Court Orders Connecticut Hedge Fund Manager and Firms to Pay Nearly $13 Million in SEC Case

Litigation Release No. 24049 / February 15, 2018

SEC v. Southridge Capital Management LLC, et al., No. 10-cv-1685 (D. Conn. Filed Oct. 25, 2010)

The Securities and Exchange Commission today announced that it obtained final judgments against a Ridgefield, Connecticut-based hedge fund manager and his investment advisory businesses. The federal court in Connecticut ordered the defendants to pay nearly $13 million in disgorgement and penalties after the court had previously determined that the defendants had illegally diverted investor money for use by other hedge funds that were illiquid and in need of cash.

The court earlier found Stephen Hicks and the businesses liable on the SEC's claim that they misappropriated investor funds. The SEC alleged that investors were defrauded because they were not told about the transfers of hedge fund assets while they were taking place. According to the SEC's complaint, Hicks sent a letter to investors admitting that legal and administrative expenses had been improperly allocated between funds, but rather than repaying the money, he transferred illiquid securities to the funds.

The February 10th judgments against Stephen Hicks, Southridge Capital Management LLC, and Southridge Advisors LLC incorporated the Partial Final Judgment issued by the District Court on August 2, 2017. The Final Judgment enjoined the Southridge entities and Hicks from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; Section 17(a) of the Securities Act of 1933; and Section 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and required them to pay $7,864,064 in disgorgement and prejudgment interest that was previously ordered. Hicks also must pay a $5 million penalty.

The additional claims resolved by the final judgments involved accusations that Hicks fraudulently misstated the value of the fund's largest investment to artificially inflate the management fees Defendants collected from investors. This settlement also resolves allegations that Hicks fraudulently solicited investors by telling them that the majority of their investments would be placed in unrestricted, free-trading shares (meaning shares that were available to be sold), cash, or near cash. According to the complaint, Hicks instead invested large portions of the solicited money in relatively illiquid deals. The defendants consented to the entry of the final judgments, and neither admit nor deny the allegations in the SEC's complaint.

For further information, please refer to Litigation Release Nos. 23905 (Aug. 11, 2017) (partial final judgment and 21709 (Oct. 25, 2010) (case filed).