SEC and Connecticut Banking Commissioner Bring Civil Fraud Charges Against Stephen M. Hicks and the Southridge Hedge Fund Investment Advisers He Controls, Claiming that They Defrauded Investors by Failing to Follow Stated Investment Policies, Overstating the Fund’s Asset Values and Misappropriating Fund Property
Hedge Fund Law Report
On October 25, 2010, the Securities and Exchange Commission (SEC) filed a civil securities fraud action in the U.S. District Court for the District of Connecticut against hedge fund manager Stephen M. Hicks (Hicks) and the two investment advisers he controls, Southridge Capital Management LLC and Southridge Advisors LLC (together, Southridge). The SEC claims that Hicks and Southridge violated the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 by (i) misleading fund investors as to the liquidity of the funds’ assets, (ii) improperly overvaluing the assets held by the funds, which resulted in their payment of inflated management fees and (iii) using one fund’s cash to pay the legal and other expenses of another fund they managed. The SEC charges that the Defendants promised investors that at least 75 percent of the funds in question would be invested in cash or liquid securities when, in fact, almost half of the funds’ assets were held in extremely illiquid investments. The SEC also claimed that the Defendants continued to value a position in one portfolio company, Fonix, at its $30 million acquisition cost, when they knew that the value of that position was worth only a fraction of that amount. We summarize the SEC’s Complaint and give a brief overview of a Connecticut state court action that makes substantially similar claims.