UNITED STATES OF AMERICA

UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

ADMINISTRATIVE PROCEEDING

File No. 3-19715

In the Matter of

Fortress Investment Management, LLC

and William M. Malloy, III

Respondents.

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PROPOSED PLAN OF DISTRIBUTION

I.

Overview

1.

Purpose. The Division of Enforcement (“Division”) submits this proposed plan

of distribution (the “Plan”) pursuant to Rule 1101 of the Commission’s Rules on Fair Fund and

Disgorgement Plans (“Commission’s Rules”), 17 C.F.R. § 201.1101. As described more

specifically below, the Plan provides for the distribution of the disgorgement, prejudgment

interest, and civil money penalties paid by Fortress Investment Management, LLC (“Fortress”)

and William M. Malloy, III (“Malloy”) (collectively, the “Respondents”) in the captioned

administrative proceeding.

2.

Background. On February 27, 2020, the Commission issued an Order Instituting

Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 203(e), 203(f) and

203(k) of the Investment Advisers Act of 1940 and Section 9(b) of the Investment Company Act

of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (the

“Order”)1 against the Respondents. In the Order, the Commission found that from

approximately January 2014 through 2016, Malloy violated the federal securities laws by failing

to fully disclose all material facts to advisory clients, including the receipt of fees from Aequitas

Enterprise (“Aequitas”) for consulting and business development services that included

introducing prospective investors to Aequitas. Those payments created a conflict of interest that

Malloy did not disclose to clients who invested in Income Opportunity Capital, LLC (“IOC”), a

private fund managed and controlled by Malloy, which in turn, invested heavily in securities

issued by Aequitas (the “Aequitas Securities”). Clients did receive information broadly

identifying a potential conflict of interest, but it was not sufficient to allow them to provide

informed consent to the actual conflict that existed. Malloy also violated the federal securities

laws by allowing an investment advisory firm controlled by Malloy, to remain improperly

registered with the Commission.

1

Advisers Act Rel. No. 5452 (Feb. 27, 2020).

As a result of the conduct described in the Order, the Commission ordered the

Respondents to pay a total of $154,097 (disgorgement of $45,040, prejudgment interest of

$9,057 and a civil penalty of $50,000 by Fortress, and a civil penalty of $50,000 by Malloy).

The disgorgement represents management fees IOC paid to Fortress that were assessed on capital

clients had invested in IOC, which in turn, invested in Aequitas Securities. In the Order, the

Commission created a fair fund, pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002,

so the civil penalties, along with the disgorgement and prejudgment interest, paid can be

distributed to harmed investors (the “Fair Fund”).

The Respondents have paid in full the amounts ordered. The Fair Fund, consisting of the

$154,097 paid by the Respondents pursuant to the Order, has been deposited in an interestbearing account at the United States Department of the Treasury’s Bureau of Fiscal Service

(“BFS”). Other than potential interest income from the BFS investment, the Commission does

not anticipate that the Fair Fund will receive additional funds.

This Plan provides for the distribution of the Fair Fund, plus accrued interest and

earnings thereon, less the Reserve (defined below) (“Net Available Fair Fund”) to those Eligible

Investors, as defined in paragraph 10 below.

3.

Jurisdiction and Control. The assets of the Fair Fund are subject to the

continuing jurisdiction and control of the Commission. The Plan is subject to approval by the

Commission, and the Commission retains jurisdiction over its implementation.

II.

Administration of the Plan

4.

Costs. All costs of administering the Fair Fund, including taxes, fees and

expenses of administration (“Costs”), shall be paid by the Fair Fund, first from the interest

earned on the funds, and if the interest is not sufficient, from the corpus of the Fair Fund.

5.

Fund Administrator. Noel Gittens is proposed to be the fund administrator for the

Fair Fund (“Fund Administrator”). As a Commission employee, the Fund Administrator shall

receive no compensation, other than his regular salary as a Commission employee, for his

services in administering the Fair Fund. In accordance with Rule 1105(c) of the Commission’s

Rules,2 no bond is required since the Fund Administrator is a Commission employee.

The Fund Administrator will be responsible for, among other things: overseeing the

administration of the Fair Fund, obtaining accurate mailing information for the Eligible Investors

(as defined below), preparing accountings, cooperating with the Tax Administrator in providing

the information necessary to accomplish income tax compliance, and distributing money from

the Fair Fund in accordance with the Plan. The Fund Administrator may be removed at any time

by order of the Commission or hearing officer.

2

17 C.F.R. § 201.1105(c).

2

6.

Tax Administrator. Pursuant to the Omnibus Order Directing the Appointment of

Tax Administrator in Administrative Proceedings that Establish Distribution Funds governing

calendar years 2019-2021,3 the Commission appointed Miller Kaplan Arase LLP as the tax

administrator (the “Tax Administrator”) for the Fair Fund.4 The Tax Administrator shall be

compensated for all reasonable costs and expenses from the Fair Fund according to the terms of

Tax Administrator’s 2019-2021 Letter Agreement with the Commission.

7.

Qualified Settlement Fund. The Fair Fund constitutes a Qualified Settlement

Fund (“QSF”) under Section 468B(g) of the Internal Revenue Code, 26 U.S.C. § 468B(g), and

related regulations, 26 C.F.R. §§ 1.468B-1 through 1.468B-5.

8.

Reserve. A reserve of $9,000.00 will be held back for future Costs and to

accommodate any unexpected expenditures or distribution payments (the “Reserve”). After all

disbursements and Costs are paid, any remaining amounts in the Reserve will become part of the

Residual described in paragraph 20.

III.

Plan Procedures

9.

No Claims Process. Based on information obtained by the Commission staff

during its investigation and the review and analysis of applicable records, the Commission staff

has reasonably concluded that it has all records necessary to calculate harm as described in

paragraph 11 below. As a result, the Fair Fund is not being distributed according to a claimsmade process, so procedures for making and approving claims in accordance with Rule

1101(b)(4) of the Commission’s Rules, 17 C.F.R. § 201.1101(b)(4), are not applicable.

10.

Specification of Eligible Investors. Investors able to receive a payment pursuant

to this Plan are limited to those clients who, based on the management fees IOC paid to Fortress,

were assessed and paid those fees based on their capital invested in IOC (“Eligible Investors”).

The Plan’s methodology seeks to compensate Eligible Investors for their full harm suffered due

to the management fees paid, including reasonable interest, along with their pro-rata share of

their investment losses. Based on information obtained during the Commission’s investigation

and in accordance with the methodology for determining harm in paragraph 11, the Commission

staff has identified thirteen (13) Eligible Investors.

11.

Methodology for Determining Distribution Payments. Using information

collected by the Commission staff, the Fund Administrator will determine the amounts to be

distributed to each Eligible Investor (“Distribution Payment”), as described below.

a.

With regard to the distribution for the return of management fees paid:

i.

3

4

Determine the amount of management fees paid by each Eligible

Investor (“Fees Paid”);

Exchange Act Rel. No. 85174 (Feb. 22, 2019).

Exchange Act Rel. No. 88597 (Apr. 8, 2020).

3

ii.

Calculate the reasonable interest to be paid to each Eligible

Investor using the short-term Applicable Federal Rate,

compounded quarterly from May 1, 2015 through August 31, 2020

(“Interest Amount”); and

iii.

Combine each Eligible Investor’s Fees Paid and Interest Amount

to determine the “Fees Paid plus Interest” amount.

b.

c.

With regard to the distribution based on investments losses in Aequitas

Securities:

i.

Determine each Eligible Investors “Investment Loss” as the

Eligible Investor’s Investment during the investment period;

ii.

Calculate the “Total Investment Loss” as the sum of the

Investment Losses of all Eligible Investors;

iii.

Calculate each Eligible Investor’s “Pro-Rata Share” by dividing

the Eligible Investor’s Investment Loss by the Total Investment

Loss;

iv.

Calculate each Eligible Investor’s “Loss Recovery” amount by

multiplying each Eligible Investor’s Pro-Rata Share by the Net

Available Fair Fund minus (a)(iii) above;

Calculate the Distribution Payment for each Eligible Investor as the sum of the

Fees Paid plus Interest and Loss Recovery amounts.

Accordingly, with this distribution, each Eligible Investor will receive a Distribution

Payment from the Net Available Fair Fund that compensates each Eligible Investor for Fees Paid

plus Interest plus a pro-rata distribution based on each Eligible Investor’s Investment Loss as

shown in Exhibit A. For the Eligible Investors, who have lost the totality of their investment,

their Loss Recovery under the Plan is approximately 3.67%. These Eligible Investors will also

be getting a recovery based on their investment losses in the receivership distribution in SEC v.

Aequitas Management, LLC et. al, Civ. Action No. 3:16-cv-00438-JR (DC.D. Oregon) (the

“Aequitas Recovery”). However, Eligible Investors’ Loss Recovery under the Plan when

combined with their Aequitas Recovery does not fully compensate them for their investment

losses, and will not result in a windfall to the Eligible Investors.

In the view of the Commission staff and the Fund Administrator, this methodology

constitutes a fair and reasonable allocation of the Fair Fund. It is anticipated that there will be

one distribution to Eligible Investors, which will take place as described herein.

4

12.

Procedures for Locating and Notifying Certain Eligible Investors. From

information obtained by the Commission staff based on the review and analysis of applicable

records from its investigation, the Fund Administrator has identified the Eligible Investors as

defined in paragraph 10. The Fund Administrator will coordinate with the Tax Administrator to

obtain information that is needed to accomplish the distribution in accordance with applicable

tax requirements relating to the Fair Fund. To the extent possible, within sixty (60) days of the

publication of the Plan for notice and comment, requests will be sent to certain Eligible Investors

whose tax information is uncertain to supply IRS Forms W-8 or W-9 tax information, and such

other information needed to ensure an efficient and accurate delivery of the distribution payment

(the “Request”). The Eligible Investors shall respond within thirty (30) days in order to receive a

Distribution Payment.

13.

Failure to Respond. If an Eligible Investor fails to respond within thirty (30) days

from the mailing of the Request, the Fund Administrator will make no fewer than two (2)

attempts to contact the Eligible Investor by telephone or email. The second attempt will in no

event take place more than thirty (30) days from the mailing of the Request. If an Eligible

Investor fails to respond to the Fund Administrator’s contact attempts as described in this

paragraph, the Fund Administrator, in his discretion, may remove such Eligible Investor from the

distribution and the allocated distribution amount will be added to the Residual described in

paragraph 20.

14.

Undeliverable Mail. If a Request and/or Distribution Payment is/are returned as

undeliverable, the Fund Administrator will make his best practicable efforts to ascertain an

Eligible Investor’s correct address. If another address is obtained, the Fund Administrator will

then resend the Request and/or Distribution Payment to the Eligible Investor’s new address

within ten (10) days of receipt of the returned mail. If the Request and/or Distribution Payment

is returned again, and the Fund Administrator, despite best practicable efforts, is unable to find

an Eligible Investor’s correct address, the Fund Administrator, in his discretion, may remove

such Eligible Investor from the distribution and the allocated distribution payment will be added

to the Residual described in paragraph 20.

Any Eligible Investor who relocates or otherwise changes contact information after

receipt of the Request must promptly communicate any change in address or contact information

to the Fund Administrator.

15.

Distribution Timing. The Fund Administrator will use his best efforts to start the

distribution within sixty (60) days of the Plan’s approval.

16.

Disbursement of the Fair Fund. The BFS will mail checks or electronically

transfer funds to each payee as instructed by the Fund Administrator. The Fund Administrator

will compile the payee information and prepare a payment file to make disbursements through

the BFS. Pursuant to Rule 1101(b)(6) of the Commission’s Rules, 17 C.F.R. § 201.1101(b)(6),

the Fund Administrator will obtain an order from the Commission to disburse the Fair Fund.

Distribution checks and/or accompanying communications will clearly indicate that the

money is being distributed from a Fair Fund established to compensate investors for harm

5

suffered as a result of securities law violations. Simultaneously with the mailing of the

distribution checks, the Fund Administrator will mail a letter to each Eligible Investor,

explaining how the two components of the Distribution Payment – the Fees Paid plus Interest

amount and the Loss Recovery amount, were calculated.

The Fund Administrator will work with BFS to obtain information about uncashed

checks, any returned items due to non-delivery, insufficient addresses, and/or other deficiencies.

The Fund Administrator is responsible for researching and reconciling errors and reissuing

payments when possible. The Fund Administrator is also responsible for accounting for all

payments. Checks issued by BFS will state on their face that they are valid for one (1) year. If

any checks issued are not cashed within the one (1) year time period, the Fund Administrator

will work with BFS to identify all uncashed checks. In the event that there are uncashed checks,

the Fund Administrator will determine the extent to which, under the circumstances in this

distribution, it would be appropriate and feasible to make additional efforts to contact the

Eligible Investor(s). Following the conclusion of any efforts by the Fund Administrator to locate

any such Eligible Investor(s), the amount of all uncashed checks will be credited to the Fair

Fund, and will become part of the Residual.

17.

Amendments and Procedural Deadline Extensions. The Fund Administrator shall

take reasonable and appropriate steps to distribute the Net Available Fair Fund in accordance

with the general purposes of this Plan. If there are any changes to the Plan that are determined to

be material, Commission approval is required prior to implementation by amending the Plan.

Immaterial changes may be made by the Fund Administrator. For good cause shown, the Fund

Administrator may extend any of the procedural deadlines set forth in the Plan.

18.

Procedures for the Receipt of Additional Funds. Should any additional funds, be

received for this matter by the Commission, prior to the Commission’s termination of the Fair

Fund, such funds will be added to the Residual.

19.

Procedures for Disputing Distribution Payments. After the Plan is approved,

disputes will be limited to questions regarding the calculations of the Distribution Payments.

Within thirty (30) days of the date of the distribution payment, the Fund Administrator must

receive a written communication detailing the dispute along with any supporting documentation.

The Fund Administrator will investigate the dispute, and such investigation will include a review

of the written dispute as well as any supporting documentation. Within thirty (30) days of

receipt of the written dispute, the Fund Administrator will notify the Eligible Investor of his

resolution of the dispute, which will be final.

20.

Residual and Disposition of Undistributed Funds. A residual account within the

Fair Fund will be established for any amounts remaining after the disbursement to Eligible

Investors from the Fair Fund (the “Residual”). The Residual may include, but is not limited to,

the Reserve, distribution checks that have not been cashed, funds from checks that were not

delivered or from funds returned to the Commission, and Fair Fund tax refunds for overpayment

or for waiver of IRS penalties. All funds remaining in the Residual that are infeasible to

distribute to investors will be transferred to the U.S. Treasury after the final accounting is

approved by the Commission. Returning such money to the Respondents would be inconsistent

6

with the equitable principle that no person should profit from their wrongdoing. Therefore, in

these circumstances, distributing disgorged funds to the U.S. Treasury is the most equitable

alternative.

21.

Accountings. When all funds have been disbursed, except for the Residual

described in paragraph 20 of the Plan, the Fund Administrator will submit a final accounting

pursuant to Rule 1105(f) of the Commission’s Rules, 17 C.F.R. § 201.1105(f), for the approval

of the Commission prior to termination of the Fair Fund and discharge of the Fund

Administrator. Since the funds are being held in a Commission designated account at the

Treasury and the Fund Administrator is a Commission employee, no interim accountings will be

made.

22.

Termination of the Fair Fund. Following the final disbursement from the Net

Available Fair Fund to Eligible Investors, the Fund Administrator will make arrangement for the

final payment of all Costs, and will submit a final accounting to the Commission. The Fair Fund

will be eligible for termination after all of the following have occurred: (a) a final accounting, in

a standard accounting format provided by Commission staff, has been submitted by the Fund

Administrator, and has been approved by the Commission; and (b) all Costs have been paid.

When the Commission has approved the final accounting, the Commission staff shall seek an

order from the Commission authorizing: (a) transfer of the remaining Residual, and any amounts

returned to the Fair Fund in the future, to the U.S. Treasury; (b) termination of the Fair Fund; and

(c) discharge of the Fund Administrator.

23.

Notice of Proposed Plan and Opportunity for Comment. The Notice of the

Proposed Plan of Distribution and Opportunity for Comment (the “Notice”) shall be published

on the Commission’s website http://www.sec.gov/litigation/fairfundlist.htm. Any person

wishing to comment on the Plan must do so in writing by submitting their comments within

thirty (30) days of the date of the Notice (a) to the Office of the Secretary, United States

Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090; (b) by

using the Commission’s Internet comment form (www.sec.gov/litigation/admin.shtml); or (c) by

sending an e-mail to rule-comments@sec.gov. Comments submitted by e-mail or via the

Commission’s website should include “Administrative Proceeding File No. 3-19715 in the

subject line. Comments received will be publicly available. Persons should only submit

comments that they wish to make publicly available.

7

EXHIBIT A

Distribution Chart

Investor # 1

Investor # 2

Investor # 3

Investor # 4

Investor # 5

Investor # 6

Investor # 7

Investor # 8

Investor # 9

Investor # 10

Investor # 11

Investor # 12

Investor # 13

Fees Paid Plus

Interest

$

558.42

$

758.05

$ 16,508.57

$ 7,580.47

$ 3,284.87

$ 8,759.65

$ 1,263.42

$ 2,695.28

$ 3,032.19

$

84.49

$ 2,442.60

$

808.59

$

589.60

$

$

$

$

$

$

$

$

$

$

$

$

$

935.92

2,752.70

25,691.90

16,516.22

7,340.54

14,681.09

2,752.70

7,340.54

7,340.54

1,835.14

5,505.41

2,202.16

1,835.14

$

$

$

$

$

$

$

$

$

$

$

$

$

1,494.34

3,510.75

42,200.47

24,096.69

10,624.41

23,440.74

4,016.12

10,035.82

10,372.73

1,919.63

7,948.01

3,010.75

2,424.74

Totals

$ 48,366.20

$

96,730.00

$

145,096.20

Investor #

Loss Recovery

8

Distribution Payment