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Former Investors Cap CEO Resurfaces After a Costly Lesson

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Investors Capital President and CEO Tim Murphy is now working as an advisor for a hybrid RIA affiliated with his former rival LPL Financial.

Murphy, who was with Investors Cap since 1994, led the independent broker-dealer through its $52.5 million merger with troubled RCS Capital (RCAP), which later emerged from bankruptcy as Cetera Financial Group. Cetera later chose to close Investors Cap and move some its registered reps to Cetera Advisors.

According to several industry sources, Murphy and other Investors Capital stakeholders accepted a large amount of stock in RCAP — 84% of the purchase price — as part of the deal, which hurt them financially. 

“I heard that he took most of his share from the sale of the IBD in RCAP stock, and that did not work out well for him,” said recruiter Jon Henschen in an interview. “That stock became worthless. In hindsight, cash is king.”

Summit Brokerage Services, led by Marshall Leeds, struck a deal for more cash — 82% of the purchase price — when that firm was sold to RCAP, according to one industry veteran who wished to remain anonymous.

Murphy’s recent move to Integrated Financial Partners was not announced in a press release or mentioned in his LinkedIn profile, but it is present in his Financial Industry Regulatory Authority BrokerCheck record.

“Tim has done it all in our industry, and we are thrilled to have him here at Integrated Financial Partners,” said President Paul Saganey, in a statement. “I have known Tim for many years, and when he shared with me his desire to be an advisor, we all felt our CPA Partnership Program would be an ideal way for him to make the transition.”

Murphy’s move to work as an advisor is, of course, a big shift from his role as head of Investors Capital, the firm he was with since 1994.

“Advisors very much liked the firm and its family atmosphere, and they were extremely disappointed when it was sold to RCAP [in 2014],” explained executive recruiter Mark Elzweig in an interview. “Rumors began circulating that maybe Murphy and others could find a way to buy back the IBD and take it private. That was obviously an unrealistic scenario.”

At the time of the deal, Investors Capital had about 500 affiliated advisors; Integrated Financial Partners has roughly 130.

“We  wish Tim well in his new role but beyond that, as a matter of policy, we do not publicly comment on individuals who are no longer affiliated with our firm,” said a Cetera Financial Group spokesperson. 

Lessons for Reps, Execs

In Henschen’s mind, the troubles apparently faced by Murphy suggest it is worthwhile “to temper your enthusiasm for stock.”

“It comes down to diversification and practicing what BDs and advisors preach: do not rely too heavily on a single stock,” the recruiter said.

As for Murphy’s move to Integrated Wealth, “He is at a place where he can get reestablished in the industry,” explained Henschen.

The former CEO is not alone in his troubles, according to Elzweig.

“A number of Investors Capital [advisors] complained that they had lost a lot of money on RCAP stock,” the New York-based recruiter said. “Cash is always preferable to stock in an acquisition deal, because with cash you know what you are getting. There’s no real risk. By and large, it’s a much safer strategy to take cash rather than stock, unless you are doing a deal with a firm like Goldman Sachs.”

Recent History

A year ago, RCS Capital announced plans for a Chapter 11 bankruptcy filing, the injection of some $150 million from key stakeholders, as well as debt and capital restructuring plans to make Cetera an independent, privately held firm.

Shares of RCS Capital did not trade on the first trading day of 2016, after trading at roughly $0.30 on Dec. 31, 2015 — significantly off their 2015 high of nearly $13.30.

As part of the plan to get rid of some noncore assets and liabilities, it said it would cut most corporate overhead expenses and other liabilities. The restructuring likely will involve the elimination of RCS Capital’s common and preferred equity.

“RCS Capital’s announcement today defines the path for transforming Cetera into a private, independently run organization that is dedicated exclusively to the financial advisors and financial institutions we support,” said Cetera CEO Larry Roth, in a statement.

(Roth is no longer CEO of Cetera. Former LPL Financial President Robert Moore stepped into the role in September.)

“Other than the new proposed equity retention program for Cetera financial advisors and key employees, substantially all of the equity of the company following the restructuring will be owned by the current first- and second-lien lenders,” RCAP explained. The restructuring entailed more than $500 million in debt reductions and preferred-stock eliminations.

At the time, RCS Capital said it was “winding down” the troubled wholesale-distribution business of Realty Capital Securities and should complete this process by the end of the first quarter. The closure of it investment banking, capital markets and related advisory services business are on a similar timetable.

2014-2015 Debacle

In late 2015, RCAP board member Edward Michael Weil resigned; earlier, he had served as CEO of the firm, as well as president, treasurer, secretary and director. In addition, he had leadership roles at American Realty Capital Properties, or ARCP, and of nontraded REITs sponsored by AR Capital.

The entwined entities — founded by real estate mogul Nicholas Schorsch — came under intense 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.

RCS Capital said it was shuttering its 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 in late 2015.

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.

According to Moody’s, RCS Capital had a total of $850 million in debt and $300 million in preferred equity in 2015. It bought Cetera for $1.15 billion in early 2014.

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 REITs.