American Realty Capital Properties (ARCP) had more than just a time change this weekend.
“In the middle of the night, we received a letter from RCS Capital Corp. (RCAP) purporting to terminate the [$700 million] equity purchase agreement, dated Sept. 30, 2014, between RCS and an affiliate of ARCP [Cole Capital],” the company said in a press release early Monday.
RCAP also told American Reality that it had canceled subadvisory deals related to five Cole Capital nontraded REITs, along with wholesale agreements; both arrangements were reached on Oct. 22. (The deals which have been terminated involved Cole Capital’s private-capital management operations, not all of Cole’s nontraded REIT businesses.)
ARCP, which is led by co-founder Chairman Nicholas Schorsch, is a sister company of RCAP; Schorsch is executive chairman of RCS Capital, which includes about 9,700 affiliated independent advisors.
Last week, news broke that American Capital is being investigated by the FBI and federal prosecutors for accounting errors that it intentionally concealed, according to multiple sources. Michael Sodo replaced Brian Block as CFO, while Gavin Brandon became chief accounting officer in place of Lisa McAlister.
One equity analyst believes RCS Capital broke off the deal to protect the interests of its advisors and their clients.
“Cole Capital is a business that deals with creating investment vehicles for retail shareholders. While there’s an ongoing investigation surrounding the integrity of the disclosers, then that business will be impaired,” explained analyst Paul Adornato of BMO Capital in an interview with ThinkAdvisor on Monday.
“Advisors would be probably avoid selling these products and might even be prohibited for selling them by their firms because of legal liability issues,” Adornato added.
RCS Capital’s shares dropped 16% Monday to trade at about $13.80, while ARCP’s declined some 10% to trade near $7.96.
American Realty, of course, is not taking the news lightly.
“As we informed RCS orally and in writing over the weekend, RCS has no right and there is absolutely no basis for RCS to terminate the agreement. Therefore, RCS’s attempt to terminate the agreement constitutes a breach of the agreement,” it explained.
“In addition, we believe that RCS’s unilateral public announcement is a violation of its agreement with ARCP. The independent members of the ARCP Board of Directors and ARCP management are evaluating all alternatives under the agreement and with respect to the Cole Capital business, generally,” the firm said.
Requests for comments from RCS and ARCP as to why their differences were being played out publicly were not returned as of press time.