Public records obtained by the Tampa Bay Times add ammunition to critics who say Democratic U.S. Senate candidate Alan Grayson's use of a hedge fund in the offshore tax haven of the Cayman Islands may have violated U.S. House ethics rules that ban receiving improper outside compensation.
"I haven't gotten one penny of compensation," Grayson said, when asked about his fund's 2011 prospectus obtained by the Times and documents he filed with the Securities and Exchange Commission earlier this month that referred to "ongoing" management fees and incentive payments.
The Orlando congressman's argument? He may be manager of the company paid to manage the funds, but that does not mean he is being paid.
"Management fees go to a corporate entity, not Rep. Grayson," his office said in an email.
"An LLC is the fund manager," said Grayson, referring to a limited liability company.
Grayson, 57, is the only officer listed in that LLC's corporate filings. He signs official paperwork as that LLC's manager, and on his 2012 and 2013 congressional financial disclosure form he lists the LLC as one of his assets, worth between $15,000 and $50,000.
"Alan Grayson and/or related family entities or persons are the sole members" of the LLC, stated a 2011 memo to investors filed with the New York Attorney General's Office.
Sugata Ray, a lecturer at the University of Florida's Warrington College of Business, reviewed Grayson's hedge fund documents for the Times.
"Everything in these records suggests he's getting compensated," said Ray, adding that it's possible the fund did not make any money.
Critics have filed two pending ethics complaints accusing Grayson of violating prohibitions against House members receiving compensation for services such as legal, financial, real estate where they have a fiduciary role. They also say he improperly allowed his name to be used on an investment fund.
Grayson said he did nothing wrong, but last month removed "Grayson" from the title of the funds. The Grayson Fund General Partner, LLC, is now the Sibylline Fund General Partner, LLC, and the Grayson Fund Management Company, LLC, is now the Sibylline Fund Management Company, LLC.
He said is not violating House ethics rules because, regardless of what his fund's prospectus suggests, he is not receiving any compensation and legally has no fiduciary role in the hedge fund he manages.
The House ethics manual, however, says "the term fiduciary (should) not be applied in a narrow, technical sense," and that members with a fiduciary role cannot be compensated directly nor "participate in any arrangement under which fees for any such services that they render are paid to any other individual or entity."
The independent Office of Congressional Ethics receives complaints such as these against Grayson and will determine whether it should be referred to the House Committee on Ethics for further investigation and potential sanctions.
Grayson, who founded a telecom company in the 1990s and later worked as a lawyer specializing in whistle blower cases, is worth as much as $105 million, based on his hand-written financial disclosure reports. He was elected to Congress in 2009, quickly emerged as a partisan lightning rod, and in 2010 lost re-election to Orlando-area Republican Dan Webster.
In April, 2011 — a few months before announcing his candidacy for another, newly drawn Central Florida congressional seat — Grayson created several inter-connected investment funds: Grayson Fund LP, based in Delaware, and Cayman Islands-based funds called Grayson Master Fund (Cayman) Ltd. and Grayson Fund (Cayman) Ltd. All trading for the pooled investments were to be done through the Caymans-based Master Fund, according to a prospectus.
As a liberal populist and U.S. Senate candidate who often complains about income inequality and companies evading taxes, setting up his own company in an offshore tax haven created, at the very least, a perception problem. The listed address of Grayson's Caymans-based hedge fund was the Ugland House in Grand Cayman, where nearly 20,000 companies list their address in order to minimize their taxes.
"Either this is the largest building in the world or the largest tax scam in the world," Barack Obama said of Ugland House in 2009.
Grayson insisted no money was ever invested in the Caymans and no taxes avoided.
"You're trying to create this appearance, which is not true, that I'm a hypocrite," Grayson told the Times last week. "You have given (Democratic Senate rival) Patrick Murphy a knife to stick in me, which is not fair."
The latest available public filing shows less than $16.4 million invested through the fund, which makes it a small hedge fund by industry standards. Ray, the University of Florida finance expert, speculated that Grayson and his lawyers likely structured the fund with the Caymans account, anticipating that future investors, both foreign and non-profit domestic investors, would want to take advantage of the tax benefits.
Grayson's office said in response to followup emails last week that he closed the Caymans funds — as reported by the Times last week —but declined to provide documentation. He also declined to reveal the names of any partners or investors.
The fee structure of Grayson's fund — a 2 percent annual management fee and also a 20 percent "incentive allocation" — is commonly used by hedge fund managers to pay lower tax rates than most Americans. That so-called "carried interest" tax break has been criticized by Democrats such as Obama and Massachusetts Sen. Elizabeth Warren as well as Republicans including presidential candidates Jeb Bush and Donald Trump.
Grayson's office said he never benefited from that carried interest exception.
Contact Adam C. Smith at [email protected] Follow @AdamSmithTimes.