Almost overnight, Nicholas Schorsch became the biggest player in the nontraded real estate investment trust industry, building an empire and making billions for himself.
Along the way, he elevated an industry.
Now, just as quickly, he may be on the verge of tearing it apart.
In a blockbuster lawsuit, the former chief accounting officer for Mr. Schorsch's flagship real estate investment trust, American Realty Capital Properties Inc., said she and a co-worker were made scapegoats by Mr. Schorsch and other executives for a $23 million accounting error coverup that rocked the company when it was disclosed at the end of October.
(More: ARCP delays third-quarter earnings report)
Specifically, the accounting executive, Lisa McAlister, said Mr. Schorsch ordered ARCP's chief financial officer at the time, Brian Block, to alter the company's quarterly financial results. After the error was finally disclosed, Mr. Block and Ms. McAlister left the company.
Ms. Mcalister's lawsuit was filed on Thursday in New York State Supreme Court in Manhattan.
“This is an incredibly serious allegation, and first let's remember it is an allegation,” said Kevin Gannon, managing director of Robert A. Stanger & Co. Inc. “But if it's proven true it's about as serious an allegation against a CEO of a public company that you can have. It needs to be dealt with swiftly.”
The nontraded REIT industry, which doubled in sales to $20 billion in 2013 from $10 billion a year earlier, is very concerned about the allegations against Mr. Schorsch, Mr. Gannon said.
He characterized Mr. Schorsch as a “swashbuckler” for his aggression, drive and innovation. In a two-year period, through a flurry of acquisitions and related companies, Mr. Schorsch built his REIT empire. In addition to the publicly traded ARCP, it included another public company, RCS Capital Corp., and a privately held REIT sponsor, America Realty Capital.
(More: Untangling Nicholas Schorsch's vast web of businesses)
Mr. Gannon said the industry was "floored" by the allegations in Ms. McAlister's lawsuit.
“Today is not a good day for the nontraded REIT industry,” said Brad Thomas, a REIT investor and editor of a REIT newsletter, The Intelligent REIT Investor. “American Realty Capital has roughly 50% of the nontraded REIT market share. That means one out of two of every nontraded REIT investors is tied to Nick.”
“This is a huge wake up call for the nontraded REIT industry,” Mr. Thomas said. “You should never have all eggs in one basket,” he said, alluding to the dominance in market share Schorsch-owned businesses had.
The Investment Program Association, an industry trade group for nontraded REITs, said the situation at ARCP was isolated.
“The IPA believes that the situation at ARCP and RCAP is unique to those public companies and their filings,” said Kevin M. Hogan, chief executive of the IPA. “It's not systemic in the public non-listed REIT industry.”
Ms. McAlister, who joined the company in November 2013, said in her complaint that in February, she noticed ARCP had improperly calculated its adjusted funds from operations, or AFFO, in a way that overstated results in the first quarter of 2014 by 3 cents per share.
When Ms. McAlister brought the error to the attention of David Kay, ARCP's chief executive officer at the time, she said Mr. Kay told her and the chief financial officer, Brian Block, not to change the error.
Later, in July, on a conference call regarding second-quarter earnings, Mr. Schorsch allegedly instructed Mr. Block to shift the numbers for the quarter in order to conceal the previous improper reporting.
“In other words, Mr. Schorsch instructed Mr. Block to take steps that would cover up the improper change in accounting with both further fraudulent accounting and a proper change that helped the cover up,” Ms. McAlister's lawsuit states.
On Monday, prior to the disclosure of the lawsuit, Mr. Schorsch
resigned as executive chairman of ARCP, Mr. Kay resigned as CEO and Lisa Beeson, its chief operating officer, also resigned.
(More: Accounting fiasco highlights tangled web behind Nicholas Schorsch's empire)
