Two Schorsch companies at odds over $700M deal

It’s open warfare within the embattled REIT empire of Nicholas Schorsch, with two of its most prominent companies in a public dispute over the previously announced $700 million sale of two related assets.
Last week, American Realty Capital Properties Inc., with the ticker ARCP, revealed a $23 million accounting error that was intentionally uncorrected and led to the resignation of the REIT’s chief financial officer and chief accounting officer.
On Monday morning, RCS Capital Corp., known by its ticker RCAP, fired the first shot. RCAP said it had ended its agreement to buy from ARCP nontraded REIT managers and advisers Cole Capital Partners and Cole Capital Advisors Inc.
(Does this development mean that 1+1≠3?)
The two companies announced the Cole deal at the start of last month; RCAP was to pay at least $700 million for the Cole assets. At the time, Mr. Schorsch recused himself from that deal because he holds executive positions at both firms.
“The RCAP board of directors determined that it is appropriate for RCAP to terminate the agreement in light of the disclosures made by ARCP on Wednesday, Oct. 29,” wrote RCAP spokesman Andrew Backman, in an email to InvestmentNews. “By doing so, RCAP has moved swiftly and decisively to protect its franchise, the interests of its shareholders and the ongoing prospects and continuing enterprise value of the company and its subsidiaries.”
ARCP immediately shot back. In a news release later Monday, the company said, “In the middle of the night, we received a letter from (RCAP) purporting to terminate the equity purchase agreement” between RCAP and ARCP for the Cole assets.
“As we informed (RCAP) orally and in writing over the weekend, (RCAP) has no right and there is absolutely no basis for (RCAP) to terminate the agreement,” the ARCP statement said. “Therefore, (RCAP’s) attempt to terminate the agreement constitutes a breach of the agreement.”
(Related: Securities America halts sales of ARC nontraded REIT)
ARCP spokesman Andy Merrill said he had no comment beyond the release. He also had no comment to media reports late last week that the FBI was investigating ARCP in the wake of its accounting mistakes.
RCAP Monday also said that it had also canceled its sub-advisory agreements between RCAP and five nontraded REITs sponsored and advised by Cole Capital. It also pulled its agreement to work as the wholesaling broker-dealer for Cole REITs.
Mr. Schorsch is the executive chairman of RCAP, which is the wholesaling broker-dealer for REITs, selling and distributing them through hundreds of independent broker-dealers. Mr. Schorsch in the past year has also acquired retail broker-dealers and now has close to 10,000 registered reps and advisers under RCAP.
(Don’t miss: Will missteps menace Schorsch’s empire?)
Mr. Schorsch is also chairman of ARCP, a large publicly traded REIT that focuses on net lease properties. He was CEO until October 1.
Beyond their statements, it was not immediately clear why two of Mr. Schorsch’s companies are at odds with each other.
Having Mr. Schorsch involved to such a degree with both RCAP and ARCP makes such a transaction “a highly peculiar situation,” said Richard Roth, a New York attorney who focuses on securities litigation.
“The big issue is whether (Mr. Schorsch) essentially disengaged from the decision making” regarding the deal for Cole and its termination, Mr. Roth said.
If he didn’t, it’s very problematic because he’s on both sides of the equation,” he explained. “If he did essentially recuse himself from the transaction and it was decided independently of him, it could be OK.”
Also on Monday, Citigroup Global Markets Inc. analyst William Katz said he was cutting the rating of RCAP to neutral from buy and lowering his 12-month price target to $20 per share from $28. RCAP shares were down almost 13% at $14.32.
“Given fiduciary risks associated with ARCP issues, we are pleased to see RCAP terminate the previously pending Cole acquisition,” Mr. Katz wrote. “However, with (LPL Financial Holdings Inc.) in the regulatory glare and following RCAP’s rapid acquisition spree to build the broker-dealer, we expect investors to take a ‘wait and see’ attitude on near term execution.”
Not all is lost with RCAP, Mr. Katz noted. “As the broker-dealer model should strengthen post recent deals, synergies should help bolster (earnings per share), and post Cole deal termination, capital flexibility will rise, in our view.”