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RCS Capital Faces Class-Action Shareholder Lawsuit

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Pomerantz LLP has filed a class-action lawsuit against RCS Capital Corporation (RCAP) and certain of its officers on behalf of a class consisting of all persons or entities who purchased RCS Capital securities between Feb. 12 and Oct. 31.

“If you are a shareholder who purchased RCS Capital securities [between Feb. 12 and Oct. 31], you have until February 27, 2015 to ask the Court to appoint you as Lead Plaintiff for the class,” the law firm stated in a news release.

The class action, filed in U.S. District Court, Southern District of New York, seeks to recover damages against defendants for alleged violations of the federal securities laws under the Securities Exchange Act of 1934.

The complaint alleges that throughout the period, RCS Capital “made materially false and misleading statements regarding the company’s business and future acquisition prospects.”

Pomerantz lists four reasons for its allegation:

1. American Realty Capital Properties, Inc.’s (ARCP) financial statements were materially false and misleading as a result of a massive accounting scandal perpetrated and concealed by senior management, including Nicholas Schorsch;

2. RCS Capital’s announced acquisition of Cole Capital from ARCP was at serious risk due to the fraud being perpetrated at ARCP;

3. RCS Capital’s revenue stream from its relationship with ARCP was in jeopardy as a result of the accounting scandal at ARCP; and as a result of the foregoing,

4. RCS Capital’s public statements pertaining to its financial position as well as the Cole Capital acquisition were materially false and misleading at all relevant times.

At the end of October, accounting errors were disclosed at American Realty Capital Properties Inc. ARCP reported on Oct. 29 that it had found accounting errors that were intentionally concealed, leading to the resignations of its chief financial officer and chief accounting officer.

Pomerantz points out that shares of RCS Capital fell $2.72, or more than 16%, on extremely heavy volume, to close at $13.69 on Nov. 3 – after the company backed out of a deal to buy Cole Capital from ARCP for $700 million. (In early December, RCS Capital settled with ARCP in a deal worth $60 million).

After news broke on Nov. 7 that Massachusetts regulator William Galvin had started an investigation of Realty Capital Securities, which conducts the wholesaling work of RCS Capital, Pomerantz points out that the shares of RCS Capital fell $0.65, or more than 5.7%, on heavy volume, to close at $10.67 on Nov. 10.

On Dec. 15, ARCP issued a press release announcing the resignation of three top executives: Schorsch stepped down as executive chairman and a director; CEO David Kay resigned; and Lisa Beeson, president and chief operating officer, also ended her time at ARCP. Following this announcement, Pomerantz said in its news release, shares of RCS Capital fell $1.35, or more than 11%, on heavy volume, to close at $10.46, on Dec. 15, 2014.

Since this resignation was announced, Massachusetts regulators have widened the scope of their investigation to include RCS Capital.

“We have sent out subpoenas to four companies this week concerning … what they knew regarding information contained in the suit: American Realty Capital Properties, American Realty Capital, RCS Capital (RCAP) and Realty Capital Securities,” said Brian McNiff, who works for the Secretary of the Commonwealth of Massachusetts William Galvin, in an earlier interview with ThinkAdvisor. “This is all related to our original complaint.”

Meanwhile, a lawsuit was filed in New York that accused Schorsch of playing a role in ARCP’s recent $23 million in accounting errors. ARCP’s former chief accounting officer, Lisa McAlister, filed a complaint alleging that Schorsch directed two executives to manipulate quarterly financial results in July. McAlister’s complaint, which was first reported in The Wall Street Journal, is part of a lawsuit that seeks at least $50 million in damages.

And, most recently, on Dec. 30, Schorsch resigned from the boards of RCS Capital Corp., New York REIT Inc. and 11 nontraded real estate investment trusts and direct investment programs sponsored by AR Capital. The company said in a statement that Schorsch will leave the companies immediately to focus on strategy and “potential liquidity events of closed programs sponsored by AR Capital.”

According to the Wall Street Journal, the Federal Bureau of Investigation has opened a criminal investigation into ARCP, and Pomerantz states in its news release that the SEC also plans to investigate, “according to a person familiar with the situation.” The SEC declined comment to ThinkAdvisor.

Pomerantz has also filed a class-action lawsuit against American Realty Capital Properties, Inc. and certain of its officers on behalf of a class consisting of all persons or entities who purchased American Realty securities between Feb. 27 and Oct. 28. Those shareholders had until Dec. 29, 2014 to ask the court to appoint them as lead plaintiff for the class.

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