Two hedge fund portfolio managers and advisory businesses allegedly defrauded investors in the Palisades Master Fund, L.P., by overvaluing illiquid fund assets placed in a "side pocket." The fund managers also used investor money for their own personal investments, and they made material misrepresentations in connection with a private securities transaction.

    Carom Into The Side Pocket.   The SEC alleges that Paul Mannion, Jr. and Andrews Reckles - both GA-based - placed World Health Alternatives Inc., an investment held by the Palisades fund, into a side pocket and valued those investments in a manner that was inconsistent with fund policy and contrary to an undisclosed internal assessment.  [Note:  A side pocket is a type of account that hedge funds use to separate particular investments that are typically illiquid from other fund investments.] 

[SEC Sweep Alert:  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 fraudulent actions took place for at least 3 months in 2005 through 2 investment adviser entities they controlled - PEF Advisors LLC, PEF Advisors Ltd.  By fraudulently inflating the net asset values of a convertible debenture, restricted stock, and bridge loans, Mannion and Reckles misled investors and enabled them to draw excessive management fees.

Apparently, Mannion and Reckles stole more than $1.6 million worth of warrants belonging to the fund.  They also improperly used investors' cash on at least 2 occasions to make personal investments.  In July 2005, Mannion and Reckles took an undisclosed $2 million from the fund as an apparent short-term loan to finance their personal investments. They separately used approximately $13,000 from the fund to pay for services not rendered to the fund. 

They also deceived a securities issuer by making material misrepresentations about their trading positions in order to participate in a private offering by the issuer - a February 2004 "PIPE" offering conducted by Radyne ComStream Inc.

The SEC seeks to collect disgorgement, fines and prejudgment interest.   [SEC PR 10-199, 10/19]