The fallout from the accounting errors by ARCP, which controls 50% of all non-traded REIT sales, not only forced chairman and founder Nicholas Schorsch to resign and walk away from hundreds of millions of dollars, but, given ARCP’s size, threatens the entire market as well.
Further complicating matters is a defamation lawsuit by ARCP’s former chief accounting officer against her former company and Schorsch in which she claims that she was ordered to alter the quarterly results and was then made the scapegoat. This prompted Massachusetts Secretary of the Commonwealth William Galvin to launch an investigation to determine who knew what, and when.
Schorsch, under another publicly traded company, RCAP — which is not involved in the investigations, scandals or lawsuits — has taken aim at the independent BD market, starting with the acquisition of First Allied in the summer of 2013 and capped by the purchase of Cetera in early 2014. Along the way, RCAP has acquired 12 BDs in total and nearly 10,000 reps, quickly becoming the second largest independent BD behind only LPL. As with the non-traded REIT market, it was thought that Schorsch and his cohorts saw an opportunity that others might have overlooked in a market that’s known for low margins and lots of liability — and that’s made even more risky with independent reps.
The question now is what effect the accounting scandal, Schorsch’s resignation from his REIT enterprise and the lawsuit will have on RCAP and the budding BD enterprise as it scrambles to integrate, consolidate and rationalize its far-flung acquisitions. Even if executed flawlessly, it’s really hard to create a culture overnight, especially with reps who see themselves as independent. The industry will be watching carefully.
