Investment Adviser Southridge Capital Management and Its Hedge Fund Manager Face SEC Securities Fraud Charges for Allegedly Overvaluing Portfolio Assets

Along with Connecticut regulators, the Securities and Exchange Commission is charging Southridge Capital Management and its hedge fund investment manager Stephen M. Hicks with financial fraud. The two are accused of fraudulently overvaluing portfolio assets.

According to the SEC, Hicks fraudulently misstated the assets’ acquisition price when he overvalued the largest position that the funds held. Hicks also allegedly arranged a transaction involved the sale of a Southridge fund-acquired telecommunications company (when the company defaulted on a $769,000 note) to Fonix Corporation, which made the purchase in exchange for securities that were valued at $33 million in 2004.

The SEC claims that the asset sold and the securities obtained were not accurately valued, Fonix’s position was wrongfully valued at its acquisition cost, and since 2004 the funds have accrued or paid hundreds of thousands of dollars in management fees. The SEC also contends that Hicks fraudulently solicited clients to place their money in new funds and told them that most of their money would be placed in free trading shares that were unrestricted, near cash, or cash. However, by 2007 many of the investors were having a difficult time redeeming their money from what were significantly illiquid securities. The SEC is seeking disgorgement of profits, injunctive relief, financial penalties, and prejudgment interest.

Meantime, in Connecticut, Banking Commissioner Howard F. Pitkin is charging Southridge and Hicks with overvaluing assets that they managed and lying to investors. The state is accusing the investment firm of purposely using bogus financial statements to overvalue the assets of five funds so that clients could be charged larger fees. State regulators contend that the alleged securities misconduct allowed Hicks and Southridge to collect over $26 million in fees.

Related Web Resources:
SEC Charges Connecticut-Based Hedge Fund Manager with Fraud in Valuing Portfolio Assets, Making Misrepresentations to Investors, and Misuse of Investor Assets,, October 25, 2010
Southridge Capital Management Founder Charged With Fraud Though He May Not Know It Yet, Dealbreaker, October 25, 2010
Institutional Investor Securities Blog

Whether you believe you were defrauded by a hedge fund adviser, a broker, a brokerage firm, an investment bank, or another party, our securities fraud law firm can explore your legal options with you during your free case evaluation.