Massachusetts regulator William Galvin fines seven firms $238,000 for role in Realty Capital proxy fraud

The securities regulator says agents for the firms submitted unauthorized proxy votes for nontraded REITs controlled by a Nicholas Schorsch firm

Jun 22, 2016 @ 11:12 am

By Bruce Kelly

In a follow-up to last year's investigation that found the now-defunct Realty Capital Securities had committed proxy fraud, Secretary of the Commonwealth of Massachusetts William Galvin has fined seven broker-dealers a total of $238,000 for their role in the fraud.

The seven broker-dealers hit with the fine are: Voya Financial Advisors Inc.; FMN Capital Corp.; Invest Financial Corp.; Newbridge Securities Corp.; Pariter Securities; Platinum Wealth Partners Inc.; and TKG Financial. The firms have also been hit with cease and desist orders and ordered to change their supervisory procedures with respect to proxy voting.

Brokers at the seven firms worked in cahoots with RCS in casting fake or unauthorized proxy votes, according to Mr. Galvin. The proxy authorization forms were each identical and were prepared for the firms to submit by RCS. Firms failed to have adequate policies and procedures with respect to proxy voting, according to Mr. Galvin.

The proxy votes in question were taken last year and involved two nontraded REITs, American Realty Capital Trust V Inc. and American Realty Capital Healthcare Trust II, and a nontraded business development company, Business Development Corp. of America.

The Massachusetts Securities Division last year said that its investigation had uncovered a pattern of RCS employees masquerading as shareholders to cast proxy votes in favor of management proposals that were instrumental in completing the merger between Apollo Global Management and American Realty Capital, an affiliated company of RCS.

RCS was the wholesaling broker-dealer of American Realty Capital. Former nontraded REIT czar Nicholas Schorsch is the majority owner of ARC, which is now called AR Global.

Mr. Galvin's orders against the seven firms “address the fact that certain registered agents of the seven firms submitted unauthorized proxy votes for their clients who held interests in the American Realty Capital Investment programs,” according to a press release. “The proxy authorization forms were each identical and were prepared for the firms to submit by Realty Capital Securities.”

"We are pleased to see this matter is being resolved with the Commonwealth of Massachusetts,” said Voya Financial spokeswoman Laura Maulucci in a statement. “In reaching this agreement, neither Voya nor the VFA representatives admitted to any liability, wrongdoing or violation of law."

“RCS's actions in Massachusetts were unfortunate and egregious,” said Derek Brumfield, principal, director of investment platform, TKG Financial. “TKG failed to follow proper procedures with regards to voting proxies on behalf of its clients, but were not found to have committed any fraud by the State of Massachusetts. Although TKG had no clients in Massachusetts, we cooperated fully with the commonwealth and are glad to move past this issue.”

Executives with the five other firms could not be immediately reached for comment.

Massachusetts Securities Division is actively investigating other broker-dealers in connection to proxy voting in ARC programs sold through RCS. The division began its investigation into ARC-related companies in 2014 when a giant, traded net lease REIT formerly controlled by Mr. Schorsch, American Realty Capital Properties Inc., now called Vereit Inc., “disclosed it had overstated its adjusted funds from operations by $23 million, and that the error was identified but not corrected,” according to the press release.

(More: How Nick Schorsch lost his mojo)

RCS was under the gun to get the proxy votes approved after ARC said last August it was merging with Apollo Global Management. That deal later fell apart and then Mr. Galvin fined RCS $3 million in connection with the proxy fraud.

RCS closed its doors last December as part of its settlement with Massachusetts, laying off 150 REIT wholesalers in the process.

“My office uncovered how RCS' own employees fabricated numerous shareholder proxy votes, but in these cases they were assisted by other financial services firms,” Mr. Galvin said in the statement. “A registered firm that fails to have reasonable compliance procedures in place to protect their clients' voting rights creates a breeding ground to allow this to happen. That will not be tolerated in the commonwealth.”

Meanwhile, Mr. Schorsch's AR Global is seeking to merge more than half a dozen of its remaining nontraded REITs into one or two large organizations.

The flurry of mergers, if successful, would put more assets under the roofs of two ARC REITs, which have unusual, difficult to break 20-year advisory contracts with AR Global, according to industry sources, including former AR Global employees. AR Global does not have the 20-year advisory agreements with the other REITs it manages, observers said.

That means AR Global, as the manager of two larger REITS, would create a larger source of fee revenue over a long period of time, benefiting Mr. Schorsch and his partners, those sources said.

On the other hand, a long-term source of revenue could also ultimately benefit investors by making American Finance Trust and Global Net Lease more attractive takeover targets and potentially gaining the attention of other REIT managers looking to buy such a revenue stream.

Corrects earlier version of the story to fix error in the original press release. The updated version notes in 11th paragraph that the company now called Vereit Inc. disclosed it had overstated its adjusted funds from operations by $23 million, and that the error was identified but not corrected, according to the press release.

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