RIA Compliance Blog
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.
The SEC also alleged that Hicks, Southridge Capital, and Southridge Advisors exaggerated the value of the largest investment in the hedge funds they advised. They claimed that the value of the investment was about $30 million when the value of what the funds did pay was significantly less than $30 million. This resulted in investors paying approximately $1.8 million in excessive, unearned management fees.
The SEC also alleged that Hicks, Southridge Capital, and Southridge Advisors used investors funds to pay about $5 million in legal and administrative expenses that the funds were not authorized to pay. In 2009, Hicks wrote a letter to investors disclosing that these unauthorized payments had been made. However, rather than reimbursing the investors, Hicks and his hedge fund advisers transferred a number of illiquid securities to the funds.
The court’s order includes an injunction that forbids Hicks, Southridge Capital, and Southridge Advisors from further violating the Investment Advisers Act of 1940. The order also requires the three of them to pay $7.9 million in disgorgement, including pre-judgment interest. Finally, the order requires Hicks to pay a $5 million civil penalty.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.