In Delaware Chancery Court, investors have brought a nontraded real estate investment fraud lawsuitagainst former RCS Capital (RCAP) CEO Nicholas Schorsch accusing him and his partners of enriching themselves by taking revenue from the publicly traded brokerage holding company. The plaintiffs are part of the RCS Creditor Trust. They are unsecured creditors who say they lost all of their investments with RCAP.
It was just last year that RCAP filed for bankruptcy after falling into millions of dollars in debt. It emerged as Aretec, the holding company that controls Cetera Financial Group.
The plaintiffs contend that Schorsch and partners Peter Budko, William Kahane, Brian Block, and Edward “Michael” Well took advantage of their authority at RCAP to enrich AR Capital, which was the nontraded REIT business that they wholly owned.
According to the complaint, the five men and different related companies raised hundreds of millions of dollar via stakeholder investments before causing RCAP to be run “unprofitably” to benefit AR Capital. The investors are accusing them of committing financial fraud “so severe” that in just a few years nearly $1B of the money invested was lost.
Beginning in 2008 AR Capital and Schorsch had raised billions of dollars through ARC-branded nontraded REITs. Schorsch touted liquidity and investor returns despite high fees and very limited transparency.
After RCAP was listed in 2013, it got into trouble when another Schorsch-controlled company, American Realty Capital Properties (now named Vereit Inc.), disclosed a $23M accounting mistake that it had not fixed on purpose. Then, in November, the Massachusetts Securities Division filed charges against Realty Capital Securities, an RCAP affiliate, with fraudulently gathering proxy votes to back real estate deals that AR Capital had sponsored. Realty Capital Securities settled by agreeing to shutter its operations and pay a $3M fine.
At The SSEK Partners Group, we work with investors who have sustained losses because of nontraded REIT fraud. Contact one of our REIT fraud lawyers today.
Investors accuse Nicholas Schorsch of plundering RCAP for own gain, InvestmentNews, March 10, 2017
Schorsch, Others Sued Over $1.4B RCS Capital Ch. 11, Law360, March 9, 2017