By Matt Dixon From Politico

TALLAHASSEE, Fla. — Rep. Alan Grayson manages hedge funds that use his name in their title, a practice prohibited by congressional ethics rules designed to prevent members from using their elected post for financial gain.

The specific ethics provisions tied to the funds Grayson manages, two of which are based in the Cayman Islands, sit in a sort of gray area and have never been examined by the House Ethics Committee.

Attorneys for the Democratic congressman say the funds are exempt from House ethics rules that ban a sitting member from naming a financial entity after themselves. But their stated rationale is considered “complete nonsense” by legal and finance experts who reviewed the fund’s regulatory filings.

The House ethics rules do not allow a sitting member to “permit his name to be used” in the name or advertising material for entities like law firms, associations and financial entities. The Grayson-run funds are Delaware-based Grayson Fund LP and Cayman Islands-based funds called Grayson Master Fund (Cayman) Ltd. and Grayson Fund (Cayman) Ltd.

The Delaware fund has active investors and more than $13 million in sales, but Grayson, a likely Senate candidate, says the structure allows him to keep investor information confidential, including not listing it on congressional financial disclosure forms. He lists the funds as assets on his forms but claims no income from them.

“The fund, like every investment fund, is bound by rules of confidentiality,” Grayson, who says he “complied fully” with congressional disclosure rules, said in an email.

The Orlando Democrat started the funds in 2011 after losing a reelection bid. He says they do not run afoul of congressional ethics rules that govern how sitting members can use their names because he has no “fiduciary duty” over the funds.

“The reason why the funds’ offerings are ‘exempt’ is that all of the fund’s investors are qualified investors,” Ken Scudder, a Grayson spokesman, wrote in an email. “‘Qualified investors,’ by definition, are sophisticated investors to which no fiduciary duty is owed.”

Bernie Black, a professor with the Northwestern University School of Law and Kellogg School of Management, said Grayson’s rationale was “complete nonsense.”

“You can’t avoid fiduciary duty by saying ‘my investors are smart,’” Black said.

The Securities and Exchange Commission says hedge funds are regulated more loosely than other types of investments, but fund managers do “owe a fiduciary duty to the funds they manage.”

“I am surprised by the assertion that a hedge fund manager would not owe fiduciary duties,” said Eric Chaffee, a University of Toledo law professor specializing in securities law. Mark Astarita, a New York attorney who specializes in securities law, called Grayson’s contention that he does not have fiduciary responsibility “absolutely incorrect.”

“The fact that the investors are ‘qualified investors’ (properly called ‘accredited investors’) is part of the definitions for the exemption, and does not address fiduciary duty,” he said in an email.

Grayson’s Washington ties were a prominent part of the early publicity for his funds after he lost his reelection bid.

“Former Rep. Alan Grayson (D-Fla.) is taking his extensive experience with financial markets and the global economy and channeling it in a new business: asset management,” read a 2011 story announcing the firm in FINalternatives, an investment industry publication.

The story identified Todd Jurkowski, a former Grayson communications director, as the fund’s vice president of investor relations. It also reminded readers that Grayson “served on the Financial Services Committee, as well as the Subcommittees on Capital Markets and on Oversight and Investigations.”

One of the funds, Delaware-based Grayson Fund LP, has three investors and listed $13.2 million in sales on November regulatory filings. A second fund, Grayson Master Fund (Cayman) Ltd., lists two investors and $13.2 million in sales. That fund is based in the Cayman Islands, a known tax haven used by domestic entities to reduce tax bills.

Grayson says his attorneys recommended that Grayson Master Fund (Cayman) Ltd. list sales through the Delaware-based fund because they are collectively owned, but no one has invested in or solicited the Cayman Islands funds. And he said that because Grayson Master Fund (Cayman) Ltd. and Grayson Fund (Cayman) Ltd. have no investors — despite the claim elsewhere that the former fund has two — he has not avoided any required federal taxes.

“Neither I nor any other investor has ‘taken any advantage’ of the Cayman Islands tax system, as you put it,” wrote Grayson, who is not legally required to disclose his funds’ investors.

Grayson has built his political brand on a populist message critical of large corporations and tax dodgers. Last October, he went on Twitter to go after Republican Mitt Romney, who when running for president in 2012 said that “corporations are people.”

“Dear Mitt Romney: If ‘corporations are people,’ they should pay taxes like we do,” wrote Grayson, who used the tweet to promote legislation he would file that would “eliminate tax breaks for corporations.”

He returned to Congress in 2012 after winning a seat in a newly drawn Central Florida district. It’s widely believed that Grayson will run in the 2016 Senate primary against Rep. Patrick Murphy, a Palm Beach County Democrat. They would be running to replace Marco Rubio, who is seeking the Republican nomination for president.

Grayson’s office said the House Ethics Committee has never considered or ruled one way or the other whether a fund like Grayson’s involves fiduciary responsibility.

“And such a ruling (if it ever did occur) would be wrong,” Scudder wrote in an email.

The office said Grayson never consulted with the ethics committee but spoke with “attorneys who specialize in this area and he acted upon their advice.”

Grayson said the funds were incorporated in the Cayman Islands to allow for potential foreign investment.

“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,” Grayson wrote.

Steve Perfect, associate professor at the Florida State University College of Business, said someone in Grayson’s position usually has a fiduciary duty unless there’s a specific agreement waiving the responsibility.

“Someone with that type of relationship would be considered to have a fiduciary duty to the hedge fund and the investors,” Perfect said.

He said even if a specific agreement were in place releasing Grayson of fiduciary duty, one would still be in place between him and fund itself.

For more on this story go to: http://www.politico.com/story/2015/06/alan-grayson-hedge-fund-ethics-119553.html#ixzz3eebo3cF7

See also related iNews Cayman stories:
Published June 11 2015 “Probable US Senate candidate Alan Grayson faces [Cayman Islands] hedge fund questions” at: http://www.ieyenews.com/wordpress/probable-us-senate-candidate-alan-grayson-faces-cayman-islands-hedge-fund-questions/

Published May 14 2015 “Potty-mouthed Alan Grayson and his offshore investments” at: http://www.ieyenews.com/wordpress/potty-mouthed-alan-grayson-and-his-offshore-investments/