The legal web for Nicholas Schorsch and his partners this month became more tangled. On March 8, the RCS Creditor Trust, the group that now controls the remains of RCS Capital Corp., or RCAP, a bankrupt brokerage formerly controlled by Mr. Schorsch, filed a complaint accusing him and his partners of siphoning off revenue from RCAP and funneling it to AR Capital, another company controlled by Mr. Schorsch.
Now might be a good time to try to untangle the knot of lawsuits and the general legal mess surrounding Mr. Schorsch and his four partners at AR Capital, now called AR Global. Those partners include William Kahane, Peter Budko, Edward "Michael" Weil and Brian Block. AR Global is the sponsor and manager of more than $10 billion of assets, mostly held in various nontraded REITs.
The legal problems for Mr. Schorsch began in October 2014. That's when a giant real estate investment trust run by Mr. Schorsch, American Realty Capital Properties Inc., or ARCP, disclosed $23 million in accounting mistakes from earlier in the year that were intentionally not corrected.
That led to dozens of investor complaints against the REIT and Mr. Schorsch. Most prominently, TIAA-CREF, the teacher retirement service provider, filed suit in early 2015 alleging that ARCP's accounting misstatement was part of a multi-year fraud perpetrated by the company to inflate financial results so it could raise capital to fuel the REIT's aggressive expansion.
EXPANSION TRIGGERS FEES
That expansion, in turn, generated more than $917 million in fees for Mr. Schorsch and other insiders, according to the complaint.
The TIAA-CREF complaint has reached a critical stage; this month the plaintiffs filed a motion to certify the complaint as a class action. Mr. Schorsch and the defendants will likely file a rebuttal to that motion in the coming weeks and the judge, Alvin K. Hellerstein, will likely rule in the summer whether to give class-action status to the lawsuit.
It's been more than two years since TIAA-CREF's complaint was filed. There can be any number of reasons why the class-action certification process has taken this long, according to Terry Lister, a senior consultant with Edgerton & Weaver and a longtime industry attorney.
"It depends upon the class and how difficult it is to certify," he said. "You have to have a commonality of interest in a class. There are usually fairly technical legal issues of who can and cannot be in the class. And the target in the case, the defendant, will push back and slow down the process, filing motions, holding hearings, deposing witnesses. There are complex federal court rules that apply to class actions."
Other investors have filed claims seeking class action status against RCAP, the broker-dealer holding company that sold AR Capital-branded REITs. After ARCP revealed the accounting irregularities in October 2014, sales of AR Capital-nontraded REITs slumped, hurting the bottom line of RCAP. Crushed by more than $1 billion in debt raised for Mr. Schorsch's buying binge of retail broker-dealers, RCAP declared bankruptcy at the start of last year.
TOP LEGAL TALENT
Meanwhile, Mr. Schorsch has surrounded himself with top legal talent. Defending him in various legal actions is Daniel Kramer, a partner at Paul Weiss who represented Steven A. Cohen and his hedge fund SAC Capital in criminal and regulatory proceedings and complaints stemming from claims of insider trading.
Another veteran of the SAC Capital prosecution, Antonia Apps, is defending ARCP in the TIAA-CREF complaint. A former assistant U.S. attorney and one of the leaders of the government's prosecution of SAC Capital, Ms. Apps is now a partner at Milbank Tweed Hadley & McCloy.
"A similarity in counsel is not an indication how a case will be determined, and lawyering up with some of the top talent in the country is what you would expect," said Steven Caruso, a plaintiff's attorney.
Mr. Kramer declined to comment on Mr. Schorsch's legal issues.
Mr. Schorsch has not been indicted by the Justice Department or sued by the Securities and Exchange Commission. But one of his partners at AR Global, Mr. Block, is currently under indictment for conspiracy and securities fraud for actions when he was CFO at ARCP.
The former chief accounting officer at ARCP, Lisa McAlister, pled guilty last June to one count of conspiracy to commit securities fraud and other offenses. She is expected to testify against Mr. Block during his upcoming trial.
Mr. Schorsch is no longer involved in ARCP, which is now called Vereit Inc.
A spokesman for Mr. Schorsch and AR Global, Jesse Galloway, did not return a call to comment.