The Connecticut Department of Banking has permanently revoked the broker-dealer license of Ridgefield-based Southridge Investment Group, a unit of Southridge Capital Management, and imposed a fine of $250,000 for numerous violations.
The Feb. 9 order may only be the tip of the iceberg for Southridge. The firm is also facing problems in an ongoing case involving its hedge funds. In October 2010, then-Attorney General Richard Blumenthal and Banking Commissioner Howard F. Pitkin announced a lawsuit against the investment adviser for securities fraud, alleging that Southridge charged investors more than $26 million in fees after lying to them and overvaluing assets it managed on behalf of various funds.
The Securities and Exchange Commission (SEC) issued a similar complaint.
“The case is progressing and is in the discovery phase right now,” said Susan Kinsman, director of communications for Connecticut Attorney General George Jepsen.
Eric Wilder, director of the division of securities and business investment of the Connecticut Banking Department, said that when the broker-dealer was originally examined, his department found two main problems. “There was no Chinese wall between the broker-dealer and at least one principal of the hedge fund,” he said, “and there was also a failure to keep emails.”
The CEO of the broker-dealer said he is not worried.
“The broker-dealer action is of no consequence to us,” Stephen M. Hicks, Southridge CEO and hedge fund manager, said in an interview.
Hicks explained that since the broker-dealer was closed eight months ago, the fine is against a nonexistent entity. Asked about the allegations against the hedge fund, Hicks said “This was political payback. We will have to sit down with my attorneys and talk about it.”
Adding that he was about to go out of the country on business, Hicks invited the Fairfield County Business Journal to sit down with him for a fuller discussion when he gets back.
The charges center on allegations that Southridge misstated valuations of assets in its funds in order to illegally earn higher fees. According to the SEC”™s original complaint, Hicks “overvalued the largest position held by the funds by fraudulently misstating the acquisition price of the assets.”
The complaint alleges in part that Hicks arranged a transaction in which a telecommunications company acquired by the Southridge funds was sold to Fonix Corp. in exchange for securities with a stated valued of $33 million. Neither the asset sold nor the securities obtained in the transaction were accurately valued by Southridge and Hicks, the SEC alleges.
The complaint added that Hicks also made “material misrepresentations to investors” and misused investor money.
