Industry Updates

U.S. regulators charge Southridge Capital for alleged fraud

Tuesday, October 26, 2010

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Opalesque Industry Update – Connecticut-based fund management and investment advisory firm Southridge Capital Management LLC was charged Monday by the U.S. Securities and Exchange Commission with defrauding investors of millions of dollars, a href=http://www.sec.gov/litigation/litreleases/2010/lr21709.htm target=_blank>accordingto the regulator’s web site.

Included in the charge sheet were hedge fund manager Stephen M. Hicks, 52 of Richfield, Connecticut and his investment advisory firm Southridge Advisors LLC. According to the SEC, Hicks defrauded investors through material misrepresentations and misappropriating money to pay off legal and administrative expenses of other funds managed by Hicks and Southridge, reported The Wall Street Journal.

Specifically, Hicks and his companies are being accused of misrepresenting the true value of a telecommunications company he bought and sold to speech recognition firm Fonix Corp. for roughly $30m in 2004, as well as the value of securities involved in the transaction.

Since 2003, Hicks is alleged to have defrauded his investors from the funds he solicited, the charge sheet said.

The Connecticut complaint said, “Through false financial statements and other violations of the funds’ private placement memoranda, SCM charged excessive fees to the funds’ investors, based on misleading and fraudulent valuations of the assets SCM managed on behalf of the funds and their investors.”

According to Connecticut Attorney General Richard Blumenthal, Southridge overvalued the assets of the funds it managed through falsified financial statements to collect higher fees.

Blumenthal filed the lawsuit against Hicks and his companies on behalf of Connecticut Banking Commissioner Howard F. Pitkin.

From 2004 to 2007, the hedge fund manager was able to raise nearly $80m thru false promises to investors that more than 75% of assets would be allocated to liquid investments or cash, the charges states. >p> For his transactions, Hicks collected more than $26m in “fraudulent” fees from 2004 to 2007.

Blumenthal was quoted by Reuters as saying, "This investment firm told lucrative lies. This kind of financial fraud harms investors, but also the entire economy.”

“Investors have a right to complete and accurate disclosure about the valuation, liquidity and use of their assets," added David Berger, director of the SEC regional office in Boston in a statement.

Founded in 1996 to specialize in private investments in public equity (PIPE) and micro-cap users, Southridge oversaw between $100m and $12m of assets from 2004 to 2007. But the fund fell to $70m as of February 2009, the SEC said in its lawsuit.

The lawsuit added that several investors requested redemptions as early as 2001 but all of these requests were turned down by Hicks.

In the complaint, the SEC wants, the court to issue a permanent injunction to prevent Hicks, his companies and his agents, employees and attorneys from directly or indirectly continue in operating the firms.

In October 2009, the SEC and Manhattan District Attorney Robert Morgenthau began their investigation into Southridge, particularly its investment strategy known as private investments in public equity (PIPEs).
- Precy Dumlao
-PD

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