The Securities and Exchange Commission (SEC) charged two Atlanta hedge fund managers with defrauding investors by allegedly hiding losses and stealing funds for their own personal use. However, an attorney for the defendants adamantly deny the fraud and embezzlement accusations.

The defendants are accused of placing the stock of a now-obsolete company into a “side pocket.” A side pocket is where a hedge fund can place low-volume stocks in order to help avoid losses. The use of side pockets is legal. However, the SEC is claiming that the defendants acted wrongfully in this case.

The defendants ran PEF Advisors, and its Palisade Master Fund had about 20 percent of its client assets invested in a company that announced it was under investigation for fraud. The company’s stock value fell drastically, and PEF moved the investment into a side-pocket. However, the SEC claims that the defendants continued to overvalue the stock when it was worth much less so they could charge excessive fees.

An attorney for the men asserted that it was impossible to determine the proper value of the stock and that their clients had given consent to put the investment in the side pocket.

The defendants are also accused of embezzling funds for their own personal use. Specifically, they are accused of borrowing $2 million from the fund to be used for personal investments and exercising stock warrants valued at $1.6 million

An attorney for the defendants said in a statement that investors did not lose any money or suffer any damages as a result of any conduct of the defendants. She asserted that they would vigorously fight the SEC charges.

Source: The Atlanta-Journal Constitution “SEC: Atlanta hedge fund defrauded investors,” J. Scott Trubey, 19 October 2010