Two more SEC Actions

Posted by Andrew Borowiec on Mar 2, 2020 11:30:56 AM

WIth the recent challenges in the equities market we believe Warren Buffet's quote "Only when the tide goes out do you discover who's been swimming naked" will once again prove true. You must have your due diligence practices up to the highest level to avoid befalling the fate of those in the 2008 crisis. 

FORTRESS INVESTMENT MANAGEMENT, LLC (“Fortress”) and
WILLIAM M. MALLOY, III (“MWM”)

The Securities and Exchange Commission disclosed the conclusion of a cease-and-desist proceeding against “Fortress” and “WMM.” During the relevant period, “Fortress”, not to be mistaken with  FORTRESS INVESTMENT GROUP (“FIG”), served as the investment Adviser to one private fund with $5.4mm in assets.

These proceedings arise from improper Commission registration and failure to disclose a conflict of interest involving William M. Malloy, III (“Malloy”) and two investment adviser firms under his control, MWM 1835, LLC (“MWM1835”) and “Fortress”. In January 2014, MWM registered with the Commission as an investment adviser at Malloy’s direction. MWM registered based on the premise that it would reach $100 million in regulatory assets under management (“RAUM”) within 120 days and therefore be eligible to remain registered. As the 120-day mark approached, “MWM” staff reported to Malloy that they believed the firm had no more than $10 million in RAUM. Nonetheless, MWM remained improperly registered for months while Malloy maintained that the firm’s RAUM included more than $100 million in assets in which he held a personal interest. Yet as Malloy knew or was reckless in not knowing, his occasional discussions with an MWM investment adviser representative regarding general investment strategies or investment ideas for these assets were not a sufficient basis to include them in MWM’s RAUM.

During 2014 and 2015, advisory clients of MWM and Malloy held approximately $2.6 million in investments in a private fund called Income Opportunity Capital, LLC (“IOC”). IOC was managed by Fortress, which Malloy controlled. At Malloy’s direction, IOC invested heavily in securities issued by an entity in the Oregon-based Aequitas enterprise (“Aequitas”).2 At the same time, Aequitas was paying Fortress a monthly fee for consulting and business development services that included introducing prospective investors to Aequitas. These payments created a conflict of interest that Malloy did not disclose to the MWM clients who invested in IOC.

SICA WEALTH MANAGEMENT, LLC (“SWM”) and
JEFFREY C. SICA (“SICA”)

The Securities and Exchange Commission disclosed the conclusion of a cease-and-desist proceeding against “SWM” and “SICA.” During the relevant period, “SWM” served as investment adviser to approximately 100 individual retail clients and had approximately $110 million in assets under management.

These proceedings involve conflicts of interest regarding compensation payments and other financial transactions provided to “SWM” and another firm owned and controlled by “SICA”, (the “Affiliated Adviser”), that were not adequately disclosed to advisory clients. From October 2013 to March 2015, on “SWMs” recommendation, approximately 45 SWM advisory clients invested a total of more than $30 million in securities issued by Aequitas Commercial Finance, LLC (“ACF”), one of numerous entities affiliated with the Aequitas enterprise, the ultimate parent of which is Aequitas Management, LLC (collectively referred to herein as “Aequitas.”).

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Tags: "risk", "compliance"

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