Elizabeth Dalziel, 22 August 2017
On August 2, 2017, a federal court in Connecticut ordered Steven Hicks (“Hicks”), a hedge fund manager, and his hedge fund advisory firms to pay almost $13 million. This payment includes disgorgement and a penalty. In 2010, the Securities and Exchange Commission (“SEC”) filed a complaint against Hicks and his two hedge fund advisers, Southridge Capital Management LLC (“Southridge Capital”) and Southridge Advisors, LLC (“Southridge Advisors”).
The complaint alleged that Hicks, Southridge Capital, and Southridge Advisors committed fraud by placing investor money in illiquid securities when investors were told that “at least 75% of their money would be invested in unrestricted, free-trading shares.”
According to the SEC’s complaint, starting in 2003, Hicks started soliciting investors. He told them that 75% of any money they invested in two funds he was starting would be invested in unrestricted, free-trading shares. Free-trading shares are shares that are eligible to be sold. Evidence shows that some potential investors were also told that the funds would invest “in short-term transactions that would take only 10 or 15 days, such as equity line of credit (‘ELC’) deals.”
In 2004 and 2005, Hicks and Southridge Capital placed investors’ money in ELCs and other short-term deals, as promised. However, in 2006, 2007, and 2008, they invested more than half of the investors’ money in illiquid funds or in promissory notes. At the same time, Hicks continued to assure investors that more than 75% of their money would be placed in liquid investments. As a result, Hicks, Southridge Capital, and Southridge Advisers could not fulfill almost $7 million in redemption requests.