Massachusetts Regulatory Charges Realty Capital Securities With Fraud Related to Proxy Votes in Real Estate Deals

Massachusetts Secretary of the Commonwealth William Galvin is charging Realty Capital Securities with fraud involving the purported gathering of proxy votes to support AR Capital-sponsored real estate deals. Realty Capital Securities is part of RCS Capital Corp., also known as RCAP. Galvin wants to take away RCS’s registration as a brokerage firm in the state.

An RCS employee provided details about how colleagues pretended to be shareholders on proxy calls so they could vote for deals that were in management’s best interests. There was purportedly no training over how to deal with proxy solicitation. Oversight is said to have involved RCS management regularly asking employees for updates about proxy votes and whether any progress had been made.

The Massachusetts regulator said that Realty Capital Securities agents pretended to be shareholders and cast bogus votes for investment programs that were sponsored by Nicholas Schorsch’s AR Capital. Schorsch is a principal shareholder in RSC Capital, which is the wholesaler broker-dealer of RCAP.

For example, reports InvestmentNews, fake votes were cast in a September vote at a Business Development Corporation of America meeting. The vote was required so that Apollo Global Management could purchase real estate assets from Schorsch. Galvin said that BDCA paid RCS $375K for the solicitation of the proxy votes.

Although the deal failed this week—Apollo was supposed to buy a $378M majority stake in the company—the global management firm was able to buy RCS’s wholesaling business, including brokerage firms Strategic Capital and Realty Capital Securities, at a lower price of $6M.

A second shareholder vote is also at issue in this case. However, the Massachusetts regulator’s office said that it believes many more fabricated votes were generated by RCS for AR Capital.

Galvin said that RCS pressured agents by telling them that they could be let go if they didn’t make proxy solicitation calls a priority. In a statement, Galvin said that votes at corporate meetings impact voter rights. He said that a registered entity with oversight and supervision so relaxed that fake proxy votes can take place shouldn’t be in business in Massachusetts.

In other RCS Capital news, the Big Board notified the firm that it is at risk of having its stock delisted from the New York Stock Exchange because it is not meeting standards to remain listed. RCS Capital has six months to get its share price at $1/share for 30 consecutives trading days.

Also, RCS Capital is expecting an over $300 million third quarter loss because of a $331.7 million impairment. That loss is much higher than the $37 million reported for the same time last year. The firm also expects a $399.7 million net loss for the first nine months of this year, along with a $488.5 million impairment charge, compared to one of $183.6 million for the same period last year.

In a filing with the Securities and Exchange Commission, the broker-dealer said that the main factor playing a part in the greater losses was the substantial drop in its market capitalization and reductions in future growth and profitability expectations for certain reporting units. RCAP’s share price has been dropping since last year in October when it was disclosed that American Reality Capital Properties Inc., another Schorsch-controlled company, purposely left $23M in unfixed accounting errors.

Read Galvin’s Complaint (PDF)

RCS Capital plans to post $307M loss for the third quarter, InvestmentNews, November 11, 2015

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