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Funds News

Connecticut sues fund adviser over fee 'lies'

* Southridge Capital Management sued

* Firm alleged to inflate assets to win higher fees

NEW YORK, Oct 25 (Reuters) - Connecticut regulators on Monday sued an investment adviser they say fraudulently collected more than $26 million in fees from wealthy investors.

Southridge Capital Management LLC and Chief Executive Stephen Hicks are accused of preparing false financial statements. Regulators say Southridge and Hicks inflated the assets of five funds from 2004 through 2007 so that they could charge higher fees.

The lawsuit filed in state court in Hartford contends that the valuation of many assets were not independently assessed as required. Southridge is accused of using “false” valuations on three small companies that comprised 72 percent of its funds’ net asset value at the end of 2007.

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.

A majority of investors requested redemptions, with some requests dating to 2001, but the Ridgefield, Connecticut-based firm has not honored them, according to the complaint filed by state Banking Commissioner Howard Pitkin.

“This investment firm told lucrative lies,” Attorney General Richard Blumenthal said in a statement. “This kind of financial fraud harms investors, but also the entire economy.”

Blumenthal is a Democratic candidate for the U.S. Senate in next week’s election.

According to the complaint, the banking department subpoenaed Southridge in 2007 to examine its investment management with respect to the five funds: Sovereign Partners LP, Southridge Partners LP, Dominion Capital Fund Ltd, Dominion Investment Fund Ltd and Southshore Capital Fund Ltd.

The lawsuit seeks civil penalties, restitution for investors, a 10-year ban on Hicks’ engaging in investment-related activities, and other remedies.

The case is Pitkin v. Southridge Capital Management LLC et al, Connecticut Superior Court, Judicial District of Hartford. (Reporting by Jonathan Stempel in New York, editing by Dave Zimmerman)

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