Nicholas Schorsch is squaring off with the giant real estate investment trust he formerly controlled, the recently rechristened Vereit Inc., in a dispute over $126.7 million. And that multi-million-dollar squabble is running parallel to potential legal action by Vereit against Mr. Schorsch.
According to its quarterly report released last week, Vereit, which had its initial public offering in 2011 under the name American Realty Capital Properties Inc., in March received a request to redeem $126.7 million worth of “operating partnership” units from affiliates of its former manager, which was run by Mr. Schorsch.
There is a legal tussle over those units, according to the report: Vereit “believes it has potential claims” against the receivers of those units and “is engaged in discussions with affiliates of the former manager” about the request.
Mr. Schorsch served as chief executive officer of ARC Properties Advisors, the REIT's former manager, from its formation in November 2010 until the company's transition to self-management in January 2014, according to the company's 2014 proxy filing.
Mr. Schorsch was also the former chairman and CEO of American Realty Capital Properties, known by its former ticker symbol ARCP. He resigned in December, two months after the company disclosed a $23 million accounting error over the first half of 2014 that was intentionally not corrected.
The accounting error sent Mr. Schorsch's nontraded REIT empire into a tailspin.
Since the end of October, the share price of ARCP/Vereit has declined 30.5% and was trading at $8.68 per share Thursday morning. Investors, including giant institutions such as TIAA-CREF, are filing complaints seeking class action status against Mr. Schorsch and ARCP/Vereit.
Last week, Mr. Schorsch and his partners sold 60% of his private real estate company to
Apollo Global Management for $378 million in cash and Apollo stock.
The share price of the brokerage company of which Mr. Schorsch is the largest owner, RCS Capital Corp., or RCAP, is in freefall. Over the past week, it has declined 55% and was trading at $2.60 per share Thursday morning. For the past 12 months, its shares have dropped a stunning 88%.
Andrew Backman, a spokesman for Mr. Schorsch, did not return calls Wednesday and Thursday for comment. A spokesman for Vereit, Parke Chapman, declined to comment.
Securities attorneys said the dispute could signal Vereit making some type of clawback attempt from Mr. Schorsch and his partners. And Mr. Schorsch's request to redeem more than $100 million of ARCP/Vereit units after the decline in ARCP/Vereit's share price raised eyebrows.
“I don't think there's any question that a clawback against former managers is on the table and a very real option,” said Andrew Stoltmann, a plaintiff's attorney. “I think [Vereit] is breaching its fiduciary duty if it didn't go after the guys who caused the mess. It's more likely a question of when, rather than if, clawback actions get filed against previous managers.”
Mr. Schorsch “has a rep for being a brazen swashbuckler and he has maintained that reputation with this current action,” Mr. Stoltmann said.
“It almost sounds like there's a potential claim being made involving the dissipation of corporate assets or other insider payments similar to what you see in a bankruptcy,” said Steven Caruso, also a plaintiff's attorney. “About the cash? I think it would give new meaning to the term insider favoritism. How do the people who ran this thing into the ground demand additional money when the normal shareholders are left out to dry?”
The change in name to Vereit last month was part of wider corporate changes under its new CEO, Glenn Rufrano. It said last week it is selling about $2 billion of non-core real estate assets, reducing debt and working to re-establish the Cole Capital brand of nontraded REITs.
