Critics pounce on hedge funds managed by Florida lawmaker

A hedge fund run by Democrat Rep. Alan Grayson is under fire from both conservatives and allies of his Democratic rival, as the Florida lawmaker runs for the Senate seat vacated by GOP presidential hopeful Marco Rubio.

Grayson is listed as manager of a trio of interconnected funds created in 2011 after he lost a congressional bid. The funds — two based in the Cayman Islands and another in Delaware — are administered by two U.S. LLCs that he also owns. 

{mosads}A conservative group called the Foundation for Accountability and Civic Trust and a supporter of Grayson’s primary opponent, Rep. Patrick Murphy (D-Fla.), have each lodged complaints with the independent Office of Congressional Ethics (OCE). They claim that Grayson has violated ethics rules by running the investment vehicle, which formerly bore his name. 

The wealthy congressman maintains his dealings are above board, and there has been no official finding to the contrary. However, his managerial role with the funds, which have grown in value since Grayson was reelected to Congress three years ago, is seen as uncommon for a sitting lawmaker, experts say.

“He’s wading into uncharted waters, in terms of lack of precedent on this kind of thing,” said Kenneth Gross, the head of the political law practice at Skadden, Arps, Slate, Meagher & Flom and veteran congressional ethics expert. 

“I’ve never seen anything like this before with a member of Congress,” Gross added. “I’m not saying it’s never happened, but I’ve never heard of it.” 

The regulations governing hedge funds — also known as private partnerships —provide anonymity for Grayson’s investors, but that privacy opens up the lawmaker to questions about who is giving the Florida congressman large chunks of money to manage.

Since 2013, one of the funds — now called the Sibylline Fund LP, after Grayson changed it in September to remove his name from the title — has increased in value by $6.25 million, to a total of $16.35 million, and gained at least one new investor, according to forms filed with the Securities and Exchange Commission (SEC).

“Virtually all Members of Congress have investments, and many have partnership investments,” Grayson spokesman Ken Scudder said in an email. “In fact, a significant number … own active businesses or farms, which is not the case with Rep. Grayson.”

Grayson’s office says that the boost in the fund’s value is the result of a well-performing market and not any capital infusions from the fund’s investors — an assertion that financial professionals call reasonable.

The new investor who entered the fund following Grayson’s re-entry to Congress has been “ ‘cashed out’ without any gain, loss, income or profit to the partnership,” the congressman’s spokesman said.

“The partnership is a ‘friends and family’ partnership, and that one investor was a long-time personal friend of Rep. Grayson whose relationship goes back many years before Rep. Grayson ever was elected to Congress,” Scudder wrote in the email, adding, “Rep. Grayson’s status as a Member of Congress had no bearing whatsoever on that investment.”

Reports filed with the SEC appear to show that the new investor joined the fund between November 2014 and October 2015 — during which time Grayson launched his Senate campaign. But the congressman’s office says the investor joined the fund earlier and that the information was omitted from earlier forms in error.

While members of the House and Senate often invest in vast stock and mutual fund portfolios, Grayson is listed on official forms as the manager of his hedge funds and the LLCs that oversee them. 

The Florida congressman had an hours-long meeting with his attorney and with OCE, Politico reported last month, but has denied any wrongdoing in connection with the hedge funds.

“The fund, like every investment fund, is bound by rules of confidentiality,” Grayson told Politico, adding that he has “complied fully” with congressional disclosure rules.

Murphy, meanwhile, has been raising questions since this summer about what types of investments the fund invests in and how much profit both the fund and Grayson have earned. 

House rules say members are not allowed to receive any compensation for affiliating with or being employed at an entity where they are beholden to other partners, also known as fiduciary duty. The definition of fiduciary duty, the ethics manual says, should be taken in a broad way.

Grayson charges a 2 percent annual management fee on the total amount of assets under management, according to a prospectus for the hedge funds obtained by the Tampa Bay Times. The fee reflects a customary arrangement for hedge fund managers. Recent regulatory forms also refer to ongoing management fees and incentive payments.

By years end, the fund will have generated an estimated $713,250 in management fees since 2013, according to calculations based on the 2 percent figure and assets listed in quarterly SEC forms. It’s unclear whether Grayson has been the beneficiary of any of those fees, or whether the fund even earns a profit.

Grayson has reported The Grayson Fund Management Co., LLC and The Grayson Fund General Partner LLC — two U.S.-based companies that help manage the funds — have assets each worth between $15,000 and $50,000. However, he lists the assets as providing no income. (Those LLCs have also replaced “Grayson” with “Sibylline” in the title.)

“Any management fees are paid to the Investment Manager,” Scudder, with Grayson’s office, said in an email, referring to The Grayson Fund Management Co., LLC. “That is a legal entity, not Alan Grayson.”

The House Ethics Manual forbids members from receiving fees for professional services involving a fiduciary duty, even if that compensation is “paid to any other individual or entity.”

Grayson is still listed on paperwork as the manager of the funds and the associated LLCs. The fund’s administrator is listed as Carla Coleman, an aide in his congressional office, according to SEC filings.

The spokesman told the Washington Free Beacon that Coleman’s duties with the funds are entirely separate from her work in Grayson’s Capitol Hill office.

“There is nothing unusual or newsworthy about a Congressional staffer working as a Congressional staffer for fewer than five days a week,” Scudder said in an email to The Hill. “By all accounts, the Grayson Fund is free to pay her for one day of work each week when she is not doing her Congressional duties, and she is free to accept that pay.”

Financial services experts told The Hill that a hedge fund with less than $30 million in sales — roughly the total amount of his three funds — is exceptionally tiny in the hedge fund world, wherein a $300 million fund is considered small.

But while a $6 million uptick in a hedge fund’s value over two years is an everyday occurrence within the big players, it could be considered a significant amount within an investment run by a sitting member of Congress.

“As a prudential matter, assuming this is legal and ethical, would it be a good idea?” asked ethics attorney Stanley Brand, senior counsel at Akin Gump Strauss Hauer & Feld. “He’s in an area where there are complicated and overlapping interpretational rules that could bite him.”

The funds in the Cayman Islands have also caused heartburn for the Senate candidate, who has denied the location is being used for a tax break.

Grayson has recently told other publications that he has shuttered those funds —called the Grayson Master Fund (Cayman) LP and the Grayson Fund (Cayman) Ltd. Asked by The Hill to provide proof, his office replied, “No proof is required.”

“Feel free to check with Cayman Islands authorities, if you regard that as relevant or useful,” Scudder wrote in an email.

The Orlando congressman, who formerly served on the Committee on Financial Services Subcommittee on Capital markets, Insurance and Government-Sponsored Enterprises, has a minimum net worth of $33.86 million, according to a handwritten financial disclosure report tallied by CQ Roll Call, making him the 12th richest member of Congress.