Keith Loria Oct. 28, 2010, 3:55pm
HARTFORD, Conn. (Legal Newsline) - A lawsuit has been filed by Connecticut Attorney General Richard Blumenthal and Banking Commissioner Howard Pitkin against an investment adviser whose firm allegedly charged more than $26 million in fees.
Southridge Capital Management allegedly lied to investors and overvalued assets it managed on behalf of various funds. The firm denies the charges.
The Ridgefield, Conn., firm acted as the general partner to five funds and provided investment advice and strategy to the funds. It allegedly overvalued the assets of the fund through false financial statements, which allowed it to illegally charge greater fees to investors in Connecticut and elsewhere.
"This investment firm told lucrative lies - allegedly charged more than $26 million in fees by fraudulently overvaluing assets," Blumenthal said.
"This kind of financial fraud harms investors, but also the entire economy. We will fight for restitution, civil penalties and an order blocking this firm from imposing future harm."
An attorney for Southridge and Hicks denied the accusations in a statement.
"We find their allegations to be baseless," attorney Robert Wolf of Gersten Savage LLP said. "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."
Wolf said that both the SEC and the Connecticut Department of Banking fail to account for the impact of the global credit crisis on the performance and liquidity profile of the funds. The company experienced significant losses itself, and Wolf alleges that it is the target of an effort to find a scapegoat.
"Southridge has consistently sought to protect and enhance the value of the capital that the investors in Southridge funds entrusted to them," Wolf said. "The funds operated in an open and transparent manner and none of the investors who committed capital to these funds was ever defrauded."
While the SEC and Blumenthal focused on a handful of positions in the structured finance segment of Southridge's business, Wolf alleges that they ignored more than 250 Southridge fund investments totaling in excess of $1 billion invested in the companies that it financed.
"All of these positions were suitable investments for sophisticated investors 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," Wolf said.
Blumenthal's suit seeks significant civil penalties, restitution and an order that Southridge and Hicks redeem all redemption requests received by investors that they have long disregarded. He also seeks an order prohibiting Hicks from engaging in any investment-related activities for 10 years.
Blumenthal is running for U.S. Senate.