IN THE MATTER OF: (Collectively, "Respondents") * * * * * * * * * * * * * * * * * * * * ORDER TO CEASE AND DESIST
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SOUTHRIDGE REAL ESTATE
PARTNERS, LIMITED PARTNERSHIP
a/k/a SOUTHRIDGE REAL ESTATE
PARTNERS, LP
RIDGEBURY PARTNERS, LLC
DOUGLAS R. ESPOSITO
(CRD No. 4259805)
STEPHEN MURRAY HICKS
(CRD No. 1248222)
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*
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NOTICE OF INTENT TO FINE
AND
NOTICE OF RIGHT TO HEARING
DOCKET NO. CF-15-8113-S
I. PRELIMINARY STATEMENT
| 1. | The Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies (“Regulations”) promulgated under the Act. |
| 2. | Pursuant to Section 36b-26(a) of the Act, the Commissioner, through the Securities and Business Investments Division (“Division”) of the Department of Banking, has conducted an investigation into the activities of Respondents to determine if Respondents have violated, are violating or are about to violate provisions of the Act or Regulations (“Investigation”). |
| 3. |
As a result of the Investigation, the Commissioner has reason to believe that Respondents have violated certain provisions of the Act and Regulations. |
| 4. | As a result of the Investigation, the Commissioner has the authority to issue a cease and desist order against Respondents pursuant to Section 36b-27(a) of the Act. |
| 5. |
As a result of the Investigation, the Commissioner has the authority to impose a fine upon Respondents pursuant to Section 36b-27(d) of the Act. |
II. RESPONDENTS
| 6. |
Douglas R. Esposito (“Esposito”) is an individual whose address last known to the Commissioner is 43 Mill Road, Danbury, Connecticut 06810. Esposito was registered as a broker-dealer agent from January 2, 2001 to January 2, 2004. Esposito has not been registered under the Act in any capacity since January 2, 2004. |
| 7. | Stephen Murray Hicks (“Hicks”) is an individual whose address last known to the Commissioner is 31 Country Club Road, Ridgefield, Connecticut 06877. Hicks has never been registered under the Act in any capacity. |
| 8. | Southridge Real Estate Partners, LP (the “Fund”) is a Delaware limited partnership formed on July 17, 2007. The Fund’s principal place of business and address last known to the Commissioner is 2A Ives Street, Danbury, Connecticut 06810. The Fund is a private investment fund authorized to make investments in or engage in any transaction related to real estate. |
| 9. | Ridgebury Partners, LLC (the “General Partner”) is a Delaware limited liability company formed on July 17, 2007. The General Partner’s principal place of business and address last known to the Commissioner is 2A Ives Street, Danbury, Connecticut 06810. At all times pertinent hereto, the General Partner has been the general partner of the Fund. As a limited liability company, the General Partner had two members, Bridgewater Partners, LLC (“Bridgewater”) and Sunodia Partners, LP (“Sunodia”). |
III. STATEMENT OF FACTS
| 10. | Bridgewater, one of the members of the General Partner, is a Connecticut limited liability company formed on January 24, 2006. Bridgewater’s principal place of business and address last known to the Commissioner is 2A Ives Street, Danbury, Connecticut 06810. Esposito is a member of Bridgewater and exercised control over Bridgewater. In so doing, Esposito also exercised indirect control over the General Partner. |
| 11. | Sunodia is a limited partnership formed under the laws of Delaware. Sunodia, in turn, had two partners, Laurel Grove Capital, LLC and Mary Hicks. |
| 12. | Laurel Grove Capital, LLC is a Delaware limited liability company that had two members, Hicks and Mary Hicks. Through his ownership interest in Laurel Grovel Capital, LLC and consequently Sunodia, Hicks exercised indirect control over the General Partner. |
| 13. | Southridge Advisors, LLC (the “Investment Manager”), a Delaware limited liability company, is the Investment Manager of the Fund. |
| 14. | From approximately August 2007 to approximately January 2010, the Fund issued securities in the form of limited partnership interests (the “Fund LP Interests”). |
| 15. | The limited partners of the Fund took no part in the conduct or control of the Fund’s business, and had no authority or power to act for or bind the Fund. Rather, the General Partner had a power of attorney to act for the limited partners who purchased Fund LP Interests. |
| 16. | From approximately August 2007 to approximately January 2010, the Fund offered and sold approximately $1.3 million of Fund LP Interests from Connecticut to approximately 20 investors (the “Fund LP Investors”). |
| 17. | Prospective purchasers of the Fund LP Interests were provided with the following documents: (a) “Southridge Real Estate Partners, L.P. Subscription Agreement for Limited Partnership Interests Offered by Private Placement Memorandum” (“Subscription Agreement”); (b) a document dated July 2007 and entitled “Confidential Private Placement Memorandum” (“PPM”); and (c) an agreement dated June 2007 and entitled “Southridge Real Estate Partners, L.P. Limited Partnership Agreement” (“LP Agreement”). The documents stated that the Fund LP Interests were not being registered under the Securities Act of 1933, as amended. Article 11.2 of the LP Agreement also stated that the Fund LP Interests “are being offered herein pursuant to an exemption from the registration requirements contained in Sections 3(b) and 4(2) of the 1933 Act”. In addition the PPM stated that “these securities are being offered under an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933 as amended, or Securities and Exchange Commission Regulation D promulgated thereunder.” (Emphasis omitted.) The Fund LP Investors were told that the Fund LP Interests would not be registered and were being offered pursuant to an exemption from registration. |
| 18. | The Fund LP Interests were not registered in Connecticut under Section 36b-16 of the Act, nor were they the subject of a filed exemption claim or claim of covered security status under Section 36b-21 of the Act, including, without limitation, the private placement exemption in Section 36b-21(b)(10) of the Act and the notice filing provisions in Section 36b-21(e) of the Act governing offerings made pursuant to Rule 506 of Regulation D. |
| 19. | From approximately August 2007 to approximately January 2010, absent registration in any capacity under the Act, Esposito and Hicks, on behalf of the Fund, offered and sold Fund LP Interests in or from Connecticut to at least one Connecticut investor and received remuneration directly or indirectly for such services and/or solicitation activity. |
| 20. | Neither Esposito nor Hicks has been registered as an agent of the issuer Fund under the Act. |
| 21. | From at least August 2007 to approximately January 2010, the General Partner, through Esposito and Hicks, transacted business as an investment adviser by giving securities-related investment advice to the Fund for compensation and at a time when the General Partner was not registered as an investment adviser under the Act. In making its investment decisions, the General Partner relied on Esposito and Hicks. The General Partner, through Esposito and Hicks, engaged in these investment advisory activities from Connecticut, and received compensation, directly or indirectly, for providing such advisory services. |
| 22. | From at least August 2007 to January 2010, the General Partner, while transacting business as an investment adviser, engaged Esposito and Hicks as unregistered investment adviser agents. |
| 23. | From at least August 2007 to approximately January 2010, Esposito and Hicks each transacted business as an investment adviser agent of the General Partner investment adviser. Esposito and Hicks made recommendations and rendered advice regarding securities to the Fund and solicited Fund investors. The General Partner had absolute discretion to accept or decline the subscription of any prospective limited partner. Esposito accepted and executed Subscription Agreements on behalf of the General Partner. In addition, the PPM also provided the General Partner with the right to suspend, delay or restrict withdrawals of capital. The PPM also authorized the General Partner to pay distributions in property (including securities), in cash or partly in property (including securities) and partly in cash. Hicks accepted and executed Redemption Agreements on behalf of the General Partner that were submitted by Fund LP Investors requesting redemption of their limited partnership interests in the Fund. Hicks also managed the day to day operations of the Fund and arranged loans for the Fund in order to finance the Fund’s continued operations. Hicks and Esposito received compensation or other remuneration directly or indirectly for providing such investment advisory services. |
| 24. | At no time were either Esposito or Hicks registered in Connecticut as an investment adviser agent of the General Partner, nor did they qualify for any exemption or exclusion from registration under the Act. |
| 25. | At least one limited partner of the Fund received a copy of a document entitled “Southridge Real Estate Opportunity Fund, Bridgewater Funding, LLC and Southridge Capital Management, LLC (‘SCM’) Investment Managers” (“Marketing Material”) prior to investing in the Fund. According to the Marketing Material, the aim of the Fund was “to actively manage a portfolio of short-term real estate loans for value-added and opportunistic real estate transactions.” |
| 26. | The Marketing Material stated that the minimum investment in the Fund was to be $250,000 in a commingled fund-NAV structure. The fees listed included 1% administration and 2% management fees. |
| 27. | In connection with Esposito’s and Hicks’ solicitation of investors to purchase limited partnership interests in the Fund, investors were provided with an LP Agreement, a Subscription Agreement and a PPM. In order to subscribe for a limited partnership interest and invest in the Fund as a limited partner, the investor was required to accept and adopt the provisions of the LP Agreement which was annexed as Exhibit A to the PPM, as well as to complete and execute a Subscription Agreement. |
| 28. | The LP Agreement and PPM both listed Southridge Advisors, LLC as the Fund’s Investment Manager. The LP Agreement stated that the Investment Manager provided investment advice and related services to the General Partner and the Fund. The LP Agreement stated that the principal investment objective of the Fund was to invest in a portfolio of secured commercial real estate loans ordinarily sourced and underwritten by Bridgewater, an affiliate of the Fund. |
| 29. | The PPM included Esposito and Hicks as principals of the General Partner, and stated that Hicks was a principal of the General Partner as well as a principal of the Investment Manager, and that his primary responsibility with the Investment Manager was overseeing all aspects of the firm’s investments. |
| 30. | The PPM stated that the Limited Partners had to rely upon the ability of the General Partner and the Investment Manager to make investment decisions consistent with the Partnership’s investment objectives and policies. Limited Partners would not have the opportunity to personally evaluate the relevant economic, financial and other information that the General Partner and the Investment Manager would use when selecting and monitoring investments. |
| 31. | The General Partner and the Investment Manager were to evaluate whether a particular situation or strategy was appropriate or feasible for the Fund. Decisions with respect to the management of the Fund’s assets and the overall management of the Fund would be made by the General Partner and or the Investment Manager. For all intents and purposes, these functions ascribed to the General Partner and the Investment Manager would, in reality, be performed by Esposito and Hicks. |
| 32. | The LP Agreement provided the General Partner with the power to act as or retain any person or entity, including any affiliate of the General Partner, as an investment adviser, including without limitation, the Investment Manager, to supervise the investment assets of the Fund and enter into an agreement with the advisor for fees. The LP Agreement also provided the General Partner with the authority to receive, buy, sell, sell short, exchange, trade and otherwise deal in and with real estate loans, securities and other property of the Fund. The General Partner was also authorized to expand, revise or contract Fund business and/or alter, modify or supplement the Fund’s investment strategies as the General Partner deemed necessary or advisable. |
| 33. | The LP Agreement and PPM both provided that in lieu of reimbursing the General Partner and/or the Investment Manager for certain expenses, including the salaries of the principals and employees of the General Partner, certain costs incurred in connection with the administration of the Fund’s operations and certain costs incurred in connection with the management of Fund assets, each Limited Partner would pay an Asset Management Fee to the General Partner, or its designee, in an amount equal to one half (1/2) of one percent (1%) of the Capital Account of such Limited Partner on the first day of each quarter and an Administrative Fee in an amount equal to one quarter (1/4) of one percent (1%) of the Capital Account of such Limiter Partner, adjusted for contributions or withdrawals. |
IV. STATUTORY AND REGULATORY BASIS FOR
ORDER TO CEASE AND DESIST
AND ORDER IMPOSING FINE
a. Violation of Section 36b-16 of the Act by the Fund -
Offer and/or Sale of Unregistered Securities
| 34. | Paragraphs 1 through 33, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 35. |
The Fund offered and sold securities in or from Connecticut to at least one investor, as more fully described in paragraphs 6 through 20, inclusive, which securities were not registered in Connecticut under the Act, as more fully described in paragraph 18. The offer and sale of such securities absent registration constitutes a violation of Section 36b-16 of the Act, which forms a basis for an order to cease and desist to be issued against the Fund under Section 36b-27(a) of the Act, and for the imposition of a fine upon the Fund under Section 36b-27(d) of the Act. |
b. Violation of Section 36b-6(c)(1) of the Act
by the General Partner –
Unregistered Investment Adviser Activity
| 36. | Paragraphs 1 through 35, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 37. |
The General Partner transacted business as an investment adviser in Connecticut absent registration, as more fully described in paragraphs 9, 15, and 21 through 33, inclusive. Such conduct constitutes a violation of Section 36b-6(c)(1) of the Act, which forms a basis for an order to cease and desist to be issued against the General Partner under Section 36b-27(a) of the Act, and for the imposition of a fine upon the General Partner under Section 36b-27(d) of the Act. |
c. Violation of Section 36b-6(c)(2) of the Act by Esposito and Hicks –
Unregistered Investment Adviser Agent Activity
| 38. | Paragraphs 1 through 37, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 39. |
Esposito transacted business as an investment adviser agent of the General Partner investment adviser in Connecticut absent registration, as more fully described in paragraphs 21 through 33, inclusive. Such conduct constitutes a violation of Section 36b-6(c)(2) of the Act, which forms a basis for an order to cease and desist to be issued against Esposito under Section 36b-27(a) of the Act, and for the imposition of a fine upon Esposito under Section 36b-27(d) of the Act. |
| 40. | Hicks transacted business as an investment adviser agent of the General Partner investment adviser in Connecticut absent registration, as more fully described in paragraphs 21 through 33, inclusive. Such conduct constitutes a violation of Section 36b-6(c)(2) of the Act, which forms a basis for an order to cease and desist to be issued against Hicks under Section 36b-27(a) of the Act, and for the imposition of a fine upon Hicks under Section 36b-27(d) of the Act. |
d. Violation of Section 36b-6(c)(3) of the Act by the General Partner –
Engaging Unregistered Investment Adviser Agents
| 41. | Paragraphs 1 through 40, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 42. |
The General Partner engaged Esposito and Hicks as investment adviser agents in Connecticut absent registration, as described more fully in paragraphs 21 through 33, inclusive. Such conduct constitutes a violation of Section 36b-6(c)(3) of the Act, which forms a basis for an order to cease and desist to be issued against the General Partner under Section 36b-27(a) of the Act and the imposition of a fine upon the General Partner pursuant to Section 36b-27(d) of the Act. |
e. Violation of Section 36b-6(b) of the Act by the Fund –
Employing Unregistered Agents of Issuer
| 43. | Paragraphs 1 through 42, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 44. |
The Fund employed Esposito and Hicks as unregistered agents of issuer in this state, as more fully described in paragraphs 14, 19 and 20. Such conduct constitutes a violation of Section 36b-6(b) of the Act, which forms a basis for an order to cease and desist to be issued against the Fund under Section 36b-27(a) of the Act, and for the imposition of a fine upon the Fund under Section 36b-27(d) of the Act. |
f. Violation of Section 36b-6(a) of the Act by Esposito and Hicks –
Unregistered Agent of Issuer
| 45. | Paragraphs 1 through 44, inclusive, are incorporated and made a part hereof as if more fully set forth herein. |
| 46. |
Esposito transacted business as an agent of issuer in this state absent registration, as more fully described in paragraphs 14, 19 and 20. Such conduct constitutes a violation of Section 36b-6(a) of the Act, which forms a basis for an order to cease and desist to be issued against Esposito under Section 36b-27(a) of the Act, and for the imposition of a fine upon Esposito under Section 36b-27(d) of the Act. |
| 47. | Hicks transacted business as an agent of issuer in this state absent registration, as more fully described in paragraphs 14, 19 and 20. Such conduct constitutes a violation of Section 36b-6(a) of the Act, which forms a basis for an order to cease and desist to be issued against Hicks under Section 36b-27(a) of the Act, and for the imposition of a fine upon Hicks under Section 36b-27(d) of the Act; |
V. ORDER TO CEASE AND DESIST, NOTICE OF INTENT TO FINE
AND NOTICE OF RIGHT TO HEARING
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein DOUGLAS R. ESPOSITO has committed at least one violation of Section 36b-6(a) of the Act and at least one violation of Section 36b-6(c)(2) of the Act;
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, STEPHEN MURRAY HICKS has committed at least one violation of Section 36b-6(a) of the Act and at least one violation of Section 36b-6(c)(2) of the Act;
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, SOUTHRIDGE REAL ESTATE PARTNERS LIMITED PARTNERSHIP a/k/a SOUTHRIDGE REAL ESTATE PARTNERS, LP has committed at least one violation of Section 36b-16 of the Act and at least one violation of Section 36b-6(b) of the Act;
WHEREAS, as a result of the Investigation, the Commissioner finds that, with respect to the activity described herein, RIDGEBURY PARTNERS, LLC has committed at least one violation of Section 36b-6(c)(1) of the Act and at least one violation of Section 36b-6(c)(3) of the Act;
WHEREAS, notice is hereby given to each Respondent that the Commissioner intends to impose a maximum fine not to exceed one hundred thousand dollars ($100,000) per violation upon each Respondent;
WHEREAS, the Commissioner further finds that the issuance of an Order to Cease and Desist and the imposition of a fine upon Respondents is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policies and provisions of the Act;
WHEREAS, the Commissioner ORDERS that DOUGLAS R. ESPOSITO CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation: (1) transacting business as an investment adviser agent in Connecticut absent registration under the Act; and (2) acting as an agent of issuer in this state absent registration;
WHEREAS, the Commissioner ORDERS that STEPHEN MURRAY HICKS CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation: (1) transacting business as an investment adviser agent in Connecticut absent registration under the Act; and (2) acting as an agent of issuer in this state absent registration;
WHEREAS, the Commissioner ORDERS that SOUTHRIDGE REAL ESTATE PARTNERS LIMITED PARTNERSHIP a/k/a SOUTHRIDGE REAL ESTATE PARTNERS, LP CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation: (1) offering and selling unregistered securities in or from Connecticut; and (2) employing unregistered agents of issuer in this state;
WHEREAS, the Commissioner ORDERS that RIDGEBURY PARTNERS, LLC CEASE AND DESIST from directly or indirectly violating the provisions of the Act, including without limitation: (1) transacting business as an investment adviser in Connecticut absent registration; and (2) engaging an unregistered investment adviser agent;
THE COMMISSIONER FURTHER ORDERS THAT, pursuant to Section 36b-27 of the Act, each Respondent will be afforded an opportunity for a hearing on the allegations set forth above if a written request for a hearing is received by the Department of Banking, Securities and Business Investments Division, 260 Constitution Plaza, Hartford, Connecticut 06103-1800 within fourteen (14) days following each Respondent’s receipt of this Order. The enclosed Appearance and Request for Hearing Form must be completed and mailed to the above address. If any Respondent will not be represented by an attorney at the hearing, please complete the Appearance and Request for Hearing Form as “pro se”. Once a written request for a hearing is received, the Commissioner may issue a notification of hearing and designation of hearing officer that acknowledges receipt of a request for a hearing, designates a presiding officer and sets the date of the hearing in accordance with Section 4-177 of the General Statutes of Connecticut and Section 36a-1-21 of the Regulations. If a hearing is requested, the hearing will be held on September 29, 2015, at 10 a.m., at the Department of Banking, 260 Constitution Plaza, Hartford, Connecticut.
The hearing will be held in accordance with the provisions of Chapter 54 of the General Statutes of Connecticut. At such hearing, each Respondent will have the right to appear and present evidence, rebuttal evidence and argument on all issues of fact and law to be considered by the Commissioner.
This Order to Cease and Desist shall remain in effect and become permanent against any Respondent that fails to request a hearing within the prescribed time period or fails to appear at any such hearing.
If any Respondent does not request a hearing within the time period prescribed or fails to appear at any such hearing, the Commissioner may order a fine in an amount not to exceed One Hundred Thousand Dollars ($100,000) per violation be imposed upon each such Respondent.
| Dated at Hartford, Connecticut, | _____/s/____________ | |
| This 10th day of July 2015. | Jorge L. Perez | |
| Banking Commissioner |
CERTIFICATION
I hereby certify that on this 10th day of July 2015, the foregoing Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing was sent by certified mail, return receipt requested, to: Southridge Real Estate Partners, LP, 2A Ives Street, Danbury, Connecticut 06810, certified mail no. 7013 3020 0000 4226 8237; Ridgebury Partners, LLC, 2A Ives Street, Danbury, Connecticut, 06810, certified mail no. 7013 3020 0000 4226 8268; Douglas R. Esposito, 43 Mill Road, Danbury, Connecticut, 06810 certified mail no. 7013 3020 0000 4226 8213; and Stephen Murray Hicks, 31 Country Club Road, Ridgefield, Connecticut, 06877, certified mail no. 7013 3020 0000 4226 8220.
| ____/s/___________ |
| Paul A. Bobruff |
| Prosecuting Attorney |