(Bloomberg News) Southridge Capital Management LLC was sued by Connecticut over $26 million in fees charged investors based on what state Attorney General Richard Blumenthal called false statements about the value of assets.

The investment firm, based in Ridgefield, Connecticut, also was sued today by the U.S. Securities and Exchange Commission and accused of defrauding investors in hedge funds.

Southridge overvalued assets of funds it managed through false financial statements to increase its fees illegally, Blumenthal said in a statement. The firm acted as general partner of the funds, providing advice and strategy, Blumenthal said today in a lawsuit in state court in Hartford filed on behalf of Connecticut Banking Commissioner Howard F. Pitkin.

"Through false financial statements and other violations of the funds' private placement memoranda, SCM charged excessive fees to the funds' investors," according to the state's complaint, "based on misleading and fraudulent valuations of the assets SCM managed on behalf of the funds and their investors."

The state Banking Department subpoenaed Southridge Capital in 2007 to investigate its operation of five funds that it advises and manages, according to the complaint.

The funds named in the suit are Sovereign Partners LP, Southridge Partners LP, Dominion Capital Fund Ltd., Dominion Investment Fund Ltd. and Southshore Capital Fund Ltd.

Southridge and Chief Executive Officer Stephen Hicks, who also was sued, didn't immediately return calls seeking comment.

Illiquid Investments

Beginning in late 2003, Hicks sought investors by telling them that most of their money would be placed in liquid investments, the SEC said in its lawsuit. By 2007, many investors in these funds were having difficulty redeeming their money because it was invested in illiquid securities, according to the SEC's suit.

Hicks, Southridge and Southridge Advisors LLC "significantly overvalued" the hedge funds' largest single investment, accruing more than $1.8 million in undeserved management fees, the SEC said in its complaint.

The Southridge firms and Hicks caused two hedge funds to pay about $5 million of legal and administrative expenses incurred by three other hedge funds, according to the SEC.

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