U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21699 / October 19, 2010
SEC v. Paul T. Mannion, Jr., Andrew S. Reckles, PEF Advisors LLC, and PEF Advisors Ltd., Civil Action No. 10-CV-3374 (N.D. Ga.)
SEC CHARGES HEDGE FUND MANAGERS WITH FRAUDULENTLY OVERVALUING SIDE-POCKETED ASSETS, DEFALCATION, AND MATERIAL MISREPRESENTATION
The Securities and Exchange Commission today charged hedge fund portfolio managers Paul T. Mannion, Jr., of Norcross, Georgia, and Andrews S. Reckles, of Milton, Georgia, and investment adviser entities they control with defrauding Palisades Master Fund, L.P. investors by overvaluing illiquid fund assets they placed in a so-called “side pocket” and by misappropriating other fund assets. The Commission also charged Mannion, Reckles, and their investment adviser entities with making material misrepresentations in connection with a private stock offering. A “side pocket” is a type of account hedge funds use to separate particular, typically illiquid, investments from the remainder of the investments in the fund.
According to the SEC’s complaint filed in the U.S. District Court for the Northern District of Georgia, from August through at least October 2005, Mannion and Reckles, through PEF Advisors LLC and PEF Advisors Ltd., two investment adviser entities they controlled, placed the hedge fund’s investments in World Health Alternatives, Inc. in a “side pocket” and valued those investments in a manner that was both inconsistent with fund disclosures and contrary to Mannion’s and Reckles’ undisclosed internal assessment of their value. As the complaint alleges, the fraudulent valuations enabled Mannion and Reckles to report to investors misleadingly inflated net asset values and allowed Mannion and Reckles to take excessive management fees from the fund.
In addition, the SEC’s complaint alleges that Mannion and Reckles stole more than one million warrants in World Health that belonged to the fund. At the time Mannion and Reckles exercised those warrants, they were worth $1.6 million. The defendants also improperly used investors’ cash to pay for their own personal investments. In July 2005, Mannion and Reckles, without disclosure, took $2 million from the fund as an apparent short-term loan to finance their personal investments, and separately used approximately $13,000 from the fund to pay for services not rendered to the fund and to purchase warrants for their personal accounts.
Finally, the SEC alleges in its complaint that Mannion, Reckles, and their investment adviser entities made material misrepresentations in connection with a February 2004 “PIPE” (an acronym for private investment in public equity) offering conducted by Radyne ComStream Inc.
The SEC complaint charges defendants 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 Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties. The complaint also seeks disgorgement from the fund as a relief defendant for profits obtained through the illegal trading in Radyne securities.