There’s more fallout from the alleged $350 million Aequitas Capital Management Ponzi scheme, with two more investment advisors tied to the Lake Oswego, Oregon financial advisor settling charges with the Securities and Exchange Commission last week.
The firms and their owners – prominent La Jolla, Calif. investor William Malloy III, 43, and Morristown, New Jersey investment advisor and frequent financial media commentator Jeffrey Sica, 52 – were accused of failing to adequately disclose conflicts of interests to clients about their relationship with Aequitas, as were two prior advisors who settled similar charges in 2019.
Altogether, four investor advisors outside of Aequitas have paid fines and disgorgement totaling more than $2.4 million to the SEC. They’ve also agreed to censure and cease and desist orders, and three of them received bars or suspensions from the securities industry.
Malloy and Sica and the firms they control “steered advisory clients to invest in Aequitas securities at the same time that Aequitas was compensating the firms through loans or for consulting services that included introducing investors to Aequitas,” according to the SEC release announcing the most recent settlements on Feb. 27. Neither advisor disclosed those conflicts to clients.
Aequitas, which once claimed to manage $1.67 billion, began winding down its operations in 2016 after its sizable investments in the student loan debt of Corinthian Colleges tanked when the for-profit school filed for bankruptcy in 2015. Between 2014 and 2015, Aequitas had raised approximately $350 million from investors, according to the SEC’s 2016 fraud complaint. By that time, the new money being raised from investors was largely going to pay off prior investors, the SEC alleged.
The SEC’s civil case is still pending against Aequitas and its principals — co-founder and CEO Robert Jesenik, co-founder and executive vice president Brian Oliver, and former CFO N. Scott Gillis — all of whom the SEC is seeking to bar from the industry and make restitution. Oliver and another former CFO, Olaf Janke, have pled guilty to criminal charges, and more criminal indictments are expected.
But, as RIA Intel previously reported, the sophisticated investment fraud couldn’t have gone on as long as it did without the participation of other RIAs. To lure them, Aequitas lent money to some RIAs to grow their assets and offered them bond-like products bearing interest rates as high as 15 percent that supposedly involved little risk.
Malloy’s ties to Aequitas go back to 2010, when he was named an executive vice president of Aequitas Capital Management. The next year Malloy founded a company called Fortress Investment Management — not to be confused with Fortress Investment Group (now part of SoftBank Group) — that entered into a consulting agreement with Aequitas, according to the SEC’s complaint. Then, in 2013 Malloy founded his investment advisor MWM 1835.
Under its agreement with Aequitas, Fortress received $15,000 a month for introducing investors to Aequitas, among other services. And during 2014 and 2015, a fund run by Fortress, called Income Opportunity Capital, bought approximately $1 million of Aequitas Commercial Finance promissory notes at the direction of Malloy, MWM, and Fortress, the SEC said. Thirteen of Malloy’s clients were invested in the fund, which had invested more than 95% of its assets in the Aequitas notes. Malloy's lawyer, Stephen Hudson of Kilpatrick Townsend & Stockton, says that “Malloy owned MWM but was not himself an investment adviser representative and did not have any of his own advisory clients.”
“The Fortress-ACM agreement incentivized Malloy, through his control of Fortress, to invest IOC in Aequitas, rather than other investments,” the SEC charged. While that created a conflict of interest, it added, “Malloy took no steps to disclose the agreement to investors.” Hudson points out that the SEC determined the disclosures “were not sufficiently specific.”
Some of those investors sued Malloy in California state court, claiming that their investment of $300,000 went into the Income Opportunity Capital fund, which they were told would pay 8% per year. Instead, they alleged that it went to Aequitas and its investments in Corinthian. The case has since been settled for an undisclosed amount, according to an attorney involved with the case.
Malloy and Fortress agreed to pay the SEC $154,057 and that Malloy is suspended from the securities industry for 12 months.
These days Malloy works through a family office called “Malloy and Company, which—according to its website--“provides capital and business expertise for private companies and real estate ventures. We foster innovation that drives positive change for the community and environment by focusing on the three key principles of authenticity, innovation and sustainability.”
A spokesman for Malloy said “Fortress Investment Management and William Malloy III are pleased to end the process with a mutually agreed-upon settlement.”
Meanwhile, Sica Wealth Management and its owner, Jeffrey Sica, will pay more than $400,000 to settle with the SEC.
Neither of the men admitted nor denied the SEC’s findings.
The SEC claims that Sica and “certain Aequitas officers had an understanding” that his firm would receive money from Aequitas, while Sica would recommend his clients invest in Aequitas securities.
From October 2013 to March 2015, on Sica’s recommendation, approximately 45 of his firm’s advisory clients invested a total of more than $30 million in securities issued by Aequitas Commercial Finance, the SEC complaint says.
At the same time, Aequitas paid his firm, Sica Wealth Management, and another advisor affiliated with Sica, approximately $2 million through consulting agreements and a loan agreement, according to the SEC.
Sica allegedly failed to disclose those arrangements to clients, which created a conflict when he recommended buying the Aequitas securities. Sources familiar with Sica, however, say that the firm withdrew some $21 million of its investments shortly before Aequitas failed, and Sica has not been barred from the securities industry, even temporarily.
Sica Wealth Management’s website showcases articles in such places as Barron’s, Fox Business, and U.S. News & World Report in which Jeff Sica is quoted discussing investments.
“We are pleased to put this issue behind us and to have had the opportunity to resolve this matter,” 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. Importantly, there is no finding in the SEC Order indicating that Sica Wealth Management was aware of the fraud being committed by Aequitas against its investors.”
Sica added that “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.”
The two other advisors who agreed last year to similar cease and desist orders, fines, and industry bars are Kristofor Behn of Foxboro, Mass.-based Fieldstone Financial Management and N. Gary Price of Gig Harbor, Wash., based-Genesis Capital. The SEC said these two also failed to disclose conflicts to their clients when recommending Aequitas securities.
Behn was permanently banned from the securities industry, while Price was barred for a year.
Corrections: A previous version of this story incorrectly stated that the SEC alleged that Malloy aided and abetted the Aequitas fraud. Also, Malloy was suspended, not barred, from the securities industry for 12 months.