Accounting fiasco highlights tangled web behind Nicholas Schorsch’s empire

In the wake of accounting problems at American Realty Capital Properties Inc., the rest of Nicholas Schorsch’s empire has drawn scrutiny for its complexity.
And calling the Schorsch empire complex is putting it mildly. It includes dozens of nontraded real estate investment trusts and other illiquid alternative investment funds such as business development companies. Mr. Schorsch also controls traded REITs, mutual funds, broker-dealers and a giant real estate sponsor, American Realty Capital, which is the bedrock for his vast domain.
Mr. Schorsch is chairman of American Realty Capital Properties Inc., or ARCP, which last month revealed a $23 million accounting error over the first six months of the year that was intentionally not corrected.
Simply put, ARCP’s admission to the accounting mistake has rocked Mr. Schorsch’s world. Major broker dealers have temporarily halted sales of nontraded REITs he controls under the ARC or Cole brands. That potentially hurts future earnings at RCS Capital Corp., the broker-dealer holding company of which he is executive chairman.
Indeed, the management structure of RCS Capital, or RCAP, recently drew the attention of one analyst, William Katz, of Citigroup Global Markets Inc.
(More: Despite Cohen’s investment, RCAP shares face short-term hurdles)
“RCAP is externally managed by RCS Capital Management,” noted Mr. Katz in a research note this month. “We believe a move to internal management may enhance credibility of RCAP’s status. In turn, we believe a simplification of organizational structure may help stabilize the story.”
RCAP pays “RCS Capital Management a quarterly fee in an aggregate amount equal to 10%” of its pre-tax income, according to RCAP’s proxy statement from April. RCAP’s “business is managed by RCS Capital Management, subject to the supervision and oversight of” its board of directors, according to the proxy.
And who controls RCS Capital Management? Mr. Schorch, who is executive chairman of RCAP, is co-CEO. William Kahane, a founding partner of ARC and former CEO of RCAP, is the other co-CEO. While RCS Capital doesn’t receive anything if RCAP doesn’t make money, it stands to make millions if the company has a good year.
Mr. Schorsch, who gets no salary at RCAP, has been an outspoken advocate for putting shareholders first and aligning the interests of investors who own his REITs with management.
REITs have commonly drawn criticism for having outside managers. The knock on such business arrangements is that they may not be in the best interests of shareholders; using an outside adviser opens up the possibility that the management company may make decisions for its own benefit rather than for the benefit of the investor.
RCAP, however, is not a REIT. It’s a broker-dealer holding company, adding to the complexity. It has two large broker-dealer subsidiaries with separate functions. One, Realty Capital Securities, distributes nontraded REITs as a wholesaler to broker-dealers for them to sell to clients. The other, Cetera Financial Group, is the umbrella for 9,100 retail and wealth management advisers registered at eight separate broker-dealers Mr. Schorsch has acquired in the past year and a half.
Mr. Schorsch is not the only one wearing multiple hats in his organization. In a welcome sign, RCAP’s CEO, Mike Weil, recently moved to simplify his position in the Schorsch empire.
(More: Schorsch is confident in his empire)
According to due diligence firm FactRight, Mr. Weil this month stepped down from numerous roles at ARC-branded REITs and related businesses. “He resigned from his positions with American Realty Capital Daily Net Asset Value Trust, American Realty Capital Healthcare Trust III, American Realty Capital Healthcare Trust II, American Realty Capital New York City REIT, and American Realty Capital Trust V to serve as the CEO of RCS Capital Corp.,” FactRight said in a research note posted on its web site, citing SEC filings from November 17.
Mr. Weil was president, chief operating officer, treasurer and secretary of two of those REITs, president treasurer and secretary of two others and the treasurer and secretary of one. Likewise, he resigned from similar roles at those REITs’ advisers and property managers. Earlier this year, Mr. Weil also stepped aside from top positions at other companies in the Schorsch empire.
“None of (Mr.) Weil’s resignations was a result of any disagreement with any of the companies,” according to FactRight.
An RCAP spokesman, Jonathan Keehner, said the company declined to comment for this column.
On top of the new clarity of his role in the Schorsch empire, Mr. Weil bought 20,550 shares of RCAP stock on Tuesday at an average price of $12.14 per share, according to a filing with the SEC. He now owns 1,083,958 shares of RCAP.
Management buying shares is always a positive sign. It’s even more so if a company has hit a patch of turbulence, as RCAP has in the past few weeks.
A key question remains. Now that Mr. Weil has clarified his role, will Mr. Schorsch do the same?