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UPDATE 1-SEC, Connecticut charge fund manager with fraud

* Southridge Capital Management sued

* Firm alleged to inflate assets to win higher fees (Recasts to add SEC lawsuit)

NEW YORK, Oct 25 (Reuters) - A Connecticut hedge fund firm was sued on Monday by U.S. and state regulators for allegedly inflating the value of its holdings, allowing it to fraudulently collect millions of dollars of undeserved fees.

Southridge Capital Management LLC and its Chief Executive Stephen Hicks, 52, were sued by the U.S. Securities and Exchange Commission and Connecticut Banking Commissioner Howard Pitkin over their management and financial reporting of several funds.

The SEC said Hicks falsely valued Southridge’s largest holding, speech recognition company Fonix Corp, at $30 million or more based almost entirely on a 2004 transaction in which Fonix bought two companies from an entity he controlled.

It also said Hicks raised $78.9 million over the 2004 to 2007 period after falsely promising investors that more than 75 percent of assets would be put in liquid investments or cash.

Connecticut alleged the overvaluing of fund assets allowed Ridgefield-based Southridge to fraudulently collect more than $26 million in fees from 2004 to 2007.

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

“Investors have a right to complete and accurate disclosure about the valuation, liquidity and use of their assets,” David Berger, director of the SEC regional office in Boston, said in a statement.

Hicks founded Southridge in 1996, according to the firm’s website, and according to the SEC, specialized in private investments in public equity and micro-cap issuers.

Hicks’ voicemail was not accepting messages on Monday. Southridge and its general counsel did not immediately return requests for comment.

Southridge oversaw $100 million to $125 million of assets between 2004 and 2007, but this sum fell to $70 million as of February 2009, the SEC said in its lawsuit.

Connecticut alleged a majority of Southridge’s investors had requested redemptions, with some requests dating to 2001, but the firm did not honor them.

The affected funds include Sovereign Partners LP, Southridge Partners LP, Dominion Capital Fund Ltd, Dominion Investment Fund Ltd and Southshore Capital Fund Ltd, Connecticut said.

Both lawsuits seek civil penalties and restitution for investors. Connecticut is also seeking a 10-year ban on Hicks’ engaging in investment-related activities.

The SEC case is SEC v. Southridge Capital Management LLC et al, U.S. District Court, District of Connecticut, No. 10-01685. The Connecticut 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 and Andre Grenon)

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