A federal court in Connecticut ordered a hedge fund manager and his investment advisory businesses to pay nearly $13 million in a case where the Securities and Exchange Commission alleged he illegally diverted investor money for use by other hedge funds that were illiquid and in need of cash.
The court found Steven Hicks of Ridgefield, Connecticut, liable on the SEC’s claim that he misappropriated investor funds. The SEC has been actively litigating the case since filing its complaint in 2010 against Hicks and his firms Southridge Capital Management LLC and Southridge Advisors LLC.
The SEC argued that investors were defrauded because they were not told about the transfers of hedge fund assets while they were taking place. According to the SEC’s complaint, Hicks later sent a letter to investors admitting that certain legal and administrative expenses had been improperly allocated between funds, but rather than repaying the money, he transferred certain illiquid securities to the funds.
The court’s order requires the Southridge entities and Hicks to pay approximately $7.9 million in disgorgement and prejudgment interest. Hicks also must pay a $5 million penalty.
The ruling is a partial final judgment. The SEC’s litigation continues with respect to allegations that Hicks and the Southridge entities also overvalued the largest position in the funds and made misrepresentations regarding the liquidity of funds they managed.
FINRA Hits Wells Fargos Securites with a $3.25 Million Fine
Wells Fargo Securities was censured, fined $3.25 million and required to review its supervisory systems and processes, according to the Financial Industry Regulatory Authority’s August disciplinary actions.
Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to report all of its reportable conventional options positions for an unknown but significant period of time because of the firm’s erroneous belief that the positions were not reportable.
After determining that the firm would begin reporting these positions, the firm failed to develop and implement a Large Options Position Report (LOPR) system, FINRA says.
After identifying and remediating the firm’s failure to report reportable conventional options positions to LOPR, FINRA determined that the firm still failed to accurately report an unknown but significant number of conventional options positions to the LOPR.
The findings also stated that the firm and a customer exceeded the over-the-counter position limit by 25% for at least 461 trading dates in options related to one security, and by 40% for two trading dates in options related to another security.
The firm had not detected these violations because of its LOPR-related deficiencies.
SEC Charges Operator of $5.7 Million Ponzi Scheme Involving Cars With Display Ads
The SEC charged a Las Vegas resident with operating a $5.7 million Ponzi scheme that claimed to generate profits from display advertisements on cars.
According to the SEC’s complaint, Robert Cortez Marshall raised at least $5.7 million from approximately 200 investors residing in several states in an unregistered offering of the securities of his company, Adz on Wheelz.
Marshall allegedly told investors that Adz would buy cars to display advertisements on large computer monitors installed into the car’s doors, roof and trunk. The SEC alleges that Marshall and Adz promised investors “guaranteed weekly royalty” payments totaling over 200% a year and told them that they could receive a full refund at any time.
However, according to the SEC, the company almost immediately ran into technical issues with the display monitors, and Adz sold few, if any, advertisements. The SEC further alleges that, because Adz derived minimal revenue, Marshall made royalty payments to existing investors with new investors’ money, thereby operating a Ponzi scheme.
The SEC also alleges that Marshall stole $1.63 million of investor funds, which he used to make cash payments to himself and for merchandise, meals and entertainment expenses.
The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus interest, and civil penalties.