How Nick Schorsch lost his mojo

The REIT king made hundreds of millions in real estate, but an accounting scandal devastated his business

By Bruce Kelly — September 21, 2015

Today's publication of our story on Nicholas Schorsch offers readers a rare glimpse into the rise — and fall — of a man who in less than a decade built a multibillion-dollar empire on the back of a little-understood and often overlooked investment vehicle known as a nontraded real estate investment trust.

Along the way, he got rich — fabulously rich. Many of the people around him, the business partners and the firms and brokers who sold his REITs, also profited. So too did many of the investors who poured money into his REITs.

Indeed, making sure investors in his REITs were rewarded was something of a mantra for Mr. Schorsch.

“Investors should get paid first,” he said in an April 28, 2013 story in InvestmentNews. “If we make investors money, we'll all make money. We have to align the interests of REIT sponsors and their investors.”

At InvestmentNews, we began asking questions about the sustainability of Mr. Schorsch's business model long before its cracks began to reveal themselves. How long could he continue to raise huge amounts of capital? Would his formula for cycling investments falter if real estate prices tumbled and interest rates rose?

In that 2013 article, we wrote: “With his current success in raising capital, the question is whether he will crash and burn as other formerly hot managers in the industry.”

Turns out he did crash and burn.

In embarking on this story, it was never our intent to depict Mr. Schorsch as a villain or a saint. No one is one or the other.

Instead, we set out to chronicle the factors that led to Mr. Schorsch's rise and fall and hopefully, to draw a universal lesson or two for readers about his journey.

To do that, InvestmentNews senior columnist Bruce Kelly spent hundreds of hours sifting through court documents, regulatory filings and newspaper clippings. He also spoke to dozens of people who had dealings with Mr. Schorsch, including former employees, business partners, brokers and industry analysts.

There are many lessons to be drawn from this story. Lessons about money, power and ambition.

I invite readers, regulators and elected officials to decide for themselves what lessons may be learned from Mr. Schorsch's story.

Editor's Note

It was late October 2013 and Nicholas Schorsch was riding high. After a bruising campaign to acquire Cole Real Estate Investments, he had won his prize. 


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

Cole, which Mr. Schorsch had pursued relentlessly for 10 months, 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 and management company and the combination of the two firms would turn ARCP into a “juggernaut” that would be unrivaled among its peers, he told investors on a conference call the morning the deal was announced.

“You could argue it's the Red Sox merging with the Yankees,” he gushed.

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

AN EMPIRE BUILDER

Along the way, the then 52-year-old Mr. Schorsch, an entrepreneur who had never finished college, had become a billionaire, according to Forbes magazine. ARCP was only one of dozens of companies in a real estate empire that he had put together in less than a decade. It was an empire from which Mr. Schorsch and his associates reaped hundreds of millions of dollars in fees –— compensation that would later be questioned by critics. Although he appeared to be a workaholic, he also enjoyed the trappings of wealth, living on Manhattan'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 breakneck 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 the empire that he had worked so hard to build. He would resign as chairman from ARCP, the giant REIT he had created, and from the boards of many of his other companies. Two of those firms are facing investigations from regulatory agencies and one is facing a criminal investigation.

How did it all fall apart so quickly?

Critics say Mr. Schorsch was more interested in making deals than being a manager. The sheer volume of mergers, stock market listings and other transactions he completed —  plus the lackluster performance of his publicly traded companies later on  — bears that out. Others say he was just interested in getting rich. The amount of money he managed to collect from all of his transactions in such a short period of time bears that out as well. 

THE BOMB DROPS

On Oct. 29, 2014, ARCP dropped a bombshell on Wall Street when it revealed a $23 million accounting misstatement that had resulted in the company reporting inflated financial results. What's more, the company charged in a filing with the Securities and Exchange Commission that the chief financial officer, Brian Block, and the chief accounting officer, Lisa McAlister, were responsible for the misstatements and an ensuing coverup and that, as a result, they had resigned from the company.

The most immediate impact of the stunning revelation was on ARCP and another publicly traded company Mr. Schorsch controlled, RCS Capital Corp. The stock of both companies plummeted and billions of dollars in market capitalization were lost. But the reverberations spread throughout his empire and continue to be felt to this day.

ARCP (now Vereit) takes a tumble
Source: Yahoo Finance

Mr. Schorsch initially tried to minimize the accounting scandal and move on. “The headline is, 'Mistakes were made, identified and the people involved were identified,'” he said in a conference call with brokers. “It will be fully corrected.”

But moving on would be difficult, especially when one of the senior executives the company blamed for the accounting debacle, Ms. McAlister, sued the company for defamation two months later. She claimed she had been made a scapegoat in the scandal. She also implicated other senior executives in her lawsuit, 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 officer David Kay and chief operating officer Lisa Beeson resigned from ARCP. 

Ms. McAlister withdrew her lawsuit several weeks later, although she maintained the right to sue the company at a later date. Meanwhile, ARCP is facing investigations and inquiries from the FBI, the Securities and Exchange Commission, and the country's most feared state securities regulator, William Galvin, the secretary of the commonwealth of Massachusetts. 

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

RCAP stock plummets
Source: Yahoo Finance

The most damning criticism of Mr. Schorsch's empire, to date, however, comes not from law enforcement or any regulator, but in a civil suit brought by investors, led by TIAA-CREF, the teacher retirement services provider. The 177-page suit claims that ARCP's accounting misstatement was part of a multiyear fraud perpetrated by the company to inflate financial results so it could raise capital to fuel the company's aggressive expansion. That expansion, in turn, generated more than $917 million in fees for 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 the story 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 securities business, many broker-dealers no longer wanted to sell his REITs for fear they might become targets of government and industry regulators, as well as plaintiff's attorneys representing disgruntled investors. Business dried up and losses mounted. 

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

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

FAMILY CONNECTIONS

Mr. Schorsch was born in 1961 into an entrepreneurial family. His grandfather was a noted real estate investor in the Philadelphia area who also raised and raced horses, and his father ran a scrap metals company.

The young Nick Schorsch in some ways had an idyllic life. According to the long-defunct Philadelphia Bulletin newspaper, his suburban Philadelphia home 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 living. Through much of the 1970s and early '80s, his father, Irvin Schorsch Jr., had run-ins with federal agencies in connection with his company, Metal Bank of America. 

“The family was well known in the Philadelphia area,” said Joseph DiStefano, a longtime business columnist for The Philadelphia Inquirer who has followed the Schorsch family for decades. “The family was for many years in a 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 Environmental Protection Agency investigated Metal Bank, and the EPA sued the company over charges of pollution. The Metal Bank site was added to the federal list of Superfund cleanup sites in 1983. 

Twenty-three years later, after the company had been sold, a federal court judge in Philadelphia approved an $18 million settlement, of which Irvin Schorsch 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 after the financial crisis to control significant assets in various markets,” Mr. Di-Stefano said.

Mr. Schorsch also had political connections. Edward Rendell, the former governor of Pennsylvania, served on the board of ARCP from 2013 to this past April. “These guys are riverboat gamblers – with the best research, due diligence, 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, said Mr. DiStefano, and he builds loyalty with the promise of a big payday. “It was very clear Nick demanded a lot of himself and people,” he said. “He runs full tilt and people believe in Nick and what he is doing. They believe that if they sacrifice upfront they will ultimately reap greater rewards in the end.”

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

EARLY CAREER

Mr. Schorsch attended Drexel University in Philadelphia, but never finished, opting instead to follow his father into the metals business, which was sold in 1994 for about $10 million. 

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

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

Four years after selling the metals business, Mr. Schorsch heard about a bank merger between First Union Corp. and CoreStates Financial Corp. Because they shared some of the same market, about 100 overlapping branches 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 for that deal by passing the hat around to friends and family, according to a former executive who worked with him at the time. It was an idea with potential large returns. Two months later, at a dinner for the investment partners, the investors found on each of their seats an envelope with a check for 100% of their principal, according to the executive, who asked not to be identified. Dividends would follow. Mr. Schorsch had hit a home run: Leasing the branches to other banks looking to expand was far stronger than anticipated. 

Enter Wall Street legend Lewis Ranieri, one of the inventors of the mortgage-backed security and a prominent figure in Michael Lewis' semi-autobiographical book about his experiences as a bond salesman during the 1980s,“Liar's Poker” (1989, W.W. Norton & Co.). In the early 2000s, while Mr. Schorsch was busy buying bank branches, Mr. Ranieri separately was thinking of doing something similar. When Mr. Ranieri's representative called First Union and then Bank of America, he was rebuffed. “The banks respond, 'It sounds interesting but we already sell all our real estate to a guy in Philly,'” according to the former executive. 

Mr. Schorsch teamed up with Mr. Ranieri, who had access to Wall Street's capital markets because of his history as a rainmaker with Salomon Brothers in the 1980s. The duo eventually launched a publicly traded REIT, American Financial Realty Trust, raising $741 million in an initial public offering in June 2003. 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 a banker, and turn it into something that would build, support and grow American Financial Realty Trust.”

SIZE MATTERS

After some initial success, American Financial Realty Trust wound up facing problems, particularly due to its rapid expansion, according to the former executive. While 75% of the bank branch real estate the REIT owned was occupied, primarily by banks, the rest was vacant, according to the former executive, who worked at the REIT. Filling those vacancies with tenants proved to be difficult. And over time, it became more difficult to locate deals because banks were expanding into new territories.

Building up the REIT was important to Mr. Schorsch, the former executive said. “It was very much my experience … that Nick believed in the 'too big to fail' 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 members reportedly concerned that Mr. Schorsch was more interested with acquisitions than operations, he and the board agreed that he would resign, according to a 2006 article in The Philadelphia Inquirer. He received a $21.6 million severance, according to an SEC filing. 

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

Mr. Ranieri praised Mr. Schorsch. “His efforts were instrumental in getting banks  and other financial institutions to recognize and appreciate the value [American Financial Realty Trust] could bring to their business,” he told the Inquirer.

Shareholders did not fare as well as Mr. Schorsch financially. 

During its IPO in 2003, American Financial Realty Trust stock was sold at $12.50 per share. It closed at $10.80 the day he resigned. When the company was sold to another REIT in 2008, shareholders received cash and stock worth $8.43 a share. If investors had held onto those shares since the IPO, they would have seen losses of 32.6%. 

NEXT STOP, NEW YORK

In 2007, Mr. Schorsch and William Kahane, a former trustee at American Financial Realty Trust, launched American Realty Capital, a private real estate 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 for investors from the rents of the tenants who lease them. Unlike an investment in publicly traded REITS, which can be liquidated because investors can sell immediately on the stock exchange where the company is listed, the shares of nontraded REITs generally have to be held for five to seven years, until the REIT is sold or listed on an exchange. At that time, investors can cash out. The amount they receive for their shares generally depends on the appreciation — or depreciation — of the underlying real estate over the time period the nontraded REIT existed.

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

GOOD TIMING

Mr. Schorsch was ramping up his nontraded-REIT business at an opportune time. After the financial crisis, retail investors were looking for safe alternatives to stocks that would pay them more than the 1% or 2% they could earn in Treasuries. With annual dividends of around 6% to 8%, nontraded REITs promised attractive returns. Besides their high commissions, a significant downside for some investors was that they had to commit their money for a multiyear period.

Mr. Schorsch realized that the illiquid nature of REITs was a drawback for many investors. He sought an advantage over competitors by cutting the time investors' money was tied up by trying to sell his REITs or list them on stock exchanges to two, three or four years, rather than five to seven. 

The strategy was not only good for investors, it was good for Mr. Schorsch and the advisers who sold his REITs. After cashing out their investment, many investors reinvested in another of Mr. Schorsch's nontraded REITs, generating yet more commissions for the advisers and more fees for ARC.

“Nick realized he could raise unlimited amounts of money from retail investors and their money was sticky,” said Frank Chandler, a former ARC executive who for a time would serve as president of Realty Capital Securities, the wholesaling division of RCS Capital. “The key was returning capital. He knew it from the beginning. He also knew that if he returned $1, the investor would then send the broker $1.25 or $1.50.” 

To help market his nontraded REITs, Mr. Schorsch kept them simple. They focused on free-standing properties that were occupied by nationally known retailers such as Lowe's, Walgreens, CVS and Dollar General. The properties were rented on a net lease basis, meaning tenants were responsible for maintenance, taxes and other charges. The rents that were paid were distributed to shareholders, after management fees were deducted. 

Mr. Schorsch took the nontraded REIT industry, as well as the independent-broker-dealer community, by storm. While other nontraded-REIT sponsors have started quickly, none have matched the speed of ARC, according to industry executives.

AGGRESSIVE MOVES

ARC was much more aggressive than other firms in trying to get advisers to sell its products, said John Rooney, managing principal of Commonwealth Financial Network, an independent broker-dealer.

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

While the competition was marketing one or two deals at a time, Mr. Schorsch was handling several. “It was clear that he had substantial goals,” Mr. Chandler said. “Billions, not millions, came out of his mouth from the beginning.”

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

“In 2007 and 2008, he began pitching to broker-dealers, but nobody knew Nick,” Mr. Chandler said. “He was far more aggressive than the average person. He would call a firm and then follow up in three days while the competition took three months. He would get on a plane to see a guy.”

And Mr. Schorsch and his executive team were also demanding with employees and others representing ARC, Mr. Chandler said. During meetings, he said they also would scream at senior lawyers and accountants at major firms over the telephone.

“That part was the posturing and setting the tone” at ARC, Mr. Chandler said. “Every day was an emergency at ARC, until you realized it wasn't. That's the way business was done.”

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

ARC's early deals paid off handsomely for investors, with returns of 11%, 14% and 33% on principal, plus dividends.

Commonwealth was one of a few large broker-dealers that would not let its advisers sell Mr. Schorsch's REITs.

POINTS OF CONCERN

“A sponsor raising tons of dollars, with dozens of products and flipping or merging the products quickly, are points of concern,” Mr. Rooney said. 

ARCP's accounting scandal, he said, “would appear to confirm suspicions of a company moving fast and willing to cut corners.”

But Mr. Schorsch also had supporters.

“I've admired everything they've done but they may have done it too fast,” said Richard Bryant, president and part owner of Capital Investment Group Inc., an independent broker-dealer that sold Mr. Schorsch's REITs. 

“What they did, particularly ARC's and Nick's stellar growth of the REITs, was unprecedented,” Mr. Bryant said. ARC and Mr. Schorsch “made my clients hundreds of thousands of dollars.”

 “ARC has been very aggressive, but on the back end, they took [REITs] full cycle,” said Dan Wildermuth, chief executive and founder of Kalos Capital Management, a broker-dealer that focuses on alternative investment strategies, including REITs. He noted that other nontraded REIT managers and sponsors had older REITs in which investors were stuck. Those REITS, whose portfolios declined in value after the financial crisis, were unable to come up with a liquidation strategy.

Those nontraded REIT players — there were only a handful in the industry — did not exactly welcome Mr. Schorsch into their clubby world. From the moment he got to New York, Mr. Schorsch began talking publicly about changes he wanted to bring to the industry, including more transparency and the need for companies to better align their interests with those of their shareholders.

Perhaps nothing illustrated the conflict between Mr. Schorsch and the established industry than his dogged pursuit of Cole Real Estate Investments. Cole initially rejected ARCP's offer to buy the company out of hand and complained in an open letter to the industry that ARCP was interfering with its business.

Undaunted, Mr. Schorsch made four more bids for Cole, eventually increasing his initial offer 15%, from $12 per share to $13.82 per share, driving up the price to $11.2 billion, including debt, according to a company proxy.

Mr. Schorsch had a big impact on the industry. Nontraded REIT sales were $9.8 billion in 2008, according to investment bank Robert A. Stanger & Co. Inc. By 2013, they had increased to $19.6 billion, and a substantial amount of that gain was directly attributable to Mr. Schorsch and his companies. 

From 2008 through May, ARC and related companies had raised $25.5 billion, exactly one-fourth of the total amount of equity raised, $102 billion, by the entire industry in that period. 

BIRTH OF AN EMPIRE

Between 2007 and 2014, Mr. Schorsch created an intricate web of companies, many of them with similar sounding names. In its suit, TIAA-CREF identified 36 companies that Mr. Schorsch either owned or controlled, many of them doing business with each other. 

Such arrangements proved highly lucrative for Mr. Schorsch and his partners, according to the complaint. In fact, the source of most of his income was not the salary or bonuses he earned from his management positions at these companies, but the fees and stock awards the entities he controlled received from the hundreds of transactions the companies were involved in during this time. 

According to TIAA-CREF's lawsuit, Mr. Schorsch headed a company called ARC Properties Advisors that was the external manager responsible for ARCP's affairs on a day-to-day basis. That firm and its affiliates received more than $66 million in 2012 and 2013 for expenses related to ARCP acquisitions, the complaint states. In addition, ARC Properties Advisors collected another $240 million in 2013 and 2014 for “subordinated distribution fees” and “strategic advisory services” in connection with ARCP's acquisition of two REITs that had been started by ARC, according to the lawsuit, and an additional $119 million for “general and administrative expenses” and $31 million for “management fees.”

In one instance, the lawsuit charges that ARC Properties Advisors received a $10 million fee from ARCP for furniture, fixtures and equipment. In SEC filings, ARCP later acknowledged that it could not confirm the value of those items because it could not even verify that it had ever received them.

BUYER AND SELLER

Mr. Schorsch's empire was so interconnected that his companies were sometimes able to collect fees from both the buyer and seller in the same transaction, according to the TIAA-CREF complaint. In one case when Mr. Schorsch was still CEO of ARCP, it purchased a REIT called ARC IV, which was also controlled by Mr. Schorsch. Yet another Schorsch firm acted as an adviser to both ARCP and ARC IV in the transaction and collected a $7.66 million fee from each of the firms, or a total of $15.32 million, according to the TIAA-CREF suit.

In all, the TIAA-CREF suit alleges that ARC Properties Advisors and its affiliates received more than $917 million from ARCP in just three years, most of which consisted of fees, commissions, services and acquisition-related expenses.

Mr. Schorsch, in his motion to dismiss the suit, claimed that the math in the complaint is faulty. While the assertion that nearly $1 billion was funneled to entities controlled by Mr. Schorsch is the “linchpin” of the complaint, he said, TIAA-CREF “fails to explain how that $917 million figure was calculated.”

Apart from the size of the fees, such deals raise questions about conflicts of interest, especially when Mr. Schorsch and his associates served as executives or board members on so many different companies in the Schorsch empire that conducted business with one another.

For example, a close confidant from Mr. Schorsch's days in Philadelphia at his first REIT, Michael Weil, served as ARCP's president, treasurer and secretary from its startup until January 2014. He also served as president, chief operating officer and director of ARC IV and another AR Capital REIT, ARC III, which was also acquired by ARCP. Mr. Weil and Mr. Schorsch, who also had management positions at both firms, abstained from the actual votes to approve those acquisitions, but one observer questioned whether there was, at the very least, an appearance of a conflict of interest.

“It's the same management team buying assets from each other,” said Brad Thomas, editor of Forbes Real Estate Investor, a publication that focuses on REITs. “How do you serve two masters?”

ANATOMY OF A DEAL

InvestmentNews asked a forensic accountant, Gordon Yale, to look at one of the deals, the sale of ARC III. ARCP paid $2.35 billion for ARC III in 2013, representing a premium of 34% over the gross equity invested in the REIT. However, Mr. Yale noted that 95% of the ARC III real estate portfolio had been purchased within the previous year. How could the properties have appreciated that much in a year or less to justify such a high price?

Although 2012 was a good year for commercial real estate, returns on benchmark indexes were in the 19% to 22% range, significantly lower than the premium ARCP paid for ARC III.

 “Given that approximately $1.46 billion of the $1.53 billion ARC III real estate portfolio had been purchased in 2012, the 34% premium paid to ARC III shareholders was simply massive,” Mr. Yale said.

But ARC III shareholders were not the only ones who enjoyed a windfall from the sale. According to a filing with the SEC, Mr. Schorsch and his partners received $98.4 million in compensation when the deal closed in early 2013. 

The payday from the sale of another REIT, American Realty Capital Healthcare Trust, was even bigger. When the ARC-sponsored REIT was sold to Ventas Inc., a giant health care REIT not controlled by Mr. Schorsch, he received one share of Ventas stock for each operating partnership unit he controlled; that worked out to $198 million. 

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

The central argument made in the TIAA-CREF suit is that Mr. Schorsch and his lieutenants were more interested in collecting high fees and payouts from acquisitions at ARCP than working legitimately to improve the performance of ARCP on behalf of its shareholders. In fact, the complaint charges that the entire purpose of ARCP's aggressive acquisition spree was to generate fees for Mr. Schorsch and his associates.

Shortly after its initial public offering in September 2011, ARCP's shares fell below the IPO price of $12.50 as the company reported only modest growth in a key metric used to measure REIT performance — adjusted funds from operations, or AFFO. ARCP's antidote was to manipulate its books through a series of improper accounting tricks to artificially inflate AFFO, and hopefully, its stock price, according to the lawsuit.

The stock price did begin to rise. After sinking to a low of $10 a share in June 2012, ARCP's stock began climbing; almost a year later it peaked at $17.81. The reason was clear, the lawsuit maintains: The company had begun reporting higher and higher AFFO figures –— though they later turned out to be inflated, the suit charges.

Given the improved stock price, ARCP began building a war chest, selling $3.5 billion in corporate debt and 800 million shares of ARCP stock. That allowed ARCP to make no less than five billion-dollar acquisitions, including the deal for Cole, and to generate the generous fees for Mr. Schorsch and his associates, the suit maintains.

But Mr. Schorsch asserts in court filings that ARCP's growth was “not indicative of fraud.” In his response to the suit, he said TIAA-CREF and the other plaintiffs “certainly do not claim that these acquisitions were harmful to shareholders — nor can they, as the acquisitions were well-received by the market.”

THE EMPIRE CRUMBLES

The good times at ARCP — and eventually the rest of the Schorsch empire — started to come crashing down when the accounting misstatements were disclosed last October. ARCP acknowledged that the AFFO number had been inflated by $12 million in the first quarter of 2014 and $10.9 million in the second quarter. The inflated AFFO figures had caused the company to understate its loss in the second quarter alone by $9.2 million. Even more startling was ARCP's admission, in an SEC filing, that two of its senior executives knew about the misstatements, but intentionally left them uncorrected.

The stock market pounced. ARCP's shares dropped from $12.45 on the day before the announcement to $7.53 almost a week later, a 40% decline that erased over $3 billion in market capitalization. In roughly the same period, shares at another major company controlled by Mr. Schorsch, RCS Capital Corp., dropped 43%, wiping out hundreds of millions of investor equity. 

Five months later, in an SEC filing, ARCP acknowledged that the company had been overstating AFFO all the way back to 2011 and that certain payments to Schorsch-related entities “were not sufficiently documented.”

COMPANIES INTERRELATED

Mr. Schorsch and his lieutenants tried to separate the scandal at ARCP from RCS Capital and his other holdings, but it didn't work. Mr. Schorsch's empire had so many interrelated companies, and personnel serving in multiple roles at those companies, that when one part of the company encountered difficulty, so did everything else. 

RCS Capital, or RCAP, for example, comprises Realty Capital Securities, the REIT wholesaler that marketed primarily nontraded REITs to advisers at independent broker-dealers, and a network of 9,500 advisers, Cetera Financial Group, that Mr. Schorsch had acquired over the previous year or so. Because of the association with ARCP, sales at the wholesaling division plunged; the brokerage business is highly regulated and broker-dealers were afraid of attracting attention from the SEC and Finra.

“It was difficult from the outside looking in to determine precisely how much overlap in practice there was between the various Schorsch entities,” said Mr. Rooney of Commonwealth Financial.

Realty Capital Securities was recently sold to Apollo Global Management for $25 million, and RCAP's CEO, Michael Weil — the same Mr. Weil who had formerly worked at ARCP and Mr. Schorsch's first REIT 10 years ago in Philadelphia — along with the company's CFO, are leaving. RCAP shares have yet to recover. In fact, following the recent reorganization and a $66 million quarterly loss, the stock dropped even further and shares are now trading at around $1.50. A year ago, those same shares hovered around $20. Altogether, more than $1 billion of equity has been lopped off the stock since the accounting scandal first broke. 

ARC, another major part of the Schorsch empire, was also damaged. ARC, which depended on the creation and sale of nontraded REITs, raised cash from investors at about half the rate after the scandal than before, according to Stanger, the investment bank. ARC also recently signed a deal with Apollo. The private-equity firm bought a 60% interest for $378 million in cash and stock and renamed the company AR Global Investments. An Apollo executive told the Wall Street Journal that the purchase would have cost the firm “billions of dollars” prior to the accounting scandal.

Shares of ARCP, which changed its name to Vereit at the end of July, have not recovered either and are trading in the $8 range, despite the hiring of a new CEO, Glenn Rufrano, who is highly regarded.

"Since the beginning of 2015, Vereit has released restated financials, established new leadership, added independent directors to its board and improved the company's internal infrastructure, including the adoption of new corporate governance initiatives." a company spokesman said in a statement. "Members of the ARCP management team that left the Company during the fourth quarter of 2014 are no longer affiliated with Vereit."

The company, which was highly leveraged from its acquisition spree, recently announced it is selling off about $2 billion worth of properties and is trying to reduce its debt. So far, it has disposed of $960 million worth of properties toward that goal, Vereit's spokesman said.

Mr. Schorsch faces an uncertain future. Forbes, which at one point estimated that he was worth $1.5 billion, recently revised that figure to $500 million. While he is expected to work for AR Global under new management, some of the firms he once headed are facing investigations and lawsuits stemming from the accounting scandal.

UNCERTAIN FUTURE

He may also be facing a legal battle with Vereit. According to its most recent quarterly report, Mr. Schorsch and his affiliates are seeking $126.7 million related to the period when they served as ARCP's external manager prior to January 2014. In an SEC filing, Vereit has indicated that it will challenge that request.

One industry veteran pointed to past nontraded REIT managers who had boom- and-bust cycles as a way of understanding the impact of Mr. Schorsch on the securities industry. 

“Nick is the latest in a line of nontraded REIT sponsors who raised a boatload of money, did an adequate job for investors and then paid himself,” said Mr. Rooney of Commonwealth. “Certainly the REITs that went full cycle did well for advisers and clients in an adverse interest rate environment.” 

“What separates Nick from his predecessors is the rapidity of the composition of his empire and the haste of which it all went bad,” he said. “That usually plays out over a decade. With Nick it unwound as fast as it sprang up.”