For the past few years, financial advisers and brokerage industry executives have bombarded me with the same question:
Whatever happened to Nick Schorsch? Where did the nontraded
REIT czar go?
I'm sure many
InvestmentNews readers could never forget Mr. Schorsch. He took the independent broker-dealer industry by storm 10 years ago, when hundreds of broker-dealers started selling his American Realty Capital branded nontraded real estate investment trusts.
Mr. Schorsch, 57, built a nontraded REIT empire, launching and merging multiple REITs with tens of billions of dollars in assets.
His American Realty Capital nontraded REITs typically attracted mom and pop investors with promises of annual returns of 7%. And brokers loved them, because they charged clients 7% commission for the sale. For a short time, broker-dealers and their reps were awash in REIT money thanks to Mr. Schorsch.
At the height of his REIT sales blitz in the summer of 2014, Mr. Schorsch was worth more than $1 billion,
according to Forbes.
That was right around the time the music stopped for the REIT czar. An accounting scandal in October 2014 rocked his flagship REIT, American Realty Capital Properties Inc., now called Vereit Inc. and operated by different management.
We know now the answer to everyone's question about what happened to Mr. Schorsch and how he has been spending his time. Turns out that he and his lawyers have spent some part of the past few years negotiating a settlement with securities regulators that shines an unflattering light on his actions in merging various REITs.
On Tuesday, Mr. Schorsch, the firm which sponsored and managed his REITS, AR Capital, and AR Capital's chief financial offficer and minority owner, Brian Block, agreed to pay $60 million in penalties to settle Securities and Exchange Commission civil charges that they wrongfully obtained millions of dollars in connection with REIT mergers that were managed by AR Capital, according to the SEC.
In a complaint and settlement filed simultaneously on Wednesday,
the SEC illustrated how the defendants allegedly inflated compensation numbers and formulas at the expense of shareholders and scooped up fees and stock rewards they were not entitled to.
Problems with math at AR Capital, which was founded by Mr. Schorsch,
were at the center of the SEC's complaint and settlement. "AR Capital, acting through Block and Schorsch ... improperly inflated an incentive fee calculation which operated as a fraud or deceit on" American Realty Capital Properties Inc., the acquiring REIT known as ARCP, and its shareholders, the SEC alleges.
Mr. Schorsch, Mr. Block and AR Capital "disregarded... formulas and disclosures" linked to their compensation, the SEC alleged.
The defendants agreed to the settlement without admitting or denying the SEC's findings.
In its complaint, the SEC made no allegations of intentional wrongdoing by Mr. Schorsch. Instead, the SEC's complaint alleges Mr. Schorsch was "at least negligent" regarding the various calculations behind the allegedly inflated fees in question.
Mr. Block has
his own separate set of problems.
At the end of October 2014, ARCP revealed a $23 million accounting error that eventually led to criminal charges against Mr. Block. He was eventually found guilty of securities fraud and then sentenced to 18 months in prison. Mr. Block's appeal of his conviction is ongoing.
An attorney for Mr. Block, Michael C. Miller, did not immediately return a phone call on Thursday morning to comment.
"We are pleased that AR Capital was able to amicably resolve this matter," said Anthony Galioto, deputy general counsel of AR Global, a separate REIT manager that Mr. Schorsch also controls. "Having put this matter behind us, we will continue to focus on serving the interest of and creating value for the shareholders of the REITs we manage."
According to the SEC, AR Capital, Mr. Schorsch and Mr. Block have agreed to pay disgorgement of more than $39 million, which includes cash and the return of the wrongfully obtained ARCP operating partnership units; and civil penalties of $14 million against AR Capital; $7 million against Mr. Schorsch, and $750,000 against Mr. Block.
The settlements are subject to court approval.
Now advisers and brokerage executives want to know: What's next for Nick Schorsch, now that he has settled with the SEC?
I can't answer that question, at least not yet. But what the allegations in the SEC complaint make clear is that investors in products like the REITs Mr. Schorsch and AR Capital managed deserved far better than what they received.
