Hedge Fund Hit With Side-Pocket Fraud Charges

Oct 20 2010 | 3:04am ET

A pair of hedge fund managers have been accused of using a side-pocket to conceal losses and overcharge investors.

The Securities and Exchange Commission said that PEF Advisors, run by Paul Mannion and Andrew Reckles, overvalued the hedge fund's investment in World Health Alternatives by more than a factor of 10. The Atlanta firm's Palisade Master Fund had about 20% of client assets invested in the company five years ago, when WHA announced that it was under investigation for accounting fraud.

PEF moved the WHA investment into a side-pocket as the stock's value plummeted by more than 90%. But according to the SEC, PEF continued to value the stake at $4.12 million, when it was worth $362,000, "at most."

"Side pockets are not supposed to be a dumping ground for hedge fund managers to conceal overvalued assets," the SEC's Robert Kaplan said. "Mannion and Reckles deceived investors about the fund's performance and extracted excessive management fees based on the inflated values."

According to the SEC, the duo stole some $1.6 million from investors using the side-pocket.

Mannion and Reckles deny the charges, arguing that "no valuation" of WHA "was reliable" following the announcement of the investigation and the company's subsequent bankruptcy filing.

The two men's attorney, Stavroula Lambrakopoulos, said that no money was lost by clients due to the use of the side pocket.

The case may be the first over the use of side-pockets, which became prevalent during the financial crisis, but it will not be the last. Kaplan said that "additional side pocket cases" are likely in the future.


In Depth

Q&A: Neil Azous Talks Global Macro Investing

Nov 24 2014 | 12:41pm ET

Neil Azous is the founder and managing member of Rareview Macro, an advisory firm...

Lifestyle

Griffin Selling Chicago Apartment

Nov 26 2014 | 11:40am ET

Citadel Investment Group’s Kenneth Griffin is making clear to his estranged wife...

Guest Contributor

Why The Big Money Is Going To Europe

Nov 14 2014 | 6:03am ET

Peer-to-peer lending was invented with the individual investor in mind. But despite...

 

Sponsored Content

    For Hedge Funds, Mastering Data Is Key To Success

    Nov 4 2014 | 9:45am ET

    Data management is important to every business, but for hedge funds, it is critical. FINalternatives recently asked Peter Sanchez, CEO of Northern Trust Hedge Fund Services, how fund managers can deal with the demands of managing data while at the same time remain transparent and abide by operational best practices. Read more…

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

November 2014 Cover

Building a better market

Reg NMS created a huge bifurcation in equity markets and while much of what has followed has been positive, in terms of lower fees and greater liquidity, many traders would like to see the market come...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.