Trouble started for American Realty Capital Properties (ARCP) in late October and continued through November.
“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 on Nov. 3.
RCAP also told American Realty 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 that 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 and Chairman Nicholas Schorsch, is a sister company of RCAP; Schorsch is executive chairman of RCS Capital, which includes about 9,700 affiliated independent advisors.
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At the end of October, news broke that American Realty was 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.com.
“Advisors would 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% following the news to trade at about $13.80, while ARCP’s declined some 10% to trade near $7.96. As of Nov. 12, RCS Capital shares had fallen to about $11.59, while ARCP was trading around $8.79.
American Realty, of course, is not taking the news lightly.