Wall Street analysts call for billionaire Nicholas Schorsch’s resignation from REIT empire RCS Capital after a lawsuit was filed by a former accounting officer at a related firm claiming he told her to lie on the company’s financial statements

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Nicholas Schorsch’s REIT empire is under siege

Schorsch’s future at RCAP is one of many issues confronting his vast real estate empire

By Bruce Kelly   |  December 21, 2014 – 12:01 am EST

It didn’t take long for Wall Street analysts to start calling for Nicholas Schorsch’s resignation from RCS Capital Corp. after a blockbuster lawsuit was filed last Thursday by a former accounting officer at a related firm claiming he told her to lie on the company’s financial statements.“We see the resignation of Mr. Schorsch as imperative,” William Katz, analyst with Citigroup Global Markets Inc., wrote in a research note the day the lawsuit was filed.

But his future at RCS Capital, or RCAP, is just one of the issues confronting Mr. Schorsch and his vast real estate empire. In addition to the lawsuit, he and the flagship real estate investment trust he founded, American Realty Capital Properties Inc., or ARCP, are facing regulatory investigations, as well as ongoing questions as to whether the independent broker-dealers he depends on to sell his nontraded REITs will want to continue to do business with him.

Last week didn’t start well for Mr. Schorsch. On Monday, he resigned as chairman, without explanation, of ARCP. Two other ARCP executives, including chief executive David Kay, also resigned.

Three days later, former ARCP chief accounting officer Lisa McAlister filed her defamation suit in New York State Supreme Court in Manhattan, claiming she and the company’s chief financial officer, Brian Block, were made scapegoats by Mr. Schorsch and other executives for a $23 million accounting error cover-up that rocked the Schorsch empire when it was disclosed in October.

Mr. Schorsch vowed to fight the allegations in court.

“Mr. Schorsch denies the allegations and intends to defend against the claims vigorously,” according to a statement released last week by American Realty Capital. “We are confident that Mr. Schorsch has engaged in no unlawful conduct.”

Nevertheless, the lawsuit reverberated on Wall Street among the analysts who follow RCS Capital, the publicly traded broker-dealer that distributes Mr. Schorsch’s REITs to other broker-dealers and investors.

Mr. Katz said Mr. Schorsch’s resignation was necessary “to quell the concern on the shares, as the longer he is involved with the firm the longer the overhang and questions on RCAP’s financial statements will likely persist.”

An analyst at Barclays echoed Mr. Katz.

Kenneth Hill wrote in his research note that although he did not believe there were accounting improprieties at RCAP and that Mr. Schorsch’s involvement there had been diminishing, “today’s news and the subsequent impact on the share price put added pressure to see his exit from the board as a first step.”

Mr. Schorsch’s empire was already showing cracks before last week’s developments. Sales of nontraded REITs sponsored by Mr. Schorsch’s privately held ARC plunged 58% in November from October; ARC sold $154.3 million worth of nontraded REITs last month, compared with $367.3 million in October, according to investment bank Robert A. Stanger & Co. Inc. RCAP relies heavily on fees from the sale of ARC’s REITs for its revenue.

Kevin Gannon, managing director of Robert A. Stanger, said the charges in the lawsuit constitute “an incredibly serious allegation … about as serious an allegation against a CEO of a public company that you can have. [If true,] it needs to be dealt with swiftly.”

The nontraded REIT industry, which doubled in sales, to $20 billion, in 2013 from 2012, was “floored” by the allegations, Mr. Gannon said.

He characterized Mr. Schorsch as a “swashbuckler” for his aggression and drive. In a three-year period, through a flurry of acquisitions and related companies, Mr. Schorsch built a REIT and brokerage empire.

Meanwhile, one noted plaintiff’s attorney called into question the ability of RCAP or ARC to distribute nontraded REITs and other products through the network of independent broker-dealers that have been among his biggest supporters.

“The allegations in the McAlister lawsuit were that executives at ARCP were told to lie and told to make things up,” said Steven Caruso, partner at Maddox Hargett & Caruso.

A spokesman for RCAP, Andrew Backman, declined to comment

Since the accounting errors at ARCP were disclosed at the end of October, executives at other Schorsch-controlled companies, including RCAP and ARC, have stressed that the accounting problems were isolated to ARCP and that there was no evidence of such problems in other products.

Along with Wall Street analysts and the securities industry, on which he relies to sell his nontraded REITs and a host of other alternative investment products, Mr. Schorsch is under intense pressure from securities regulators.

Realty Capital Securities, the wholesaling broker-dealer controlled by RCAP, in November received a subpoena from the Massachusetts Secretary of the Commonwealth requiring the production of documents and other materials, according to RCAP’s most recent quarterly report.

The Massachusetts Securities Division wanted documents from January to November relating to sales by Realty Capital Securities of certain nontraded REITs and similar products sponsored or co-sponsored by ARC. The FBI and Securities and Exchange Commission are reportedly investigating ARCP.

On Friday, the Massachusetts Securities Division said it was widening its investigation of Schorsch’s companies and had sent subpoenas to officials at RCAP, ARC and ARCP. The subpoenas were “to determine the extent of their knowledge in the matters brought up in the defamation suit,” said spoke-sman Brian McNiff.

When the accounting error at ARCP came to light, the company said Ms. McAlister and Mr. Block resigned for intentionally leaving the error uncorrected over a six- month period.

But in her lawsuit, Ms. McAlister claimed she had brought the error to the attention of company officials but that she and Mr. Block were told to leave it alone. She said they were forced to resign.

“In other words, Mr. Schorsch instructed Mr. Block to take steps that would cover up the improper change in accounting with both further fraudulent accounting and a proper change that helped the cover-up,” the complaint states.

RCAP and ARC said last week the allegations in Ms. McAlister’s complaint, for which she is seeking $50 million in damages, were unfounded and without merit. Neither company mentioned any change in Mr. Schorsch’s status as chairman of RCAP and chairman and CEO of ARC.

“There have been no reported accounting irregularities at RCS Capital, none, and the recent unfounded allegations reported in the press in connection with our chairman … should not have any material impact on the long-term strength of our business model or our operating results,” said RCAP CEO Michael Weil.

ARC also dismissed the suit as being without merit.

But Stephen Meister, Ms. McAlister’s attorney, disagreed.

“I think the lawsuit is with merit,” Mr. Meister said. “I think she was made a scapegoat and was a whistleblower, and they are trying to blame her. She was forced out in an extremely oppressive situation with bodyguards in the meeting when she was forced to resign.

“Ultimately, we are going to be in a court of law, and both sides of the story will be heard,” he said.

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