Fidelity, Pershing, Schwab join suspension of Schorsch REITs

Clearing and custodian giants temporarily halt handling some of his non-trade real estate investment trusts.

Nov 12, 2014 @ 12:40 pm

By Bruce Kelly

After an accounting scandal rocked one of Nicholas Schorsch's companies, broker-dealers began suspending trades of nontraded real estate investment trusts packaged and managed by companies he controlled. Now, three giants in the clearing and custody industry have followed suit, presenting another potential blow to his business.

Those firms, Fidelity, Pershing and Schwab, have joined the exodus and are moving away from Mr. Schorsch's American Realty Capital and Cole branded REITs.

(More: Massachusetts regulator Galvin investigating Schorsch B-D)

Thirty-one of the top 50 independent broker-dealers, ranked by total revenue, have clearing agreements with Pershing, according to a review of InvestmentNews data . Meanwhile, 15 of the top 50 have clearing agreements with National Financial Services, Fidelity's clearing arm. (It is increasingly common for broker-dealers to have agreements with more than one clearing firm as a tool to recruit advisers, so some broker-dealers use both Pershing and National Financial and were therefore counted twice.)

Mr. Schorsch is chairman and chief executive of ARC. He is also the former CEO and current chairman of the publicly traded REIT, American Realty Capital Properties Inc., or ARCP, which owns Cole Capital Partners and Cole Capital Advisors Inc.

On Oct. 29, ARCP revealed a $23 million accounting error from the first half of the year that was intentionally uncorrected, sending the various entities of Mr. Schorsch's empire into a tailspin. For example, ARCP's stock has lost almost 30% of its value since its accounting problems were revealed.

InvestmentNews has reported that several leading independent broker-dealers with 38,800 registered reps and investment advisers pulled the plug, at least temporarily, on selling ARC or Cole REITs. That is about one-quarter of the independent contractor reps and adviser total, based on figures from the Financial Services Institute, a trade group with more than 100 member firms and 160,000 independent reps and advisers.

Fidelity on Monday said it would not facilitate new purchases of certain nontraded real estate investment trusts affiliated with Cole and RCS Capital Corp., the parent company of the wholesaling broker-dealer that distributes the ARC REITs.

Meanwhile, Pershing last Friday told broker-dealers that use its clearing services that, effective immediately, it would not “facilitate purchases of the following investment products sponsored by Cole Capital,” according to a memo to advisers from Independent Financial Group, a fast growing independent broker-dealer based in San Diego.

IFG was not cutting all Cole sales, according to the memo. “Note that this determination was made solely by Pershing and not IFG,” according to the memo, which lists seven Cole products as being affected. “IFG selling agreements on all Cole products are active for any business that you intend to conduct outside Pershing, (i.e., direct business), according to the memo.

“Direct business” is industry nomenclature for products that are held in custody with the product sponsor rather than the clearing firm. Independent broker-dealers commonly sell mutual funds, variable annuities and REITs in this manner.

Joe Miller, IFG's CEO, did not immediately return a call on Wednesday afternoon to comment.

Tony DeFazio, a spokesman for RCS Capital Corp., another Schorsch company, did not return calls to comment. Andy Merrill, a spokesman for ARCP, did not return a call to comment.

A Fidelity spokeswoman, Nicole Abbott, confirmed Fidelity's halt of ARC and Cole sales. She added that the halt was in effect for both the broker-dealers that National Financial Services, its clearing firm, processes trades for, as well as the registered investment advisers it acts as a custodian for.

When asked about Pershing's decision, spokeswoman Cassandra Osei said it was the company's policy not to comment about clients.

“We've suspended sales pending further investigation,” said Charles Schwab Corp. spokeswoman Alison Wertheim in an email. The suspension affects both ARC and Cole REITs. Schwab is custodian for registered investment advisers.

Joseph Giannone, a spokesman for TD Ameritrade Institutional, another RIA custodian, in an email said, “With regard to ARC, the situation is evolving and so currently we're monitoring developments.”

Meanwhile, internal divisions within the Schorsch empire became more intense this week. ARCP on Tuesday filed a lawsuit against RCAPstemming from RCAP's announcement last week that it was terminating its agreement to buy the Cole businesses from ARCP, according to a news release issued by ARCP Wednesday.

RCAP's deal to buy Cole from ARCP was announced at the start of October; RCAP was to pay at least $700 million for the Cole assets. RCAP announces its earnings Thursday.

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