RCAP Investors Sue Schorsch and Others for “Looting” Company
RCS Creditor Trust, a group of unsecured RCS Capital Corp. (RCAP) investors, filed a lawsuit last week in the Delaware Chancery Court alleging that founder Nick Schorsch and his AR Capital partners “looted” the company at the expense of its investors.
AR Capital, a Schorsch-controlled entity now known as AR Global, has more than $10 billion in assets. RCS Capital Corp., prior to declaring bankruptcy last year, was a publicly-traded holding company founded to distribute AR Capital-sponsored non-traded investment offerings.
Also named in the lawsuit are various affiliated companies, as well as executives William Kahane, Edward Michael Weil, Peter Budko and Brian Block. Block, the ex-chief financial officer of former RCAP-affiliate American Realty Capital Properties, is awaiting trial in Pennsylvania for conspiracy, securities fraud, and other charges for his alleged role in the 2014 accounting scandal that nearly brought down the company.
The complaint states that the defendants “raised hundreds of millions of dollars in public stakeholder investments, then caused RCAP to operate unprofitably for AR Capital’s benefit, and to make boldly imprudent investments that served only AR Capital’s interests.”
“This abuse, together with the foreseeable impact of financial fraud they perpetrated at an affiliated entity, was so severe that after less than three years RCAP declared bankruptcy, having lost nearly $1 billion in investors’ money,” the suit alleges.
The lawsuit claims that Schorsch and his AR Global partners, “exercised virtually unfettered power, which they exploited to loot RCAP for AR Capital’s benefit by shifting the cost of raising investments to RCAP, while keeping virtually all of the profits generated by those investments for themselves.”
According to the lawsuit, Schorsch blocked attempts by the independent directors to negotiate superior deals with third parties to avoid bankruptcy.
“Stockholder value has been wiped out, and creditors owed more than $250 million stand to collect little beyond the proceeds of this litigation. Meanwhile, the defendants have collected and continue to reap hundreds of millions of dollars in ongoing fees, all resulting from investments procured by RCAP. A large portion of those profits fairly belong to RCAP,” the complaint states.
The lawsuit allegations include breaches of fiduciary duty and corporate waste, with plaintiffs demanding the imposition of a constructive trust to recover unjustly gained proceeds from the businesses named in the complaint, as well as an accounting and damages.
RCAP’s bankruptcy was confirmed by Judge Mary Walrath of the U.S. Bankruptcy Court in Delaware in May 2016.
