RCS Capital’s Proxy Vote Scandal Ensnaring More Broker-Dealers

Massachusetts regulators say broker-dealer agents may have played a role in two fraudulent proxy voting schemes this year

Realty Capital Securities faces legal action for fraudulent proxy votes. Realty Capital Securities faces legal action for fraudulent proxy votes.

Massachusetts securities regulators said Friday they are looking into the broker-dealers who appear to have played a role in fraudulent proxy-voting schemes orchestrated by Realty Capital Securities in 2015.

“We are investigating other broker-dealers in connection with the proxy solicitations that went on at Realty Capital Securities,” said a spokesperson for Secretary William Galvin, referring to details laid out in a 33-page administrative complaint filed last week against RCS.

Specifically, the regulators cite the case of 65 accounts for which votes were cast by broker-dealers agents who claimed to have the authority to cast these votes for investors in May 2015; Realty Capital Securities, though, does not appear to have verified this authority. A similar arrangement was organized by broker-dealer agents in September 2015, when a vote was taken for the now-failed sale of Realty Capital, affiliated entities and assets to Apollo Global Management.

The case does not name the broker-dealers, and Galvin’s office declined to do so on Friday. The 33-page complaint, though, does give the names of several RCS registered reps who pretended to be shareholders. It also names RCS managers who pushed reps to produce proxy votes.

Realty Capital Securities — itself a broker-dealer — is owned by RCS Capital (RCAP), the parent company of the Cetera Financial Group of independent broker-dealers with some 9,500 affiliated advisors. The company distributes American Realty Capital products, and its operations have had managerial and other ties to companies founded by real estate mogul Nicholas Schorsch.

Despite being a wholesale broker-dealer and retaining a professional proxy services firm, RCS conducted proxy solicitation services for all AR Capital sponsored funds and received “significant compensation” for this work, according to the Nov. 12 case filed by Commonwealth of Massachusetts’ Securities Division.

In addition, the case brought against the company asserts that Realty Capital Securities made efforts “to obtain documentation from broker-dealer agents to facilitate voting of client shares.”

Realty Capital Securities would ask broker-dealers to confirm their authority for proxy voting on behalf of clients. They would then talk with the agents about which shareholders had not voted and ask that either they be allowed to contact the investors or for the agents to contact the investors directly.

“Upon information and belief, RCS never verified if broker-dealer agents had authority to vote client shares,” the securities division explains.

Realty Capital Securities received a letter from a broker-dealer agent who claimed to have authority to vote as a proxy for 65 client accounts, which all voted for RCS management on all proposals.

Proxy firm data found that just 50 of the accounts had been asked to vote in May 2015 by phone. It also found that 15 accounts had voted online or by paper ballot.

A second letter was received by RCS from a broker-dealer agent that asserted that the agent could vote for clients in the September 2015 vote concerning the sale of certain entities to Apollo.

However, according to the 2015 Special Meeting Proxy Statement, broker-dealer agents “did not have discretion to vote client shares unless clients provided express instructions to the broker-dealer agent,” the suit explains. Again, such authority was not verified by RCS.

These developments followed the debacle of October 2014, when American Realty Capital Properties (now VEREIT) reported $23 million of accounting errors. After that news broke, many broker-dealers stopped selling nontraded REITs and other products associated with American Realty Capital Properties, AR Capital and RCAP, ventures founded or led in the past by Schorsch.

For more details, see earlier coverage of RCS' latest earnings and related developments.


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