The fallout from American Realty Capital Properties’ $23 million accounting error continues as LPL Financial became the latest firm to announce it was indefinitely suspending sales of investment products sponsored by American Realty Capital Properties, RCS Capital and their affiliates.
The announcement came on the heels of Monday's news that Nicholas Schorsch’s RCS Capital Corp. was pulling out of its agreement to acquire non-traded REIT sponsor Cole Capital from ARCP for $700 million.
LPL's decision on Tuesday to halt sales of investment products means that the firm's 13,900 advisors will not be able to sell at least some of ARCP's REIT products. LPL had no further comment on its decision to suspend sales or under what circumstances the firm would consider lifting the suspension.
The Boston-based firm's decision followed AIG Advisor Group's statement released Monday noting that due to ARCP's accounting irregularities, it was suspending sales of two of the company's REITS, American Realty Capital New York City REIT and Phillips Edison-ARC Grocery Center REIT II, effective immediately. "At this time, the suspensions are considered temporary, but indefinite, and will remain in effect until AIG Advisor Group’s due diligence team has time to review potential implications of the recent news regarding ARCP," the firm said. AIG Advisor Group has about 11,700 advisors across all of its broker/dealers.
National Planning Holdings also barred the sale of some Schorsch REIT sales for its 3,544 advisors last Thursday, specifically new sales in Phillips Edison – ARC Grocery Center REIT II (“PE-ARC II”) products. The suspension went into effect immediately.
Last month, RCAP said it would purchase Cole from American Realty for $700 million, but announced Monday it was terminating the agreement. ARCP is fighting the decision, saying in a statement RCS Capital had no right to do so.
“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 Monday. “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.
