The Securities and Exchange Commission (SEC) has issued a press release stating that the SEC has charged Paul T. Mannion, Jr., of Norcross, Georgia, and Andrews S. Reckles, of Milton, Georgia, two hedge fund portfolio managers, with defrauding investors in the Palisades Master Fund, L.P. Specifically, it is alleged by the SEC that these individuals, along with their investment advisory businesses, PEF Advisors LLC and PEF Advisors Ltd., overvalued illiquid fund assets that were placed in a “side pocket.” A side pocket is defined as “a type of account that hedge funds use to separate particular investments that are typically illiquid from the remainder of the investments in the fund.” Robert Kaplan, Co-Chief of the SEC’s Asset Management Unit explained that “side pockets are not supposed to be a dumping ground for hedge fund managers to conceal overvalued assets. Mannion and Reckles deceived investors about the fund’s performance and extracted excessive management fees based on the inflated asset values in a side pocket.”
The SEC also alleges that Mannion and Reckles used investor funds to fund their own personal investments. Further, it is alleged that these individuals made false representations to a securities issuer about their trading positions so that they could participate in a private offering.
Scott Friestad, Associate Director of the SEC’s Division of Enforcement stated that “Mannion and Reckles put their own selfish interests ahead of Palisades’ investors, treating the fund like their own personal bank account by stealing and improperly borrowing millions of dollars in fund assets.”
The SEC’s complaint alleges that investors were defrauded over at least a three-month period in 2005 and that Mannion and Reckles took more than one million warrants in World Health that were worth approximately $1.6 million. Further, it is alleged that these individuals took out a personal undisclosed loan totaling $2 million in order to finance their own personal investments. In addition, the complaint states that they used approximately $13,000 from the fund for services allegedly not rendered to the fund. The SEC also alleges that in 2004 Mannion and Reckles made misrepresentations in connection with a PIPE (private investment in public equity) offering which was conducted by Radyne ComStream Inc.
The SEC’s complaint charges these men with “violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.” The SEC seeks financial penalties, disgorgement of profits, prejudgment interest, and injunctive relief.
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