December 7, 2021

Volume XI, Number 341

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December 07, 2021

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December 06, 2021

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Federal Judge Reaffirms Decision to Narrow SEC’s Adviser Act Claims Against Hedge Fund

Last week, a Georgia federal judge reaffirmed a decision to narrow two claims in a civil enforcement action accusing two hedge fund managers and their firms of defrauding investors. Paul T. Mannion Jr. and Andrew S. Reckles are principals and co-owners of PEF Advisors Ltd. and PEF Advisors LLC, which are investment advisers to two feeder funds for Palisades Master Fund, L.P. (Palisades). The Securities and Exchange Commission alleges that in August, September and October 2005, defendants reported monthly “net asset values” with inflated values of certain assets held by Palisades, and that in July and August 2005, defendants personally exercised stock warrants belonging to Palisades.

According to the SEC, defendants’ actions violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and subsections (1) and (2) of Section 206 of the Investment Advisers Act of 1940. In 2011, the court held that Section 206 of the Advisers Act only applied to the extent defendants’ conduct was directed at Palisades, rather than individual investors and limited defendants’ liability for these claims to the amount of the increased management fees they received as a result of the alleged overvaluations. In April 2013, the SEC filed a motion for reconsideration, arguing that the court should not have limited the scope of the valuation claim to defendants’ inflated management fees.

On November 12, the court reaffirmed its decision to narrow the claims, reasoning that Section 206 requires proof of a “material” misrepresentation or omission to a “client,” and that the “client” was Palisades itself, not Palisades’ individual investors. Although a fiduciary relationship can be inferred where a hedge fund manager directly advises an investor, the court held that the SEC did not plead that defendants advised investors.  

Securities and Exchange Commission v. Mannion et. al., No. 10-cv-03374 (N.D. Ga. Nov. 12, 2013).

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume III, Number 327
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About this Author

Associate

Margaret McQuade concentrates her practice on matters of employment law and executive compensation, with an emphasis on negotiating and drafting a wide range of agreements, and mediating and arbitrating claims on behalf of both employees and employers.

212-940-6664
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