Schorsch-Linked Firm Shuts Down to Settle Vote-Rigging Complaint

  • RCS Capital affiliate will pay $3 million to Massachusetts
  • Employees accused of impersonating shareholders in proxy fight

An arm of Nicholas Schorsch’s investment empire will cease operations in Massachusetts this week and eventually across the U.S. to settle allegations that its employees impersonated shareholders and rigged a proxy vote, according to the state’s securities regulator. 

Realty Capital Securities LLC agreed to a $3 million fine as part of the settlement, according to the office of William Galvin, Secretary of the Commonwealth of Massachusetts. Galvin’s office said Realty Capital Services also agreed to a censure but didn’t say whether the company confirmed or denied the allegations against it.

Galvin’s office, in a complaint last month, laid out allegations against the Massachusetts-based broker-dealer that was part of a web of companies founded, created or partly owned by Schorsch. Employees of Realty Capital Securities -- facing pressure to drum up support for charter changes at a specialty-finance company linked to Schorsch -- attempted to fabricate proxy votes, even using “contrived” accents to pose as shareholders, according to the complaint. 

The September charter changes at Business Development Corp. of America, or BDCA, were a prerequisite for selling it as part of a proposed $19 billion deal between two Schorsch-backed companies -- American Realty Capital, or AR Capital, and RCS Capital Corp. -- and Apollo Global Management, Galvin alleged.

BDCA was created by AR Capital, a closely held company founded and part-owned by Schorsch, according to the Massachusetts complaint. As of November, Schorsch was the largest shareholder in RCS Capital, the publicly traded parent of Realty Capital Securities, according to data compiled by Bloomberg.

The complaint against Realty Capital Securities didn’t accuse AR Capital, RCS Capital or Apollo of wrongdoing.

Jesse Galloway, a spokesman for AR Capital, didn’t immediately respond to a request to comment or to make Schorsch available for comment. Apollo didn’t immediately respond to a request for comment through Charles Zehren of Rubenstein Associates.
 

Winding Down

RCS Capital confirmed that it had reached a “mutually acceptable resolution” with the Massachusetts complaint about the proxy solicitation process. “We are pleased that this matter has been resolved in an efficient and timely manner,” said Andrew Backman, an RCS Capital spokesman.

In a statement, the company said the process of winding down Realty Capital Securities, a wholesale distribution unit, would be completed by the end of the first quarter. RCS Capital also said it would focus on building Cetera Finanical Group, its retail-advice business.

“Today’s actions represent the continued execution of our previously announced strategic plan to reposition the company as a pure-play, Cetera-only focused retail advice business,” Mark Auerbach, the non-executive chairman of RCS Capital, said in the statement. “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.”

Accounting Errors

Schorsch’s holdings were thrown into disarray last year when one of his publicly traded REITs, American Realty Capital Properties Inc., or ARCP, disclosed that it had accounting errors that were intentionally concealed. Schorsch last December resigned from boards of ARCP, RCS Capital and 12 other companies.

AR Capital -- which collected fees as an outside sponsor of many of the companies -- said at the time that the moves would eliminate any perceived conflicts. Schorsch, expressing faith in the directors, said at the time the changes were part of the natural evolution of the growing companies.

In the complaint filed last month, Galvin’s office described the Massachusetts broker-dealer, Realty Capital Securities, as a high-pressure environment where employees were urged to focus exclusively on the September proxy vote at BDCA.

RCS exerted “immense internal pressure” to round up votes, according to the complaint, which referenced an Aug. 5 e-mail to staff from a senior RCS officer.

“We need each and everyone of you regardless of excuse and circumstance to focus on this all day today ... this ... is for your own personal well-being,” the manager wrote, according to the complaint. “Please don’t put me in a position where I’m asking you why you are not working on Proxy.”

Impersonating Shareholders

As part of the alleged scheme, RCS employees called a proxy firm, claiming to have located shareholders of the specialty finance company, and conferenced in colleagues who in at least two instances impersonated the BDCA shareholders, according to the complaint. One RCS employee, adopting an accent, allegedly told the proxy-solicitation firm representative that he was voting with BDCA’s management and directors on all proposals.

Some of this information was provided by a “concerned” employee, according to the complaint.

In the September proxy vote, shareholders of BDCA were asked to vote in favor of several changes to the company’s charter that would have been a prerequisite for the proposed deal with Apollo, according to the Massachusetts complaint. That transaction fell apart in early November, a week before Galvin’s action.

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