Hedge Fund Side Pockets

Hedge Fund Side Pockets

SEC Looking into Hedge Funds Use of Side Pockets

The Securities and Exchange Commission is now targeting hedge funds again, this time for the use of side pockets. The SEC's Asset Management Unit is trying to figure out if hedge funds have charged investors higher fees based on inflated values of assets held in "side pockets."
Securities regulators charged two hedge fund managers at Georgia-based Palisades Master Fund with fraud on Tuesday, claiming they had overvalued illiquid assets placed in a "side pocket" to deceive investors and steal millions of dollars.

Hedge funds typically use "side pockets" to stash illiquid securities and avoid losses until the markets for the securities improve, but the U.S. Securities and Exchange Commission has heightened scrutiny of the practice recently.

In a civil complaint filed in U.S. District Court in Atlanta on Tuesday, the SEC claimed that hedge fund managers Paul Mannion, 48 and Andrew Reckles, 40, and their investment advisory company PEF Advisors misappropriated investor cash and securities by using the side pockets in 2005.

The SEC said that the fund had placed fraudulent values on convertible debt, bridge loans and restricted stock in the side pocket, and misrepresented values to investors. Source

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