Weston v. RCS Capital Corporation

Updated: June 29, 2015
Status: Ongoing Case

On March 31, 2015, Labaton Sucharow was appointed co-lead counsel in this securities class action against RCS Capital Corporation (RCAP), a New-York based financial services firm.

The action arises from the accounting fraud at one of RCAP's affiliates, American Realty Capital Properties, Inc. (ARCP), which was perpetrated and concealed by senior management of ARCP and RCAP, including Nicholas Schorsch, ARCP's now former Chairman and RCAP's now former Executive Chairman. In particular, the plaintiffs generally allege that the defendants' failure to fully disclose this fraud rendered their statements from February 12, 2014 through December 18, 2014 (the class period) regarding RCAP's financial position and outlook false and misleading. As a result, RCAP is alleged to have caused its stock to trade at artificially inflated prices during the class period.  

The case is Weston v. RCS Capital Corporation, No. 14-cv-10136 (S.D.N.Y.). Lead plaintiffs are City of Providence and Oklahoma Police Pension Fund and Retirement System. Labaton Sucharow represents the City of Providence. The defendants are RCS Capital Corporation and certain of its affiliates, officers and directors.

RCAP and the American Realty Capital group of companies (American Realty), which includes AR Capital, LLC, ARCP, and certain other companies founded and controlled by Schorsch, have historically shared many executives and directors. RCAP—commonly referred to as the "crown jewel" of Schorsch's REIT empire—was formed in order to expand and grow American Realty's wholesale broker-dealer, investment bank, capital markets and transaction management business lines. During the Class Period, the majority of RCAP's revenues were generated from services provided to American Realty, including the wholesale distribution of American Realty's investment products.

On October 29, 2014, ARCP shocked the market by disclosing that its senior management had intentionally concealed certain accounting irregularities during the first half of 2014, and that investors should no longer rely on its financial statements, and other financial information, contained in its annual report for the year ended 2013 and quarterly reports for the periods ended March 31, 2014 and June 30, 2014. ARCP also announced the resignation of its Chief Financial Officer (CFO), who was a RCAP director until July 2014, and its Chief Accounting Officer (CAO).

As a result of this announcement, RCAP unilaterally terminated a recently announced deal to acquire Cole Capital Partners and Cole Capital Advisors from ARCP, many of the largest independent broker-dealers in the United States (not to mention other smaller broker-dealers) announced that they were indefinitely suspending sales of RCAP, Cole Capital, and American Realty investment products, and RCAP's ability to generate revenue was adversely affected.

On December 15, 2014, ARCP announced the resignation of its Chairman, Schorsch, among other executive officers. Three days later, ARCP's former CAO filed a defamation lawsuit against ARCP and Schorsch (among others) in which she accused Schorsch of (i) ordering subordinates, including ARCP's former CAO and CFO, to manipulate ARCP's financial results, and (ii) publicly blaming the CAO for Schorsch's own wrongdoing. Shortly thereafter, on or around December 30, 2014, Schorsch abruptly resigned from his position as RCAP's Executive Chairman.

As a result of the above revelations, RCAP's stock price decreased by more than 50 percent from its price on first day of the class period and by nearly 50 percent from its closing price on October 28, 2014, the day before ARCP disclosed its accounting fraud.