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Blotter: November 2010

Pocket Change

A side pocket, an accounting tool used by hedge funds to separate illiquid investments from the rest of the money in their funds, figures in a fraud case brought by the Securities and Exchange Commission against two Georgia portfolio managers. The malfeasance allegedly committed by Paul T. Mannion Jr. and Andrew S. Reckles occurred in 2004 and 2005, according to SEC charges. The two managers placed their Palisades Master Fund's investments in World Health Alternatives Inc. in a side pocket and mis-valued those investments so they could levy excessive management fees, regulators said.

Mannion and Reckles also stole more than 1 million warrants in World Health, valued at $1.6 million, that belonged to the fund. In July 2005, they also helped themselves to an undisclosed $2 million from the fund as an apparent short-term loan to finance their personal investments. In addition, they used about $13,000 from the fund to pay for services they never provided to Palisades, the SEC claimed. According to the SEC's complaint, Mannion and Reckles made substantial misrepresentations in connection with a private investment in public equity offering conducted by Radyne ComStream Inc. The two managers conducted portions of their scheme through two investment advisor entities they ran called PEF Advisors LLC and PEF Advisors Ltd.

Ponzi Play

Investors lost more than $1 billion in a ponzi scheme that netted two Florida-based hedge fund managers $58 million in fees, the SEC charged. Bruce F. Prévost and David W. Harrold misled investors about the safety of investments in Minnesota businessman Thomas Petters' ostensible plan to finance the purchase of vast amounts of consumer electronics by vendors who would resell the merchandise to major retailers. The electronics transactions never happened, regulators said, and Petters was charged last year with running a ponzi scheme. When he was unable to make payments on investments held by the funds that Prévost and Harrold managed, the Florida managers concocted sham note exchange transactions to hide the problem from clients, the SEC said. Prévost and Harrold operated through two firms, Palm Beach Capital Management LP and Palm Beach Capital Management LLC. Regulators said the firms funneled money to Petters as early as 2004 and through at least June of 2008. Prévost and Harrold sold interests in their funds to individuals, foundations, family trusts and other hedge funds across the country.

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