’s Retirement Fund Board invested $7 million in GrayCo, a fund that Gray’s firm created and manages.
In New Haven, the decision to invest in Gray’s fund was made out in the open, according to Kottage.
Only after the SEC started investigating did New Haven revisit its relationship with Gray. Gray’s dual role as consultant and moneymaker led New Haven’s pension fund to end its consulting arrangement with Gray last week. Gray is staying on as adviser to the fund for about 30 days, until a new adviser is selected.
Kottage said the pension fund will keep its money in the GrayCo product for now: “It’s a well-vetted, legal due-diligence fund,” Kottage said.
There are “penalties associated with selling it,” he added. “It would have to be sold on the secondary market, which would be a foolish move to make.”
Last year, the GrayCo product gained 12 percent, Kottage said. “Going forward, it has the potential to make even more.”
Tags: larry gray, grayco, jorge perez, jimmy kottage
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The real question is whether “finder’s fees” were ever paid out as the result of investment decisions regarding these New Haven pension funds, and if so, to whom?
People have short memories, but 15 years ago State treasurer Paul Silvester, and then NAACP chief Ben Andrews, (Rowland allies), both went to jail because of shenanigans involving finder’s fees, which were essentially kick-backs paid by investment firms in exchange for pension funds.
Refresh your memory here: