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Massachusetts’ regulators charged registered representatives of Realty Capital Securities — a broker-dealer that is part of RCAP — with impersonating shareholders and casting proxy votes in favor of management proposals at meetings of an investment program sponsored by American Realty Capital, a company owned by Nicholas Schorsch and William Kahane that manages nontraded real estate investment trusts or nontraded REITs.
Specifically, the regulators cite the case of 65 accounts for which votes were cast by broker-dealers’ agents who claimed to have the authority to cast these votes for investors in May; Realty Capital Securities, though, does not appear to have verified this authority. A similar arrangement was organized by BD agents in September 2015, when a vote was taken for the now-failed sale of Realty Capital, affiliated entities and assets to Apollo Global Management.
The case does not name the broker-dealers, and Galvin’s office declined to do so on Friday. The 33-page complaint, though, does give the names of several Realty Capital registered reps who pretended to be shareholders. It also names Realty Capital managers who pushed reps to produce proxy votes.
Despite being a wholesale broker-dealer and retaining a professional proxy services firm, Realty Capital conducted proxy solicitation services for all AR Capital-sponsored funds and received “significant compensation” for this work, according to the Nov. 12 case filed by the Massachusetts Securities Division.
In addition, the case brought against the company asserts that Realty Capital Securities made efforts “to obtain documentation from broker-dealer agents to facilitate voting of client shares.”
Realty Capital would ask broker-dealers to confirm their authority for proxy voting on behalf of clients. They would then talk with the agents about which shareholders had not voted and ask that either they be allowed to contact the investors or for the agents to contact the investors directly.
“Upon information and belief, RCS never verified if broker-dealer agents had authority to vote client shares,” the securities division explains.
Realty Capital received a letter from a BD agent who claimed to have authority to vote as a proxy for 65 client accounts, which all voted for Realty Capital management on all proposals.
Proxy firm data found that just 50 of the accounts had been asked to vote in May by phone. It also found that 15 accounts had voted online or by paper ballot.
A second letter was received by Realty Capital from a BD agent that asserted that the agent could vote for clients in the September vote concerning the sale to Apollo.
However, according to the 2015 Special Meeting Proxy Statement, BD agents “did not have discretion to vote client shares unless clients provided express instructions to the broker-dealer agent,” the suit explains. Again, such authority was not verified by Realty Capital.
— Check out RCS Capital’s Proxy Vote Scandal Ensnaring More Broker-Dealers on ThinkAdvisor.