Realty Capital Securities Shut Down

RCS Capital Corporation (NYSE: RCAP), the brokerage firm founded by real estate mogul Nicholas Schorsch to distribute AR Capital-sponsored non-traded investment offerings, will start shutting down its wholesale distribution business today and will settle fraud charges with the state of Massachusetts.

According to the company, “the series of actions [is] designed to further accelerate [the company’s] strategic repositioning to focus on the independent retail advice business, Cetera Financial Group, rationalize its capital structure, increase financial flexibility and position the company for long-term growth.”

As part of its previously stated plan to transition RCS Capital to a retail-focused entity, the company’s board of directors has authorized plans to wind down the operations of Realty Capital Securities, its wholesale distribution business. The process, which will begin today, is expected to be completed by the end of the first quarter 2016. The broker-dealer will lay off around 200 employees and close its doors in Massachusetts by Friday, and in other states thereafter.

The company also announced it has reached an agreement to settle with the Massachusetts Secretary of the Commonwealth, Securities Division, regarding the fraud complaint against Realty Capital Securities. The state alleged that RCS violated the Massachusetts Uniform Securities Act and the regulations thereunder in connection with shareholder proxy solicitation process in the Commonwealth of Massachusetts. Under the agreement, RCS will pay a $3 million fine. RCS has also decided to voluntarily withdraw its broker-dealer license in Massachusetts and all other state and federal jurisdictions.

Mark Auerbach, the company’s non-executive chairman commented, “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. 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. After careful consideration, the board concluded that the wind down of the Realty Capital Securities wholesale distribution business was essential in our continuing efforts to create a leaner, more efficient organization dedicated to realizing the full earnings potential of Cetera Financial Group. While we still have more work to do, we consider today’s actions important steps forward in this ongoing strategic process.”

SC Distributors, the distributor of several non-AR Capital sponsored non-traded investment vehicles, will be repurchased by its senior executives from RCS Capital Corporation who will re-establish the company as an independent alternative investment distribution platform. The transaction is expected to close in early 2016.

Patrick Miller, president of SC Distributors, said in a statement, “We are excited to re-establish SC as an independent alternative investment platform and believe we are well-positioned to continue to execute on our business plan in close partnership with our high-quality, independent product sponsors.”

Acquired by RCAP in August, 2014, SC Distributors has continued to independently operate as a wholesale broker- dealer over the past 15 months. There will be no impact or changes to the investment management, governance or operations of any of the current product offerings distributed on the SC platform as a result of the transaction, according to the company.

Mario Garcia Jr., chief executive officer and managing partner of Validus Group, a Tampa-based investment firm that served as the lead founding capital partner for SC, also added “We believe this transaction re-establishes SC as a premier provider of alternative investment solutions to the broker-dealer marketplace and positions SC to take advantage of a number of exciting growth opportunities going forward. We are delighted to reaffirm our commitment to this business and build on our strategic relationship with the SC management team.”

The DI Wire will continue to track and report on this and other AR Capital-related news.