SEC: Atlanta hedge fund defrauded investors
http://http://www.pluris.com//sec-atlanta-hedge-fund-defrauded-investors

SEC: Atlanta hedge fund defrauded investors

By: J. Scott Trubey | October 18, 2010

(October 19, 2010 - Atlanta Journal-Constitution)  The Securities and Exchange Commission on Tuesday charged two metro Atlanta hedge fund managers, their company and the fund with defrauding investors in 2005 by overvaluing investments to hide losses while diverting millions for their own use.

An attorney for Paul T. Mannion Jr. and Andrew S. Reckles denied the charges and said investors were not harmed.

Mannion, 48, of Norcross, and Reckles, 40, of Milton, ran PEF Advisors, whose main fund was Palisades Master Fund LP. They are accused of putting the stock of a now-defunct Pennsylvania company into a so-called “side pocket,” a place for hedge funds to stow devalued, low volume stocks to help avoid heavy losses.

Side pockets are legal, but the SEC alleges Mannion and Reckles overvalued the stock in order to charge excessive fees. They also improperly borrowed $2 million from the Palisades fund to finance personal investments and stole and exercised stock warrants from the fund valued at $1.6 million, according to the complaint.

"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," said Scott W. Friestad, associate director of the SEC's enforcement division.

Stavroula E. Lambrakopoulos, a Washington, D.C., attorney for the defendants “strongly” denied the charges.

“No Palisades investors lost any money or were otherwise damaged as a result of any of the alleged conduct by our clients,” she said in a statement. “All of that is ignored by the SEC's lawsuit against our clients. We intend to vigorously defend against the SEC's unproven allegations in court."

The company the fund invested in, World Health Alternatives, went bankrupt in 2006, less than a year after its former CEO resigned under a cloud of fraud and embezzlement allegations.

Lambrakopoulos said it was impossible to properly value the company’s stock, and the managers put the investment in the side pocket with their clients’ consent.

Hedge funds are like mutual funds for very wealthy investors who bet big on a fund’s defined investment strategy.

Espen Robak, president of Pluris Valuation Advisors in New York, said when a side pocket is used properly, it can help protect investors.

“But it can be abused,” he said.