RCS Says Some Brokers Lift Suspensions After ARCP FalloutBrian Louis and Prashant Gopal
RCS Capital Corp., seeking to distance itself from accounting errors at American Realty Capital Properties Inc., said some brokers have lifted suspensions on investment products it sells.
“We anticipate most of the suspended RCS products will be reinstated by the year end,” Chief Executive Officer Michael Weil said on the company’s earnings conference call today. “Several broker-dealers have already lifted suspensions that have been put in place.”
RCS shares have fallen 43 percent since the accounting mistakes were disclosed two weeks ago, partly because of concern over damage to its business selling nontraded real estate investment trusts sponsored by AR Capital LLC. That company was created by Nicholas Schorsch, RCS’s chairman and biggest shareholder, and chairman of American Realty Capital Properties as well. Brokerage firms including LPL Financial Holdings Inc. have said they were suspending sales of some products tied to the New York-based companies.
RCS fell 2.1 percent today to $11.35, paring a loss of as much as 23 percent after its earnings trailed analyst estimates. American Realty Capital Properties rose 0.2 percent to $8.81. Its shares have dropped 29 percent since the errors were disclosed.
RCS said today the board’s audit committee and management team are confident in its reported results after a review by an independent external counsel and forensic accounting firm. The investigation, which included interviews and “testing” of various layers of financial statements, was “deliberately limited” and didn’t include a review of e-mails, Chief Financial Officer Brian D. Jones said.
“Going into the exercise we had no reason whatsoever to believe that there was anything at all incorrect in our previous financial statements,” Jones said on the call. “As the exercise continued and that belief continued to be validated, the scope of the work was therefore limited.”
The company also is cooperating with a separate investigation by the Massachusetts Securities Division into Boston-based Realty Capital Securities, the RCS broker-dealer that distributes AR Capital’s nontraded REITs, Bill Dwyer, the CEO of that unit, said on the call.
The probe was largely prompted by the American Realty Capital accounting errors last month, said Brian McNiff, a spokesman for Massachusetts’s secretary of the commonwealth, which oversees the securities regulator. It will look at information investors were given about Realty Capital Securities and the products it sells, he said in a phone interview today.
“We’re going to cooperate fully with them,” Dwyer said. “I want to reiterate that anything that’s transpired was not related to any operating basis at our firm or any performance of any product.”
RCS last week ended a deal with American Realty Capital Properties to buy Cole Capital, a private-capital management business. American Realty, the biggest U.S. owner of single-tenant buildings, sued RCS on Nov. 11 over the termination.
“We remain confident in our legal position regarding the termination and we’ll provide updates as required in our public filings,” Weil said on the call.
The acquisition of Cole was part of RCS’s growth plan, said Keven Lindemann, director of the real estate group at SNL Financial in Charlottesville, Virginia.
“Now that that deal is in jeopardy, it’s not too surprising that the stock has been hit as hard as it has,” he said in a telephone interview.
Weil said RCS has been working with officials at AR Capital to review the financial controls and processes of their products that the broker-dealer sells. The review concluded that those companies will file their quarterly reports with regulators tomorrow with no issues or delays, Weil said.
Schorsch beneficially owns about 40 percent of RCS’s Class A common stock and, through his beneficial ownership of its Class B common stock, has majority voting control of the company, according to the American Realty Capital complaint.