Nick Schorsch executive chairman of RCS Capital

Nick Schorsch, executive chairman of RCS Capital

RCAP Calls Off Cole Capital Deal

Less than a week after sister company American Realty Capital Properties (ARCP) announced a $23 million accounting error, Nicholas Schorsch’s RCS Capital Corp. (RCAP) said it has terminated its agreement to acquire non-traded REIT sponsor Cole Capital from ARCP. Last month, RCAP said it would purchase Cole from American Realty for $700 million.

As of 9:45 a.m. eastern time, ARCP’s stock price was down 10 percent. RCAP’s stock was down 12 percent and continues to decline. 

“As we informed RCS orally and in writing over the weekend, RCS has no right and there is absolutely no basis for RCS to terminate the agreement,” ARCP said, in a statement. “Therefore, RCS's attempt to terminate the agreement constitutes a breach of the agreement. In addition, we believe that RCS's unilateral public announcement is a violation of its agreement with ARCP.  The independent members of the ARCP Board of Directors and ARCP management are evaluating all alternatives under the agreement and with respect to the Cole Capital business, generally.”

RCAP, which has built a network of about 9,700 independent advisors through acquisition, said it has also nixed subadvisory agreements between RCAP and five Cole Capital non-traded REITs. Wholesaling agreements between RCAP subsidiary Realty Capital Securities and Cole were also terminated.

Last week, ARCP announced it had incorrectly calculated its adjusted funds from operations by $12 million for the first quarter of 2014 and by nearly $11 million for the second quarter. The non-traded REIT sponsor said it did not expect the matter to impact any previously announced transactions, including the sale of Cole Capital.

American Realty said that CFO Brian Block and Chief Accounting Officer Lisa McAlister resigned and that financial statements going back to 2013 can’t be relied upon. The accounting errors were reportedly intentionally concealed.

“We don’t have bad people, we had some bad judgment there,” CEO David Kay said during a conference call last week, according to Bloomberg. “We had two employees which have resigned as the result of the effects of that calculation and the non-disclosure of the error in the first quarter.”

On the heels of the news, law firms Johnson & Weaver and Ademi & O'Reilly announced they were launching investigations into possible securities fraud claims against ARCP.

The SEC is investigating the REIT, according to the Wall Street Journal. The FBI has also opened an investigation into the company, according to Reuters

Schorsch, executive chairman of RCS Capital (RCAP), jumped into the independent broker/dealer space with his purchase of First Allied Securities and The Legend Group, with 1,500 advisors, in June 2013. But since then, Schorsch has been on an acquisition tear, shocking the industry with the number of deals he’s penned. Today, his empire consists of 11 broker/dealers and 9,700 advisors, Girard Securities being the most recent acquisition.

 

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