falling hard...“the fun part of real estate is the deal. the rest is drudgery.” nicholas...

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September 21-25, 2015

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FallingHard How Nick Schorsch’s REIT empire unraveled0

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“The fun part ofreal estate isthe deal. The restis drudgery.”

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Cole, which Mr. Schorsch had pursued relentlessly for 10months, would cost the company another $11.2 billion.

But to Mr. Schorsch, the price was worth it.Cole Real Estate Investments Inc. was a large,well-respected real estate investment trust andmanagement company and the combinationof the two firms would turn ARCP into a“juggernaut”that would be unrivaledamong its peers, he told investors on aconference call the morning the deal wasannounced.

“You could argue it’s the Red Soxmerging with the Yankees,”he gushed.

ARCP would now have a portfolio worth$21 billion, up from just $100 million twoyears earlier. In the same conference call, Mr.Schorsch bragged that ARCP belonged in theS&P 500, an index of the largest and mostinfluential companies in the U.S.

AN EMPIRE BUILDERAlong the way, the then 52-year-old Mr. Schorsch, an entrepreneur

who had never finished college, had become a billionaire, according to Forbesmagazine.ARCP was only one of dozens of companies in a real estate empirethat he had put together in less than a decade. It was an empire from whichMr. Schorsch and his associates reaped hundreds of millions of dollars in fees–— compensation that would later be questioned by critics.Although heappeared to be a workaholic, he also enjoyed the trappings of wealth, living onManhattan’s Upper East Side and in mansions in Virginia and Newport, R.I.,

where he collected vintage race cars.Basking in the glow after the purchase of Cole that October day, Mr.

Schorsch indicated it might finally be time to step back from ARCP’s break-neck acquisition spree.

“This is the time for us to take a break,”he said.What Mr. Schorsch didn’t realize that day was that just a year later, his

flagship REIT would be rocked by a scandal that would all but gut theempire that he had worked so hard to build. He would resign as chairmanfrom ARCP, the giant REIT he had created, and from the boards of many ofhis other companies.Two of those firms are facing investigations from regu-

latory agencies and one is facing a criminal investigation.How did it all fall apart so quickly?

Critics say Mr. Schorsch was more interestedin making deals than being a manager.Thesheer volume of mergers, stock market list-ings and other transactions he completed —plus the lackluster performance of his pub-licly traded companies later on — bearsthat out. Others say he was just interestedin getting rich.The amount of money hemanaged to collect from all of his trans-actions in such a short period of timebears that out as well.

THE BOMB DROPSOn Oct. 29, 2014, ARCP dropped a

bombshell on Wall Street when itrevealed a $23 million accounting mis-statement that had resulted in the com-

pany reporting inflated financial results.What’s more, the company charged in a filing

with the Securities and Exchange Commissionthat the chief financial officer, Brian Block, and the

chief accounting officer, Lisa McAlister, were responsi-ble for the misstatements and an ensuing coverup and that, as a result, theyhad resigned from the company.

The most immediate impact of the stunning revelation was on ARCP andanother publicly traded company Mr. Schorsch controlled, RCS Capital Corp.The stock of both companies plummeted and billions of dollars in market capi-talization were lost. But the reverberations spread throughout his empire and

10 InvestmentNews | September 21, 2015 InvestmentNews.com

IT WAS LATE OCTOBER 2013 and Nicholas Schorschwas riding high. After a bruising campaign to acquireCole Real Estate Investments, he had won his prize.

The acquisition of Cole capped one of the most aggres-sive and feverish buying binges in retail real estate his-tory. In just two years, one of the firms he headed,American Realty Capital Properties Inc., had made atleast five major acquisitions, costing $8.8 billion in total.

The REIT kingwho lost his mojo

Nick Schorsch made hundreds of millions in real estate, but an accounting scandal devastated his businessBy Bruce Kelly

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This is not the one-off story of a rogue employee or two ... It is the story of asystematically corruptcorporate culture, starting atthe very top.”

TIAA-CREF court filing

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continue to be felt to this day.Mr. Schorsch initially tried to minimize the accounting scandal and move

on.“The headline is,‘Mistakes were made, identified and the people involvedwere identified,’”he said in a conference call with brokers.“It will be fullycorrected.”

But moving on would be difficult, especially when one of the senior execu-tives the company blamed for the accounting debacle, Ms. McAlister, sued thecompany for defamation two months later. She claimed she had been made ascapegoat in the scandal. She also implicated other senior executives in herlawsuit, including ARCP’s chairman, Mr. Schorsch, who she alleged told Mr.Block to conceal intentional accounting misstatements. Four days before Ms.McAlister’s lawsuit was announced, Mr. Schorsch, chief executive officerDavid Kay and chief operating officer Lisa Beeson resigned from ARCP.

Ms. McAlister withdrew her lawsuit several weeks later, although shemaintained the right to sue the company at a later date. Meanwhile, ARCP isfacing investigations and inquiries from the FBI, the Securities andExchange Commission, and the country’s most feared state securities regula-tor,William Galvin, the secretary of the commonwealth of Massachusetts.

RCS Capital also is being investigated by Mr. Galvin’s office, as well as bythe Financial Industry Regulatory Authority Inc., the brokerage industry’sself-regulator.

The most damning criticism of Mr. Schorsch’s empire, to date, however,comes not from law enforcement or any regula-tor, but in a civil suit brought by investors, led byTIAA-CREF, the teacher retirement servicesprovider.The 177-page suit claims that ARCP’saccounting misstatement was part of a multiyearfraud perpetrated by the company to inflate finan-cial results so it could raise capital to fuel thecompany’s aggressive expansion.That expansion,in turn, generated more than $917 million in feesfor Mr. Schorsch and other insiders, according to

the complaint.“This is not the one-off story of a rogue employee or two, however senior,

involving a narrow scheme to defraud,”according to the court filing.“It is thestory of a systematically corrupt corporate culture, starting at the very top.”

Mr. Schorsch declined to be interviewed for this story.As a result of the accounting scandal and ensuing legal troubles, Mr.

Schorsch’s companies were seriously wounded. In the highly regulated secu-rities business, many broker-dealers no longer wanted to sell his REITs forfear they might become targets of government and industry regulators, aswell as plaintiff’s attorneys representing disgruntled investors. Businessdried up and losses mounted.

Last month, Mr. Schorsch sold a majority interest in another of his flagshipcompanies, the privately held AR Capital, formerly known as AmericanRealty Capital, to private-equity firm Apollo Global Management Inc. Apolloalso bought part of RCS Capital.

Mr. Schorsch has denied all allegations of wrongdoing against him madein the TIAA-CREF and McAlister complaints, according to an Aug. 12 motionto dismiss filed in U.S. District Court for New York’s Southern District inManhattan.

FAMILY CONNECTIONS

Mr. Schorsch was born in 1961 into an entrepreneurial family. Hisgrandfather was a noted real estate investor in the Philadelphiaarea who also raised and raced horses, and his father ran a scrapmetals company.

The young Nick Schorsch in some ways had an idyllic life. According tothe long-defunct Philadelphia Bulletin newspaper, his suburban Philadelphiahome resembled a farm, complete with 11 lambs, three goats and a donkey;the chicken coop held five chickens and two peacocks.

Such a lifestyle stood in contrast to how Mr. Schorsch’s father made a liv-ing.Through much of the 1970s and early ’80s, his father, Irvin Schorsch Jr.,had run-ins with federal agencies in connection with his company, MetalBank of America.

“The family was well known in the Philadelphia area,”said Joseph DiSte-fano, a longtime business columnist for The Philadelphia Inquirer who has

followed the Schorsch family for decades.“The family was for many years ina tough business, scrap metal, and they also owned metal processing plants.They tangled with federal regulators for years.”

Both the Occupational Safety and Health Administration and the Envi-ronmental Protection Agency investigated Metal Bank, and the EPA sued thecompany over charges of pollution.The Metal Bank site was added to thefederal list of Superfund cleanup sites in 1983.

Twenty-three years later, after the company had been sold, a federal courtjudge in Philadelphia approved an $18 million settlement, of which IrvinSchorsch Jr. agreed to pay $9 million.

“It was interesting to see Nick move beyond that into the real estate

investing world in the late 1990s and 2000s, and to see him reemerge afterthe financial crisis to control significant assets in various markets,”Mr. Di-Stefano said.

Mr. Schorsch also had political connections. Edward Rendell, the formergovernor of Pennsylvania, served on the board of ARCP from 2013 to thispast April.“These guys are riverboat gamblers – with the best research, duediligence, standards and practices available,”Mr. Rendell told Mr. DiStefano,referring to Mr. Schorsch and his colleagues, in a 2013 article for the Inquirer.

Mr. Schorsch’s drive and ambition are his dominant characteristics, saidMr. DiStefano, and he builds loyalty with the promise of a big payday.“It wasvery clear Nick demanded a lot of himself and people,”he said.“He runs fulltilt and people believe in Nick and what he is doing.They believe that if theysacrifice upfront they will ultimately reap greater rewards in the end.”

Apart from his business responsibilities, Mr. Schorsch serves on theboard of trustees at the Gateway Middle School and is a past board memberof The Hewitt School, both in New York. He is a member of the advisoryboard and former honorary chairman of the charitable organization Heartsof Gold, which fosters sustainable change and self-sufficiency among home-less mothers and their children.

EARLY CAREERMr. Schorsch attended Drexel University in Philadelphia, but never fin-

ished, opting instead to follow his father into the metals business, which wassold in 1994 for about $10 million.

Mr. Schorsch’s wife, Shelley, acted as a business partner in some of hisearly ventures.“His wife told me he didn’t need to go back into business”atthat point, Mr. DiStefano said.

Taking his cue from his grandfather, Mr. Schorsch began to think aboutinvesting in real estate.

Four years after selling the metals business, Mr. Schorsch heard about a

2006Aug. 16 — Nicholas Schorsch

resigns as CEO of American FinancialRealty Trust, the publicly traded REIT heand his wife founded eight years earlier.According to the Philadelphia Inquirer,trustees made the move due to “long-simmering worries that the companywas putting rapid growth ahead of gen-erating profit.”

2007August — Mr. Schorsch and William

Kahane launch American Realty Capital, a pri-vate real estate management company.

2008 February — Mr. Schorsch, Mr. Kahane and

Michael Weil launch Realty Capital Securities,a wholesale broker-dealer and manager ofARC’s nontraded REITs.

2011Sept. 7 — American Realty Capital Proper-

ties announces completion of its initialpublic offering at $12.50 a share.

2012February — ARC’s first nontraded

REIT, American Realty Capital Trust,files to be listed on the Nasdaq GlobalSelect Market only four years after itwas founded.

2013Feb. 28 — ARCP

closes its acquisi-tion of American RealtyCapital Trust III for $2.35billion.

June 5 — RCS CapitalCorp., or RCAP, a new

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ARCP (now Vereit) takes a tumble


bank merger between First Union Corp. and CoreStates Financial Corp.Because they shared some of the same market, about 100 overlappingbranches in the Philadelphia region were scheduled to be closed.

Mr. Schorsch offered to buy the excess branches en masse for $22 million.His plan was to lease the branches out to other banks. He raised the equity forthat deal by passing the hat around to friends and family, according to a for-mer executive who worked with him at the time. It was an idea with potentiallarge returns.Two months later, at a dinner for the investment partners, theinvestors found on each of their seats an envelope with a check for 100% oftheir principal, according to the executive, who asked not to be identified. Div-idends would follow. Mr. Schorsch had hit a home run: Leasing the branchesto other banks looking to expand was far stronger than anticipated.

Enter Wall Street legend Lewis Ranieri, one of the inventors of themortgage-backed security and a prominent figure in Michael Lewis’semi-autobiographical book about his experiences as a bond sales-man during the 1980s,“Liar’s Poker”(1989,W.W. Norton & Co.). In the

early 2000s, while Mr. Schorsch was busy buying bank branches, Mr. Ranieriseparately was thinking of doing something similar.When Mr. Ranieri’s repre-sentative called First Union and then Bank of America, he was rebuffed.“Thebanks respond,‘It sounds interesting but we already sell all our real estate to aguy in Philly,’”according to the former executive.

Mr. Schorsch teamed up with Mr. Ranieri, who had access to Wall Street’scapital markets because of his history as a rainmaker with Salomon Brothersin the 1980s.The duo eventually launched a publicly traded REIT, AmericanFinancial Realty Trust, raising $741 million in an initial public offering in June2003. A year after the IPO, the REIT made two large transactions. At its peak,it had a $4.6 billion portfolio, including close to 1,400 bank branches and

office buildings.“Nick was a master builder,”the former executive said.“He would take a

tiny thing that people didn’t think was significant — like a relationship with abanker, and turn it into something that would build, support and grow Ameri-can Financial Realty Trust.”

SIZE MATTERSAfter some initial success, American Financial Realty Trust wound up fac-

ing problems, particularly due to its rapid expansion, according to the formerexecutive.While 75% of the bank branch real estate the REIT owned wasoccupied, primarily by banks, the rest was vacant, according to the formerexecutive, who worked at the REIT. Filling those vacancies with tenantsproved to be difficult. And over time, it became more difficult to locate dealsbecause banks were expanding into new territories.

Building up the REIT was important to Mr. Schorsch, the former executivesaid.“It was very much my experience … that Nick believed in the ‘too big tofail’ theory,”he said.“Bulk and size of assets owned and leased was not a cure-all but an important objective to be achieved.”

With American Financial Realty Trust shares down and some board mem-bers reportedly concerned that Mr. Schorsch was more interested with acqui-sitions than operations, he and the board agreed that he would resign,according to a 2006 article in The Philadelphia Inquirer. He received a $21.6million severance, according to an SEC filing.

“His thesis ran its course,”the former executive said.“The interesting thingor lesson he learned was that capital markets are almost bottomless. If hecould figure a way to get to them, he didn’t need a Lew Ranieri the secondtime [around].”

Mr. Ranieri praised Mr. Schorsch.“His efforts were instrumental in gettingbanks and other financial institutionsto recognize and appreciate thevalue [American Financial RealtyTrust] could bring to their busi-ness,”he told the Inquirer.

Shareholders did notfare as well as Mr. Schorschfinancially.

During its IPO in 2003,American Financial RealtyTrust stock was sold at$12.50 per share. Itclosed at $10.80 theday he resigned.When the companywas sold to anotherREIT in 2008, share-holders received cashand stock worth $8.43 ashare. If investors hadheld onto those sharessince the IPO, theywould have seen losses of32.6%.

NEXT STOP, NEW YORKIn 2007, Mr. Schorsch and William Kahane, a former trustee at Ameri-

can Financial Realty Trust, launched American Realty Capital, a private realestate management company in New York. ARC developed, or sponsored,nontraded REITs, which at the time was a financial services backwater.

The idea of a nontraded REIT is to raise a pool of money from investors,quickly buy a portfolio of properties and create an income stream forinvestors from the rents of the tenants who lease them. Unlike an investmentin publicly traded REITS, which can be liquidated because investors can sellimmediately on the stock exchange where the company is listed, the shares ofnontraded REITs generally have to be held for five to seven years, until theREIT is sold or listed on an exchange. At that time, investors can cash out.Theamount they receive for their shares generally depends on the appreciation —or depreciation — of the underlying real estate over the time period the non-traded REIT existed.

Advisers working for independent broker-dealers sell nontraded REITs toindividual investors as a way to diversify their stock-and-bond portfolios. For theadvisers and broker-dealers, it doesn’t hurt that the sales earn sizable commis-sions — often 7% to the adviser and another 1% to 2% to the broker-dealer.Addi-tional commissions and fees from the sponsor and its affiliates can drive up thecost of nontraded REITs to 12% or more the first year, and that’s why someadvisers refuse to sell them.They believe the steep fees and commissions make itdifficult for the investor to earn the return of his or her principal.

GOOD TIMINGMr. Schorsch was ramping up his nontraded-REIT business at an oppor-

tune time. After the financial crisis, retail investors were looking for safe alter-natives to stocks that would pay them more than the 1% or 2% they couldearn in Treasuries.With annual dividends of around 6% to 8%, nontradedREITs promised attractive returns. Besides their high commissions, a signifi-

company with Realty Capital Securi-ties at its core, raises $50 million

in an IPO of 2.5 millionshares on the NewYork Stock Exchange.

Sept. 5 — RCAP hiresLarry Roth, head of AIG’s

Advisor Group of independentbroker-dealers, as CEO of Realty

Capital Securities.

Sept. 25 — RCAP Holdings com-pletes its acquisition of First Allied Hold-

ings, a broker-dealer holding companywith 1,500 reps and advisers, for an undis-closed sum.

Oct. 23 — ARCP, initially rebuffed, buysCole Real Estate Investments Inc. for $11.2 bil-lion, creating the coutry’s largest net leaseREIT.

2014Jan. 3 — ARCP acquires American Realty

Capital Trust IV for $3 billion in cash and com-mon and preferred stock.

April 15 — ARC’s New York REIT lists onNYSE at $10.75 a share.

April 30 — RCAP says it has closed its $1.2billion acquisition of Cetera Financial Group,which contains four distinct broker-dealershousing about 6,600 registered reps andadvisers.

Start in real estateContinued from Page 11

His efforts were instrumental ingetting banks and otherfinancial institutions to recognizeand appreciate the value[American Financial Realty Trust]could bring to their business.”

Lew Ranieri, former chairman, AmericanFinancial Realty Trust, in a 2006 article inThe Philadelphia Inquirer

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cant downside for some investorswas that they had to commit theirmoney for a multiyear period.

Mr. Schorsch realized that theilliquid nature of REITs was adrawback for many investors. Hesought an advantage over competi-tors by cutting the time investors’money was tied up by trying to sellhis REITs or list them on stockexchanges to two, three or fouryears, rather than five to seven.

The strategy was not only goodfor investors, it was good for Mr.Schorsch and the advisers who soldhis REITs. After cashing out theirinvestment, many investors rein-vested in another of Mr. Schorsch’snontraded REITs, generating yetmore commissions for the advisersand more fees for ARC.

“Nick realized he could raiseunlimited amounts of money fromretail investors and their moneywas sticky,”said Frank Chandler, aformer ARC executive who for atime would serve as president ofRealty Capital Securities, thewholesaling division of RCS Capi-tal.“The key was returning capital.He knew it from the beginning. Healso knew that if he returned $1, theinvestor would then send the bro-ker $1.25 or $1.50.”

To help market his nontradedREITs, Mr. Schorsch kept them sim-ple.They focused on free-standingproperties that were occupied bynationally known retailers such asLowe’s,Walgreens, CVS and DollarGeneral.The properties were rentedon a net lease basis, meaning ten-ants were responsible for mainte-nance, taxes and other charges.Therents that were paid were distrib-uted to shareholders, after manage-ment fees were deducted.

Mr. Schorsch took the non-traded REIT industry, as well as theindependent-broker-dealer commu-nity, by storm.While other non-traded-REIT sponsors have startedquickly, none have matched thespeed of ARC, according to indus-try executives.

AGGRESSIVE MOVESARC was much more aggressive

than other firms in trying to getadvisers to sell its products, saidJohn Rooney, managing principal ofCommonwealth Financial Network,an independent broker-dealer.

“The number of calls they madeto the firm was unusual,”he said.“They were very tenacious.”

While the competition was mar-keting one or two deals at a time,Mr. Schorsch was handling several.

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May 29 — RCAP shares drop nearly 5%after it announces plans to sell 20 millionshares in a secondary offering, netting $466million.

July 11 — RCAP Holdings com-pletes its acquisition of InvestorsCapital Holdings, adding another450 reps and advisers.

Sept. 23 — RCAP hires long-time LPL executive Bill Dwyer

as CEO of Realty Capital Securi-ties, replacing Mr. Roth, whoassumed the top post at Ceteraseveral months earlier.

Oct. 1 — RCAP says it is acquiring ColeCapital Partners and Cole Capital Advisorsfrom ARCP for up to $400 million in cash andstock. It will also inherit $300 million of ARCPdebt. Mr. Schorsch, who recuses himself

from the deal, is the executive behindboth RCAP and ARCP. The deal is latercalled off after ARCP’s accountingmisstatement is disclosed.

Oct. 29 — ARCP announces, inan SEC filing, its chief financial offi-cer, longtime Schorsch associateBrian Block, and chief accountingofficer Lisa McAlister have resignedafter the discovery of a $23 million

accounting misstatement that thecompany claims the exec-

utives chose not tocorrect. Mr. Schorschdownplays the effectsthe error might haveon his REIT empire.

Oct. 30 — The four firms in National PlanningHoldings’ broker-dealer net-work inform their 3,954 repsand advisers that theyare “temporarily sus-pending nontradedREITs sponsored ordistributed by [ARC]and its affiliated com-panies.” Several topbrokers, including AIG

Advisor Group, LPL and Securities America,soon follow suit. Even Cetera,a broker-

dealer owned by RCAP,suspends sales ofARCP’s Cole brand.

Nov. 7 — Massa-chusetts regulatorWilliam Galvin

announces an inves-tigation into Realty

Capital Securities andhow it has sold nontradedREITs. In December, Mr.Galvin, Massachusetts’ sec-retary of the common-wealth, expands his office’s investigation to


Continue on Page 14

THE BOSTON GLOBE, GETTY IMAGESDEAN STEVENSON


“It was clear that he had substantialgoals,”Mr. Chandler said.“Billions,not millions, came out of his mouthfrom the beginning.”

What he lacked in experience,Mr. Schorsch made up for in ambi-tion, personal drive and persistence.

“In 2007 and 2008, he beganpitching to broker-dealers, butnobody knew Nick,”Mr. Chandlersaid.“He was far more aggressivethan the average person. He wouldcall a firm and then follow up inthree days while the competitiontook three months. He would get ona plane to see a guy.”

And Mr. Schorsch and his exec-utive team were also demandingwith employees and others repre-senting ARC, Mr. Chandler said.During meetings, he said they alsowould scream at senior lawyers andaccountants at major firms over thetelephone.

“That part was the posturingand setting the tone”at ARC, Mr.Chandler said.“Every day was anemergency at ARC, until you real-ized it wasn’t.That’s the way busi-ness was done.”

“I saw nothing illegal orimmoral, but the people [at ARC]were aggressive, much more than Ihad seen before in my life,”Mr.Chandler said.

ARC’s early deals paid off hand-somely for investors, with returnsof 11%, 14% and 33% on principal,plus dividends.

Commonwealth was one of afew large broker-dealers that wouldnot let its advisers sell Mr.

14 InvestmentNews | September 21, 2015

Life Insurance | BenefitAccess Rider

“How can I make sure I’m never a burden on my kids?”

include three other Schorsch entities: ARCP,American Realty Capital and RCAP.

Dec. 15 — Mr. Schorsch steps down aschairman of ARCP. The next day, Citigroup

Capital Markets upgrades its rat-ings on shares of RCAP, whileMoody’s Investors Service down-grades $2.5 billion of ARCP unse-cured debt to junk status.

Dec. 30 — RCAP announcesthat Mr. Schorsch has resigned asexecutive chairman and given uphis board seat, and that Mr.Kahane has also resigned from theboard. Mr. Schorsch also resignedas chairman and CEO of publiclytraded New York REIT Inc. andfrom the boards of 11 nontradedREITs and other direct investmentprograms sponsored by ARC.

2015Feb. 19 — Ms. McAlister drops her

two-month-old defamation suit againstARCP. In a New York statecourt filing, she stipulates itis being withdrawn with-out prejudice —meaning it can even-tually be refiled. Herlawsuit had accusedMr. Schorsch and for-mer CEO David Kay ofmaking her a scapegoat in theaccounting scandal.

March 2 — ARCP’s auditcommittee says it has“found certain materialweakness” in the com-

pany’s internal controls over financialreporting, and its disclosure controls

and procedures. The information ispart of ARCP’s third-quarter 2014 earn-ings report, which had been delayed

from the fall in the wake ofthe accountingproblems.

March 10 —

ARCP announcesthat industry veteran

Glenn Rufrano willtake the reins in April,

replacing interim CEOWilliam Stanley,

who will stay on asinterim chairman.The previous

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It was clear he hadsubstantial goals.Billions, not millions,came out of his mouthfrom the beginning.”Frank Chandler, formerpresident, Realty CapitalSecurities

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CEO, Mr. Kay, resigned in December alongwith Mr. Schorsch.

April 17 — An investor lawsuit filed inJanuary is amended, and now alleges thatARCP generated over $917 million in fees,commissions and payments made directly orindirectly to Mr. Schorsch and his associates

in connection to an alleged multi-yearfraud. TIAA-CREF is the lead plaintiff. Ina court filing, Mr. Schorsch denies allallegations of wrongdoing.

June 2 — In ARC’s first liquidity eventof the year, Global Net Lease, formerlyAmerican Realty Capital Global Trust,

begins trading onNYSE. Concurrently withits listing, the REITlaunches a tender offer topurchase up to $125 mil-lion worth of its shares at$10.50 per share.

July 30 — Cetera closesdown J.P. Turner & Co.,one of the broker-dealers it

acquired. About half the 300 advisers ofthe firm are invited to move to anotherCetera firm, Summit Brokerage Services.

Aug. 6 — RCAP is exiting thewholesale distribution businessto focus on Cetera, its retailbrokerage. Private-equitygiant Apollo Global Man-agement has agreed to

buy Retail Capital Securities for$25 million, RCAP says in a

statement. Apollo also takesa 60% stake in ARC. Mr.Schorsch is RCAP’s largestshareholder.

Sept. 1 — Four monthsafter joining the RCAP

board, Larry Roth stepsdown. In a regulatory filing,

the company said his resig-nation is not related to

any disagreementwith it or the board,

saying he willfocus on hisrole asCetera’s CEO.

Schorsch’s REITs.

POINTS OF CONCERN“A sponsor raising tons of dol-

lars, with dozens of products andflipping or merging the productsquickly, are points of concern,”Mr.Rooney said.

ARCP’s accounting scandal, hesaid,“would appear to confirm sus-picions of a company moving fastand willing to cut corners.”

But Mr. Schorsch also had sup-porters.

“I’ve admired everything they’vedone but they may have done it toofast,”said Richard Bryant, presidentand part owner of Capital Invest-ment Group Inc., an independentbroker-dealer that sold Mr.Schorsch’s REITs.

“What they did, particularlyARC’s and Nick’s stellar growth ofthe REITs, was unprecedented,”Mr.Bryant said. ARC and Mr. Schorsch“made my clients hundreds of thou-sands of dollars.”

“ARC has been very aggressive,but on the back end, they took[REITs] full cycle,”said Dan Wilder-muth, chief executive and founderof Kalos Capital Management, abroker-dealer that focuses on alter-native investment strategies, includ-ing REITs. He noted that othernontraded REIT managers andsponsors had older REITs in whichinvestors were stuck.Those REITS,whose portfolios declined in valueafter the financial crisis, wereunable to come up with a liquida-tion strategy.

Those nontraded REIT players— there were only a handful in theindustry — did not exactly welcomeMr. Schorsch into their clubbyworld. From the moment he got toNew York, Mr. Schorsch began talk-


I’ve admiredeverything they’vedone, but they mayhave done it too fast.”

Richard Bryant, president,Capital Investment Group

EXITInvestmentNews.com September 21, 2015 | InvestmentNews 15

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ing publicly about changes hewanted to bring to the industry,including more transparency andthe need for companies to betteralign their interests with those oftheir shareholders.

Perhaps nothing illustrated theconflict between Mr. Schorsch andthe established industry than hisdogged pursuit of Cole Real EstateInvestments. Cole initially rejectedARCP’s offer to buy the companyout of hand and complained in anopen letter to the industry thatARCP was interfering with itsbusiness.

Undaunted, Mr. Schorsch madefour more bids for Cole, eventuallyincreasing his initial offer 15%,from $12 per share to $13.82 pershare, driving up the price to $11.2billion, including debt, according toa company proxy.

Mr. Schorsch had a big impacton the industry. Nontraded REITsales were $9.8 billion in 2008,according to investment bankRobert A. Stanger & Co. Inc. By2013, they had increased to $19.6billion, and a substantial amount ofthat gain was directly attributableto Mr. Schorsch and his companies.

From 2008 through May, ARCand related companies had raised$25.5 billion, exactly one-fourth ofthe total amount of equity raised,$102 billion, by the entire industryin that period.

BIRTH OF AN EMPIREBetween 2007 and 2014, Mr.

Schorsch created an intricate webof companies, many of them withsimilar sounding names. In its suit,TIAA-CREF identified 36 compa-nies that Mr. Schorsch either ownedor controlled, many of them doingbusiness with each other.

Such arrangements provedhighly lucrative for Mr. Schorschand his partners, according to thecomplaint. In fact, the source ofmost of his income was not thesalary or bonuses he earned fromhis management positions at thesecompanies, but the fees and stockawards the entities he controlledreceived from the hundreds oftransactions the companies wereinvolved in during this time.

According to TIAA-CREF’s law-suit, Mr. Schorsch headed a com-pany called ARC PropertiesAdvisors that was the externalmanager responsible for ARCP’saffairs on a day-to-day basis.Thatfirm and its affiliates received morethan $66 million in 2012 and 2013for expenses related to ARCPacquisitions, the complaint states.In addition, ARC Properties Advi-sors collected another $240 millionin 2013 and 2014 for “subordinateddistribution fees”and “strategicadvisory services”in connectionwith ARCP’s acquisition of twoREITs that had been started byARC, according to the lawsuit, andan additional $119 million for “gen-eral and administrative expenses”and $31 million for “managementfees.”

In one instance, the lawsuitcharges that ARC Properties Advi-sors received a $10 million fee fromARCP for furniture, fixtures andequipment. In SEC filings, ARCPlater acknowledged that it could not

confirm the value of those itemsbecause it could not even verify thatit had ever received them.

BUYER AND SELLERMr. Schorsch’s empire was so

interconnected that his companieswere sometimes able to collect feesfrom both the buyer and seller inthe same transaction, according tothe TIAA-CREF complaint. In onecase when Mr. Schorsch was stillCEO of ARCP, it purchased a REITcalled ARC IV, which was also con-trolled by Mr. Schorsch.Yet anotherSchorsch firm acted as an adviser

to both ARCP and ARC IV in thetransaction and collected a $7.66million fee from each of the firms,or a total of $15.32 million, accord-ing to the TIAA-CREF suit.

In all, the TIAA-CREF suitalleges that ARC Properties Advi-sors and its affiliates received morethan $917 million from ARCP injust three years, most of which con-sisted of fees, commissions, servicesand acquisition-related expenses.

Mr. Schorsch, in his motion todismiss the suit, claimed that themath in the complaint is faulty.While the assertion that nearly $1

billion was funneled to entities con-trolled by Mr. Schorsch is the “linch-pin”of the complaint, he said,

TIAA-CREF “fails to explain howthat $917 million figure was calcu-lated.”


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Schorsch had supporters

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Apart from the size of the fees,such deals raise questions aboutconflicts of interest, especiallywhen Mr. Schorsch and his associ-ates served as executives or boardmembers on so many differentcompanies in the Schorsch empirethat conducted business with oneanother.

For example, a close confidantfrom Mr. Schorsch’s days inPhiladelphia at his first REIT,Michael Weil, served as ARCP’spresident, treasurer and secretaryfrom its startup until January 2014.He also served as president, chiefoperating officer and director ofARC IV and another AR CapitalREIT, ARC III, which was alsoacquired by ARCP. Mr.Weil and Mr.

Schorsch, who also had manage-ment positions at both firms,abstained from the actual votes to

approve those acquisitions, but oneobserver questioned whether therewas, at the very least, an appear-

ance of a conflict of interest.“It’s the same management team

buying assets from each other,”saidBrad Thomas, editor of Forbes RealEstate Investor, a publication thatfocuses on REITs.“How do youserve two masters?”

ANATOMY OF A DEALInvestmentNews asked a foren-

sic accountant, Gordon Yale, to lookat one of the deals, the sale of ARCIII. ARCP paid $2.35 billion for ARCIII in 2013, representing a premiumof 34% over the gross equityinvested in the REIT. However, Mr.Yale noted that 95% of the ARC IIIreal estate portfolio had been pur-chased within the previous year.How could the properties have

appreciated that much in a year orless to justify such a high price?

Although 2012 was a good yearfor commercial real estate, returnson benchmark indexes were in the19% to 22% range, significantlylower than the premium ARCP paidfor ARC III.

“Given that approximately $1.46billion of the $1.53 billion ARC IIIreal estate portfolio had been pur-chased in 2012, the 34% premiumpaid to ARC III shareholders wassimply massive,”Mr.Yale said.

But ARC III shareholders werenot the only ones who enjoyed awindfall from the sale. According toa filing with the SEC, Mr. Schorschand his partners received $98.4 mil-lion in compensation when the dealclosed in early 2013.

The payday from the sale ofanother REIT, American RealtyCapital Healthcare Trust, was evenbigger.When the ARC-sponsoredREIT was sold to Ventas Inc., agiant health care REIT not con-trolled by Mr. Schorsch, he receivedone share of Ventas stock for eachoperating partnership unit he con-trolled; that worked out to $198 mil-lion.

“Why is Nick being paid somuch for this?”asked Forbes’Mr.Thomas.“Nick made a lot of money.Those numbers are mind-boggling.”

The central argument made inthe TIAA-CREF suit is that Mr.Schorsch and his lieutenants weremore interested in collecting highfees and payouts from acquisitionsat ARCP than working legitimatelyto improve the performance ofARCP on behalf of its shareholders.In fact, the complaint charges thatthe entire purpose of ARCP’saggressive acquisition spree was togenerate fees for Mr. Schorsch andhis associates.

Shortly after its initial publicoffering in September 2011, ARCP’sshares fell below the IPO price of$12.50 as the company reportedonly modest growth in a key metricused to measure REIT performance— adjusted funds from operations,or AFFO. ARCP’s antidote was tomanipulate its books through aseries of improper accountingtricks to artificially inflate AFFO,and hopefully, its stock price,according to the lawsuit.

The stock price did begin torise. After sinking to a low of $10 ashare in June 2012, ARCP’s stockbegan climbing; almost a yearlater it peaked at $17.81.The rea-son was clear, the lawsuit main-tains: The company had begunreporting higher and higher AFFOfigures –— though they laterturned out to be inflated, the suitcharges.

Given the improved stock price,ARCP began building a war chest,selling $3.5 billion in corporate debtand 800 million shares of ARCPstock.That allowed ARCP to makeno less than five billion-dollaracquisitions, including the deal forCole, and to generate the generousfees for Mr. Schorsch and his asso-ciates, the suit maintains.

But Mr. Schorsch asserts incourt filings that ARCP’s growthwas “not indicative of fraud.”In hisresponse to the suit, he said TIAA-CREF and the other plaintiffs “cer-tainly do not claim that theseacquisitions were harmful to share-holders — nor can they, as theacquisitions were well-received by



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the market.”

THE EMPIRE CRUMBLES The good times at

ARCP — and eventu-ally the rest of theSchorsch empire —started to come crash-ing down when theaccounting misstate-ments were disclosedlast October. ARCPacknowledged that theAFFO number hadbeen inflated by $12million in the firstquarter of 2014 and$10.9 million in thesecond quarter.Theinflated AFFO figureshad caused the com-pany to understate itsloss in the secondquarter alone by $9.2million. Even morestartling was ARCP’sadmission, in an SECfiling, that two of itssenior executives knew about themisstatements, but intentionally leftthem uncorrected.

The stock market pounced.

ARCP’s shares dropped from$12.45 on the day before theannouncement to $7.53 almost aweek later, a 40% decline that

erased over $3 billion in marketcapitalization. In roughly the sameperiod, shares at another majorcompany controlled by Mr.Schorsch, RCS Capital Corp.,dropped 43%, wiping out hundredsof millions of investor equity.

Five months later, in an SEC fil-ing, ARCP acknowledged that thecompany had been overstatingAFFO all the way back to 2011 andthat certain payments to Schorsch-related entities “were not suffi-ciently documented.”

COMPANIES INTERELATEDMr. Schorsch and his lieutenants

tried to separate the scandal atARCP from RCS Capital and hisother holdings, but it didn’t work.Mr. Schorsch’s empire had so manyinterrelated companies, and person-nel serving in multiple roles atthose companies, that when onepart of the company encountereddifficulty, so did everything else.

RCS Capital, or RCAP, for exam-ple, comprises Realty Capital Secu-rities, the REIT wholesaler thatmarketed primarily nontradedREITs to advisers at independentbroker-dealers, and a network of9,500 advisers, Cetera FinancialGroup, that Mr. Schorsch hadacquired over the previous year orso. Because of the association withARCP, sales at the wholesaling divi-sion plunged; the brokerage busi-ness is highly regulated andbroker-dealers were afraid ofattracting attention from the SECand Finra.

“It was difficult from the outsidelooking in to determine preciselyhow much overlap in practice therewas between the various Schorschentities,”said Mr. Rooney of Com-monwealth Financial.

Realty Capital Securities wasrecently sold to Apollo Global Man-agement for $25 million, andRCAP’s CEO, Michael Weil — thesame Mr.Weil who had formerlyworked at ARCP and Mr.Schorsch’s first REIT 10 years agoin Philadelphia — along with thecompany’s CFO, are leaving. RCAPshares have yet to recover. In fact,following the recent reorganizationand a $66 million quarterly loss, thestock dropped even further andshares are now trading at around

$1.50. A year ago, those sameshares hovered around $20. Alto-gether, more than $1 billion ofequity has been lopped off the stock

since the accountingscandal first broke.

ARC, another majorpart of the Schorschempire, was also dam-aged. ARC, whichdepended on the cre-ation and sale of non-traded REITs, raisedcash from investors atabout half the rate afterthe scandal than before,according to Stanger,the investment bank.ARC also recentlysigned a deal withApollo.The private-equity firm bought a60% interest for $378million in cash andstock and renamed thecompany AR GlobalInvestments. An Apolloexecutive told the WallStreet Journal that the

purchase would have cost the firm“billions of dollars”prior to theaccounting scandal.

Shares of ARCP, which changedits name to Vereit at the end of July,have not recovered either and aretrading in the $8 range, despite thehiring of a new CEO, GlennRufrano, who is highly regarded.The company, which was highlyleveraged from its acquisitionspree, recently announced it is sell-ing off about $2 billion worth ofproperties and is trying to reduceits debt.

Mr. Schorsch faces an uncer-tain future. Forbes, which at onepoint estimated that he was worth$1.5 billion, recently revised thatfigure to $500 million. While he isexpected to work for AR Globalunder new management, some ofthe firms he once headed are fac-ing investigations and lawsuitsstemming from the accountingscandal.

UNCERTAIN FUTUREHe may also be facing a legal bat-

tle with Vereit.According to its mostrecent quarterly report, Mr. Schorschand his affiliates are seeking $126.7million related to the period whenthey served as ARCP’s external man-ager prior to January 2014. In anSEC filing,Vereit has indicated that itwill challenge that request.

One industry veteran pointed topast nontraded REIT managerswho had boom- and-bust cycles asa way of understanding the impactof Mr. Schorsch on the securitiesindustry.

“Nick is the latest in a line ofnontraded REIT sponsors whoraised a boatload of money, did anadequate job for investors and thenpaid himself,”said Mr. Rooney ofCommonwealth.“Certainly theREITs that went full cycle did wellfor advisers and clients in anadverse interest rate environment.”

“What separates Nick from hispredecessors is the rapidity of thecomposition of his empire and thehaste of which it all went bad,”hesaid.“That usually plays out over adecade.With Nick it unwound asfast as it sprang up.”

[email protected]: @bdnewsguy



Lawsuit outlines alleged fraud

6/2013 6/2014 6/20150

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$40

RCAP’s share price reaches all-time high

$39.504/1/2014:

ARCP reveals $23 millionerror that was intentionally not corrected

$16.9910/29/2014:

9/15/2015:

The stock is down 91% since the ARCP accounting misstate-ment was announced.

$1.53

RCAP’s stock plummets


falling hard...“the fun part of real estate is the deal. the rest is drudgery.” nicholas...

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