Grayson’s Hedge Funds Under Scrutiny For Possible Ethics Violations

Alan Grayson / AP
June 30, 2015

Rep. Alan Grayson (D., Fla.) is finding himself in hot water over managing hedge funds that bear his name, actions that are in possible violation of House ethics rules.

Sitting members of Congress are prohibited from using their name in titles of entities for personal financial gain, Politico reports. Rep. Grayson has three hedge funds with his name attached to their title.

One of Grayson’s funds, Grayson Fund L.P, is based out of Delaware and consists of three investors. According to November regulatory filings, the fund shows sales totaling $13.2 million.

Another fund with the lawmaker's name attached, Grayson Master Fund (Cayman) LP, is based out of the Cayman Islands, an area known as a tax haven by entities based in the United States to reduce their tax bills. This fund shows two investors and an additional $13.2 million in sales.

Ken Scudder, a spokesman for Rep. Grayson, defended the hedge funds, saying they are exempt from ethics rules that prohibit lawmakers from running financial institutions with their names attached.

"The reason why the funds’ offerings are ‘exempt’ is that all of the fund’s investors are qualified investors," Scudder said in an email to Politico. "‘Qualified investors,’ by definition, are sophisticated investors to which no fiduciary duty is owed."

However, one law professor called this defense "complete nonsense."

"You can’t avoid fiduciary duty by saying ‘my investors are smart,’" Bernie Black, a professor at Northwestern University school of Law and Management, told Politico. "The core of fiduciary duty is the duty of loyalty, which is basically, ‘I won’t not steal.’ A hedge fund manager can’t justify stealing from his investors by claiming they are smart."

Grayson started the hedge funds in 2011 after being defeated for re-election.

"Neither I nor any other investor has ‘taken any advantage’ of the Cayman Islands tax system, as you put it," Grayson said to Politico in retaliation to the location of his funds.

He went on to later say the Cayman funds were for potential foreign investments.

"A fund like this is required to have an international account, in the event that there are investors who are not taxed under US law, regardless of whether there actually are such investors," he said.

According to the report, Grayson never reached out to the ethics committee for consultation. His office says despite not consulting with the committee, he did have conversations "with attorneys who specialize in this area and he acted upon their advice."