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RCS Capital Charged With Proxy-Voting Fraud; NYSE May Dump Stock

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The RCS Capital (RCAP) saga continued to worsen Thursday as Massachusetts regulators charged the company with fraudulent proxy voting and moved to revoke the firm’s broker-dealer registration in the state.

In addition, RCS Capital says it received a notice from NYSE for noncompliance with the $1 minimum bid price rule, as it shares trade near $0.50. The company has at least six months to stay listed and bring its average share price back to $1. (The stock closed at $0.45, up about 10%, on Thursday.)

Secretary of the Commonwealth William F. Galvin, who is calling for a permanent cease and desist order and administrative fine, says RCAP fraudulently cast shareholder proxy votes on investment programs sponsored by American Realty Capital at the June annual meeting of the Business Development Corp. of America (BDCA), an investment sponsored by American Realty Capital, and at a special September meeting of BDCA.

The September vote was required as part of a proposed deal with Apollo Global Management to buy real estate assets from Nicholas Schorsch, according to Galvin’s office; Apollo cancelled this deal (which also involved a joint venture) on Monday, though a separate arrangement for Apollo to buy Realty Capital Securities’ wholesale distribution business for $6 million, “a considerably reduced asking price,” is moving ahead, the regulators say.

(Schorsch was formerly the chairman and chief operating officer of BDCA.)

“In both instances, registered agents of Realty Capital Securities located in the Boston office impersonated shareholders, fabricating proxy votes,” the complaint stated.

“This fraudulent activity corrupts the governance of the targeted corporations,” Galvin said, in a press release. “Votes taken at corporation meetings affect the rights of investors and their votes should count. Any registered entity whose supervision and oversight is so lax as to allow fabricated proxy votes should not be doing business in the commonwealth.”

One email cited by Galvin’s office states: ”We need each and every one of you regardless of excuse and circumstance to focus on this all day today … this … is for your own personal well-being … ( p)lease don’t put me in a position where I’m asking you why you are not working on Proxy.”

Furthermore, regulators in Massachusetts say they were told by an RCS employee that “if they did not participate in proxies, they would get a call from [RCS Chairman and American Realty Capital President & COO] Michael Weil and would risk termination,” Galvin’s office explained.

The complaint also alleges that Realty Capital Securities was paid $375,000 by BDCA to solicit proxy votes “notwithstanding the inherent conflict with the brokerage firm’s vested interest in reaching an affirmative vote.”

The case in Massachusetts came about from an RCS employee who explained how RCS employees pretended to be shareholders and cast proxy votes in favor of management proposals.

“The investigation obtained from the proxy firm audio recordings of a June 23 call and a Sept. 29 call, both purportedly from shareholders. The two shareholders denied their voices were on the call,” explained Galvin’s office. (The RCS employee on the calls used his Fifth Amendment rights and declined to testify.)

“RCS Capital is aware of the Massachusetts Securities Division’s investigation and is fully cooperating with all relevant agencies. RCS Capital has received the complaint and is currently reviewing it,” the company said in a statement late Thursday.

Other Issues

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 real-estate mogul Nicholas Schorsch.

On Tuesday, Hatteras Funds said it was buying its business back from RCAP in order to re-establish itself as an employee-owned alternative investment firm. Meanwhile, speculation continues about the future of the RCAP-owned Cetera Financial Group of broker-dealers, led by Larry Roth, as RCAP’s stock has plunged.

Earlier this week, Moody’s Investors Service placed the following RCS-related ratings on review for downgrades: RCS’ B3 corporate family rating, B3 $575 million senior secured first lien term loan, B3 $25 million senior secured first lien revolving credit facility, and CAA2 $150 million senior secured second lien term loan.

“RCS’ ratings could be downgraded should Moody’s conclude that the prospects of RCS’ independent retail advisory business are not  sufficiently reliable and adequate to satisfy RCS’ existing obligations at their current ratings level,” Moody’s explained in a statement.

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