This ARCP Lawsuit Report Crushes RCS Capital Shares, Despite Analyst Upgrades

On December 16, the Wall Street Journal reported that American Realty Capital Properties Inc ARCP had been cut by Moody's to "junk" (Ba1) with a negative outlook. The rating agency cited concerns over the recent accounting irregularities, cover-up, executive shake-up and ongoing investigations.

However, nothing is so bad that it can't get worse when it comes to the negative headlines surrounding the ARCP saga. Just ask shareholders of RCS Capital Corp RCAP, whose shares were crushed Thursday, December 18, following a news report that reflected negatively on their current Executive Chairman Nicholas Schorsch.

The Latest Lawsuit Targets The C-Suite

Where previously there was smoke, there is allegedly now a "smoking gun."

On December 18, the Wall Street Journal broke the news that former ARCP Chief Accounting Officer (CAO) Lisa McAllister had filed a lawsuit alleging defamation against ARCP, former CEO and Chairman Nick Schorsch and former CEO David Kay.

Related Link: Why Is American Realty Capital Properties Inc Sliding Lower?

According to the WSJ report, "Lisa P. McAlister, alleges Mr. Schorsch instructed her and former Chief Financial Officer Brian Block to shift numbers in the company's second-quarter results to cover up errors from the first quarter. Ms. McAlister repeatedly expressed concern about the directive to fellow executives and others, including an email to Grant Thornton LLP, the real-estate-investment trust's audit firm, but her concerns were ignored, according to the complaint."

Related Link: The Saga Shaking The REIT World

RCS Capital Recent Upgrades

Ironically, RCS Capital management has been meeting with investment bank analysts, and explaining why the company is well positioned to be successful in 2015 and beyond.

Related Link: RCS Capital: 5 Key Takeaways From BoA Merrill Lynch Conference Presentation

On December 16, Citigroup upgraded RCAP from Neutral to Buy, raising its price target $6 from $13 to $19. This represented a whopping 81.6 percent increase from its then previous close of $10.46.

On December 18, the same day as the McAllister lawsuit news broke, Barclay's reinstated RCS Capital at Overweight with a PT of $20. This represented a 70 percent upside from the previous close of $11.76.

Bottom Line

The ARCP related crisis of confidence is dragging down RCAP shares despite the favorable views from Wall Street sell-side analysts.

At this point it appears that the controversy surrounding RCAP Executive Chairman Schorsch has now reached a tipping point.