Southridge Capital Management Founder Charged With Fraud Though He May Not Know It Yet

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This afternoon, Connecticut regulators accused investment adviser Southridge Capital and its chief executive Stephen Hicks of "preparing false financial statements" that "inflated the assets of five funds from 2004 through 2007 so that they could charge higher fees," in an alleged scam that netted them an ill-gotten $26 million. Additionally, many investors have apparently put in redemption requests as far back as 2001, though none of them have seen a dime. Attorney General said the firm told "lucrative lies" which hurt not only its clients "but also the entire economy." How is Hicks taking the news? Is he ashamed and/or embarrassed? Is he defiantly calling the charges bogus, telling family and friends he'll fight them? Is he proud of what he's done and the alliterative prose he inspired in Blumenthal? Or does have no idea he's been accused of anything, having only seen a bunch of missed calls on his phone?

Hicks founded Southridge in 1996, according to the firm's website. His voicemail was not accepting messages on Monday. Southridge and its general counsel did not immediately return requests for comment.

CT Sues Fund Adviser Over Fee 'Lies' [Reuters]

Update: A statement from Southridge/Hicks:

In response to the complaints filed yesterday by the SEC and the State of Connecticut, Robert Wolf, an Attorney for Southridge Capital Management and Stephen Hicks, stated:

“We find their allegations to be baseless. Neither Southridge nor Stephen Hicks has committed fraud or engaged in violations of the securities laws, and both Mr. Hicks and Southridge categorically deny any wrongdoing.

The SEC and Connecticut Attorney General’s Office have focused on a handful of positions in the structured finance segment of Southridge's business, ignoring over 250 Southridge fund investments totaling in excess of $1 billion invested in the companies that it financed. Both complaints ignore the fact that Stephen Hicks and his family were large investors in the funds, and, if the allegations in the complaints were to be believed, they would be among the so-called scheme’s most significant victims.

Southridge and Stephen Hicks have always worked tirelessly to protect and enhance the value of the capital that the investors in Southridge funds entrusted to them. The funds operated in an open and transparent manner and none of the sophisticated investors who committed capital to these funds was ever defrauded.

Both the SEC and Connecticut Department of Banking fail to account for the impact of the global credit crisis on the performance and liquidity profile of the funds. Like many peer hedge funds, Southridge experienced losses and significantly reduced liquidity. Rather than acknowledging the realities of the credit crisis, the SEC and the State of Connecticut appear to be engaging in an effort to find blame where none exists.

All of these positions were permissible investments under the respective limited partnership agreements and were valued fairly in accordance with the fully disclosed valuation policy of the funds, a conclusion supported by Southridge's independent auditor.

Both Mr. Hicks and Southridge will vigorously defend these charges and are confident that the evidence will conclusively demonstrate that the complaints filed today are totally without merit.”

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