Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Industry Spotlight > Broker Dealers

RCS Capital Loses Ex-CEO as Board Member

Your article was successfully shared with the contacts you provided.

RCS Capital (RCAP) says one of its board members — Edward Michael Weil — has resigned.

Last month, Weil was replaced by Larry Roth as CEO of the besieged firm, after one year on the job. Earlier, he served as president, treasurer, secretary and director of RCAP; his roles have included leadership of publicly traded American Realty Capital Properties, or ARCP, and of nontraded REITs sponsored by AR Capital.

The entwined entities — founded by real-estate mogul Nicholas Schorsch — have come under scrutiny after ARCP reported $23 million in accounting errors in October 2014; more recently, a deal to sell some of RCS Capital’s assets fell apart when Apollo Global Management cancelled the transaction.

According to RCS Capital, Weil’s “resignation did not result from a disagreement with the company or the board of directors.”

RCS Capital said last week that it would shutter troubled wholesale distribution unit, Realty Capital Securities, and agreed to pay $3 million to the state of Massachusetts to settle charges tied to alleged fraudulent proxy-voting schemes.

That news followed a decision by Moody’s Investors Service to downgrade RCAP’s credit ratings on $750 million of debt. The downgrades reflect “RCS’ diminished ability to satisfy its debt load from its ongoing activities, and also the risk that it may not be able to attract a sufficient and timely amount of new investment that is necessary to fully protect creditors’ interests, as it seeks to recapitalize its balance sheet,” Moody’s explained in a statement.

With its stock trading around $0.35, the company is urgently trying to raise funds.

(According to RCAP, its largest shareholder is the hedge fund Luxor Capital Group at 12.5%; BlackRock Fund Advisors owns nearly 3% and Vanguard nearly 2%, while its IBD J.P. Turner owns 4%. These and other institutional shareholders control 42% of the company, and insiders own 43% of its shares.)

According to Mark Auerbach, RCAP’s non-executive chairman, the company’s latest moves are part of the firm’s “strategic plan to reposition the company as a pure-play, Cetera-only focused retail advice business.” (Cetera includes a number of broker-dealers and about 9,500 affiliated independent financial advisors.)

“These latest steps, which are extremely difficult but necessary, along with our recently announced capital raise, lender modifications and other initiatives, will enable us to further rationalize our business while we continue to work with Lazard to explore options to raise additional capital and complete further asset divestitures,” Auerbach explained in a statement.

RCAP expects to close the wholesale distribution business by March 31.

Moody’s, though, remains quite bearish on RCAP’s future. Cetera may be “a reasonably strong franchise, yet [it] has significantly underperformed compared to management’s expectations and is not producing sufficient cash flows to service RCS’ existing level of debt,” Moody’s explained in a statement.

RCS Capital has a total of $850 million in debt and $300 million in preferred equity. It bought Cetera for $1.15 billion in early 2014.

Regulatory Matters

In addition to agreeing to pay a $3 million fine, Realty Capital Securities says it is withdrawing its broker-dealer license in Massachusetts and all other state and federal jurisdictions.

Massachusetts’ regulators charged registered representatives of Realty Capital Securities — a broker-dealer that is part of RCAP — with impersonating shareholders and casting proxy votes in favor of management proposals at meetings of an investment program sponsored by American Realty Capital, a company owned by Nicholas Schorsch and William Kahane that manages nontraded real estate investment trusts or nontraded REITs.

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; Realty Capital Securities, though, does not appear to have verified this authority. A similar arrangement was organized by BD 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 Realty Capital registered reps who pretended to be shareholders. It also names Realty Capital managers who pushed reps to produce proxy votes.

Despite being a wholesale broker-dealer and retaining a professional proxy services firm, Realty Capital 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 the 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 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 received a letter from a BD agent who claimed to have authority to vote as a proxy for 65 client accounts, which all voted for Realty Capital management on all proposals.

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

A second letter was received by Realty Capital from a BD agent that asserted that the agent could vote for clients in the September vote concerning the sale to Apollo.

However, according to the 2015 Special Meeting Proxy Statement, BD 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 Realty Capital.

— Check out RCS Capital’s Proxy Vote Scandal Ensnaring More Broker-Dealers on ThinkAdvisor.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.