Larry Roth
Larry Roth

Editor's Note: This story was updated on Jan. 8 to include names of RCS Capital first-lien lenders. 

Once fast-growing RCS Capital said late on Monday it plans to file for Chapter 11 bankruptcy in late January, marking another setback for the dealmaker that snapped up a grab-bag of broker-dealers over the past two years.

The firm also announced plans to restructure its largest holding, the broker-dealer Cetera Financial Group, with a $150 million injection of capital from lenders to convert it to an independent firm.

The money will be used to "make continued significant investments in technology, advisor growth and service enhancements in what is already an industry-leading platform for the financial institutions and financial advisors Cetera supports," the company said in a release.

First-lien lenders include investment firms Fortress Investment Group, Eaton Vance Management and Carlyle Investment Management, according to SEC documents.

"RCS Capital's announcement today defines the path for transforming Cetera into a private, independently run organization that is dedicated exclusively to the financial advisors and financial institutions we support," Larry Roth, CEO of Cetera and RCS, said in the release. "The restructuring marks a fresh start that will place the issues of the past months firmly behind Cetera, while providing the financial advisor network with the capital and operational structure to profitably grow its market leadership."

Many Cetera advisors, frustrated with problems at their parent RCS Capital (also known as RCAP), had threatened to leave their longtime B-D, but hoped they would not be forced to do so. An accounting scandal at another firm started by RCS founder Nicholas Schorsch eventually lead both firms into ongoing controversy.

"Cetera's member broker-dealer firms will not be involved" with the bankruptcy, according to a statement. Other key points in the restructuring includes the following:

  • A retention plan for key Cetera advisors and employees made up of cash and equity in RCS Capital. The "new Cetera" will be a privately held, wholly-owned subsidiary of the new restructured company, rather than the "legacy, publically traded RCAP," according to RCAP spokesman Andrew Backman.
  • The elimination of the common and preferred equity of RCS Capital. 
  • A reduction of indebtedness and preferred stock in excess of $500 million.
  • The sale of alternative fund manufacturers the Hatteras Funds Group for $5.5 million to its prior owners and management, as RCS continues to sell off non-core assets.
  • Bradley Scher, a managing member of Ocean Ridge Capital Advisors, will join the RCS board.

The company posted a $266.5 million third-quarter net income loss from continuing operations, and its stock price, which now trades at under $1, has lost over 90% of its value over the past year. Total account assets for Cetera advisors average approximately $17.5 million, according to Financial Planning. By contrast, the average AUM per IBD advisor is $30.1 million, according to 2013 data from Cerulli Associates.

"This has not always been an easy journey," Roth said in the release, "and we thank the advisors and institutions we serve for the remarkable loyalty and patience they have shown to us throughout this time."

Additional reporting by Charles Paikert.

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