Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, October 19, 2010

SEC Charges Hedge Fund Managers with Overvaluing Assets in "Side Pocket"

The SEC charged two Georgia hedge fund portfolio managers and their investment advisory businesses with defrauding investors in the Palisades Master Fund, L.P. by overvaluing illiquid fund assets they placed in a "side pocket." According to the SEC, Paul T. Mannion, Jr.and Andrews S. Reckles placed the Palisades hedge fund's investments in World Health Alternatives Inc. in a side pocket and valued those investments in a manner that was inconsistent with fund policy and contrary to an undisclosed internal assessment. A side pocket is 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. The SEC's Asset Management Unit has been probing whether funds have overvalued assets in side pockets while charging investors higher fees based on those inflated values.

The SEC also alleges that the hedge fund managers stole approximately $1.6 million of investor money to pay for their own personal investments and made material misrepresentations in connection with a private securities transaction.

The SEC complaint,filed in federal district court in Georgia, charges defendants with violations of the antifraud provisions of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.

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