Broker-Dealer Realty Capital Securities (RCS) Charged with REIT Fraud: Schwab, Fidelity and Cetera Suspend REIT Sales

The state of Massachusetts has charged Realty Capital Securities (RCS) with fraudulently rounding up proxy votes to support real estate deals sponsored by AR Capital. RCS, a wholesale broker-dealer, and AR Capital are both owned by RCS Capital Corp. (RCAP). The Investment News has a good summary.

Reacting to these charges, Cetera Financial Group, also owned by RCAP, has suspended sales of AR Capital real estate investment trusts (REITs) and other alternative investments all ten Cetera broker-dealers. Even more striking, AR Capital has stated that it will stop creating and selling new alternative investment products. In a statement, William Kahane, co-owner of AR Capital, cited the Labor Department’s proposed fiduciary standard and new client account statement pricing standards for non-traded REITs and other investments as reasons for AR Capital’s withdrawal from a market that it has recently dominated. But one could reasonably ask whether those explanations are a smokescreen for the true reason—being charged with fraud.

Three days later, both Fidelity and Schwab also announced they were suspending sales of AR Capital REITs.

This news is yet another major blow to AR Capital. Last year, the company’s REIT sales fell close to 50% when American Realty Capital Properties Inc. revealed a $23 million accounting misstatement for the first half of 2014 that was intentionally left uncorrected.

This turmoil in the REIT and alternative investment markets adds to investor skepticism of many of these products where high transaction fees, self-dealing, a lack of due diligence and poor liquidity can result in large losses.

If you have suffered an investment loss from an REIT or similar alternative investment product and are concerned that it may have been caused by conflicted or unsuitable advice from your financial advisor, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.