Nicholas Schorsch's RCAP gets scorched on multiple fronts

Two deals called off, Mass. charges fraud, NYSE may delist firm

Nov 15, 2015 @ 12:01 am

By Bruce Kelly and Mark Schoeff Jr.

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Less than two years ago, Nicholas Schorsch compared RCS Capital Corp., the brokerage holding company he founded, to Merrill Lynch and Raymond James Financial Inc., two storied names in the securities industry.

“We are a newly minted investment bank with reach from Wall Street to Main Street,” Mr. Schorsch told InvestmentNews in January 2014 when he announced that RCS Capital, or RCAP, was buying Cetera Financial Group, a network of 9,500 financial advisers, for $1.15 billion.

If it hadn't been before, Mr. Schorsch's vision of a brokerage powerhouse was surely shattered last week after a flood of negative events washed over RCAP and its advisers as well as AR Capital, the privately held real estate management company owned by Mr. Schorsch and his partner, William Kahane.

Multimillion-dollar deals were called off. Highly touted assets were sold for a pittance. RCAP was threatened with delisting by the New York Stock Exchange. And an influential state securities regulator charged a company that once was the bedrock of Mr. Schorsch's domain with fraud.


“The string of events in the Schorsch world in recent months is not what you want when you are building a franchise,” said Alois Pirker, research director for the Aite Group's wealth management practice. “It's been a roller coaster. I cannot imagine the morale in the firm is any good.”

“They had in their hands the opportunity to create the next LPL Financial and make [RCAP] one of the next big franchises in the market,” said Mr. Pirker. “It sounds like they have moved away from that because of everything that's been happening recently.”

In perhaps the most serious development for Mr. Schorsch, Massachusetts last Thursday charged Realty Capital Securities, a division of RCAP, with fraudulently rounding up proxy votes to support real estate deals sponsored by AR Capital.

Realty Capital Securities has been a linchpin of Mr. Schorsch's empire; it is a wholesaling broker that markets nontraded real estate investment trusts and other alternative investments to financial advisers. Those advisers, in turn, sell the investments to their clients.

In an administrative complaint, Massachusetts Secretary of the Commonwealth William Galvin said agents of RCS impersonated shareholders and cast fake votes for investments sponsored by AR Capital.

Mr. Galvin's office, which oversees the state securities division, has been investigating RCS for a year. It began its inquiry after another company formerly controlled by Mr. Schorsch, American Realty Capital Properties Inc., now Vereit Inc., said in October 2014 it had intentionally left uncorrected accounting misstatements over the first half of 2014.

One of the proxy vote incidents occurred at the June annual meeting of the Business Development Corporation of America and another at its monthly meeting in September. Mr. Schorsch was formerly chairman and chief operating officer of BDCA.


The September vote was required in order for Apollo Global Management to buy real estate assets from Mr. Schorsch. In that deal, announced in August, Apollo would have bought a majority stake in AR Capital for $378 million and created a new company. But it fell apart last Monday, three days before the Massachusetts complaint was filed.

Apollo did succeed in buying RCS Capital Securities and other wholesaling operations at a sharply reduced price of just $6 million in cash. That's a far cry from what had been announced in August. RCAP had agreed to sell RCS Capital Securities and other related parts of the company for $25 million in cash.


Mr. Galvin is seeking to revoke RCS Securities' broker-dealer registration in the state, impose a cease-and-desist order and levy a fine.

Andrew Backman, a spokesman for RCAP and AR Capital, did not return a phone call and email Friday morning to comment for this story.

On Thursday, RCAP issued a statement regarding Mr. Galvin's complaint. “RCS Capital is aware of the Massachusetts Securities Division's investigation and is fully cooperating with all relevant agencies,” according to the statement. “RCS Capital has received the complaint and is currently reviewing it. At this time, the company has no further comment.”


Last Thursday was a particularly grueling day for RCAP. Along with Mr. Galvin's complaint, the company said it had earlier received notice from the NYSE that it was in danger of having its stock delisted. The Big Board had notified RCAP that its common stock did not meet NYSE's standards for continued listing. Specifically, RCAP stock had failed to trade above $1 a share for 30 consecutive trading days. RCAP's shares closed last week at 37 cents and were down 97% in the past 12 months.

Also last week, RCAP said it expected to report a third-quarter loss of more than $300 million due to a $331.7 million impairment, or write-down, of goodwill and intangible assets. RCAP's third quarter earnings report is expected to be released today.

Adding to the tumult at RCAP is its attempt to sell Cetera Financial Group. Cetera CEO Larry Roth told advisers last week on a private conference call that the brokerage network has half a dozen potential suitors kicking its tires and will have a new owner or significant private-equity investor by year-end.

“The Cetera advisers are the ones being impacted by what's happening at RCAP, and they had nothing to do with this,” said Larry Papike, president of Cross-Search, a recruiting firm.

Margins are thin at Cetera, in the low single digits, Mr. Papike said, and a potential buyer would probably want to see current management cut expenses and integrate the back offices of the dozen or so different broker-dealers under Cetera's roof before making an offer.

“It's going to be very difficult to get somebody to buy it,” he said.


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