A group of investors has accused former head of Cetera Financial Group Nicholas “Nick” Schorsch and his partners of shaving off revenues of RCS Capital (“RCAP”), a company once controlled by Schorsch that went into bankruptcy, for their own benefit.
The complaint was filed on March 8, 2017 by RCS Creditor Trust as a damages suit in the RCAP bankruptcy case, according to an InvestmentNews report. The complaint accuses Schorsch and some of his associates and companies of essentially looting RCAP and its public investors. According to a Law360 report, RCS Creditor Trust ties many of its allegations of “disloyal self-dealing” to Schorsch.
The complaint accuses the Schorsch and his associates of breaching or aiding breaches of fiduciary duty, duty of care, and duty of loyalty, as well as wasting corporate assets. Further, it alleges that nearly $1 billion in public stakeholder investments in RCAP were destroyed. One of the individuals named in the suit, Brian S. Block, was arrested on conspiracy, securities fraud and related charges in September 2016 in connection to a Schorsch-owned company, American Realty Capital Properties.
RCAP was a publicly-traded brokerage holding company that had its public offering in 2013. RCAP made most of its profits selling AR Capital non-traded real estate investment trusts (“REITs”). Schorsch also owned AR Capital, and the complaint alleges that Schorsch was funneling revenue from RCAP to AR Capital.
Eventually, RCAP was destroyed by Schorsch’s binge purchases of retail broker-dealers. Many of Schorsch’s broker-dealers still operate under the Cetera moniker, though Schorsch is no longer connected to them.
RCAP declared bankruptcy in January 2016. In May 2016, RCAP emerged from bankruptcy with a brand new name, Aretec, Inc., which is Cetera spelled backwards.
Schorsch built his wealth off of non-traded REITs. Non-traded REITs are illiquid vehicles that invest in a variety of income-producing real estate. The idea behind a non-traded REIT is to raise a pool of money from investors, quickly buy a portfolio of properties and create an income stream for investors from the rents of the tenants who lease them.
Unlike publicly-traded REITS, the shares of non-traded REITs generally have to be held for five to seven years until the REIT is sold or listed on an exchange. The sales of these non-traded REITs may accrue high commissions for the brokers and fees that can drive up the cost of non-traded REITs to 12%, making it difficult to earn a return of principal.
Many of the firms under then Cetera network have a history of selling alternative investments, including Schorsch and RCS Capital’s penchant business development companies (“BDCs”), non-traded REITs, oil and gas drilling partnerships, and private placements. Our firm has compiled a list of some of the non-traded REITs and BDCs.