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Regulation and Compliance > Federal Regulation > SEC

Advisors to Cough Up $564K for Undisclosed Conflicts of Interest

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Two advisors have agreed to pay a combined $564,000 for not adequately disclosing their conflicts of interest related to Oregon-based Aequitas Management, a firm they persuaded their clients to invest in, the Securities and Exchange Commission said.

The SEC previously charged Aequitas and three of its top executives with fraudulently raising more than $350 million from about 1,500 investors. The SEC also previously charged advisors in Massachusetts and Washington for failing to disclose their Aequitas-related conflicts of interest to advisory clients.

In two separate orders issued Thursday, the SEC found that from 2013 to 2015, Jeffrey C. Sica of Morristown, New Jersey; William M. Malloy III of La Jolla, California; and the investment advisory firms that they each controlled, steered advisory clients to invest in Aequitas securities. That was despite the fact that, at the same time, Aequitas was compensating the firms of Malloy and Sica via loans or for consulting services that included introducing investors to Aequitas, the SEC said.

According to the order against Sica and his firm, Sica Wealth Management, the firm received about $2 million from Aequitas pursuant to a consulting and loan agreement. However, Sica and SWM failed to adequately disclose the agreements and payments to their clients who invested in Aequitas securities, according to the SEC.

According to the order against Malloy and his firm, Fortress Investment Management, Fortress received monthly payments of $15,000 from Aequitas. However, Malloy failed to adequately disclose the payments to clients who invested in a Fortress fund that invested significantly in Aequitas securities, the SEC said. Malloy also inaccurately claimed that another advisor he controlled had the $100 million in assets under management required for SEC registration, causing it to remain improperly registered, the SEC charged.

Without admitting or denying the SEC’s findings, Sica and SWM consented to an order finding they failed to disclose conflicts of interest in violation of Section 206(2) of the Investment Advisers Act of 1940, the SEC said. Also without admitting or denying the SEC’s findings, Malloy and Fortress consented to an order finding that Malloy violated Section 206(2) and aided and abetted and caused a violation of Section 203A of the Advisers Act, and that Fortress was a cause of Malloy’s Section 206(2) violations, the SEC said.

The order also suspended Malloy from the industry for 12 months. The $564,000 that Sica, Malloy and their related entities agreed to pay will be used for the disgorgement of the advisory fees they charged during the time of their violations and to fund a distribution to harmed investors, the SEC said.

“We are pleased to put this issue behind us and to have had the opportunity to resolve this matter,” Jeffrey Sica said in a statement. “Like many investors, we were deceived by Aequitas, and in 2015, when questions we raised about Aequitas’ financial position led to additional red flags, our firm immediately and proactively shifted its focus to protecting our investors and demanded that their money be returned,” he said, adding: “In the half-decade since the SEC investigation was launched, our firm has taken significant steps to strengthen our controls environment, and have bolstered our compliance and operations teams with the addition of new staff and leadership to help ensure our level of diligence is as strong and robust as it can be.”

Malloy filed a revised Form ADV indicating his firm had $104 million in AUM, “even though the firm’s chief compliance officer, a compliance consultant, and outside counsel determined the firm had only $13 million in AUM,” Cipperman Compliance Services said in an email Tuesday.

Cipperman questioned why Malloy made that claim “when there doesn’t appear to be any real benefit,” adding: “If a firm doesn’t reach the $100 million AUM within the 120 days, the only real consequence is having to move the registration to the relevant state jurisdiction. If you have to squint too hard to count the assets (i.e. your CCO, counsel, and compliance consultant disagree with you), it may be time to accept reality. Otherwise, you may end up barred from the industry altogether.”

— Check out SEC Charges Bogus Brokers With Fraud on ThinkAdvisor.


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