Schorsch Board Resignations Signal Retreat to BackgroundBrian Louis
Nicholas Schorsch’s resignation from the boards of 13 companies marks another step back for the public face of a real estate empire that has been roiled by an accounting scandal.
Schorsch, 53, will leave the boards of the companies -- including two that are publicly traded, RCS Capital Corp. and New York REIT Inc. -- to focus on strategy at his investment firm AR Capital LLC, according to a statement today. The other resignations are from nontraded real estate investment trusts and direct-investment programs sponsored by AR Capital.
The departures come two weeks after Schorsch resigned as chairman of American Realty Capital Properties Inc., a publicly traded owner of more than 4,000 U.S. buildings, which in October disclosed that it had accounting errors that were intentionally concealed. He’s now moving to the background for other REITs he helped start at AR Capital, which has raised billions of dollars from individual investors seeking to put money in real estate.
“If Nick’s not on those boards, those boards are more independent than they were before,” Kevin Gannon, president of investment bank Robert A. Stanger & Co., said in a telephone interview. “They’re deciding that it’s probably best that Nick and others aren’t at the helm of these entities while this is going on.”
The accounting errors at American Realty Capital Properties, or ARCP, have led to regulatory investigations and shareholder lawsuits and helped reduce money flowing into Schorsch’s entities. RCS Capital -- whose businesses include raising money from investors for AR Capital nontraded REITs -- has lost 38 percent of its value since the ARCP disclosure. The stock rose 7.6 percent today to $12.16 in New York. Schorsch is its biggest shareholder.
ARCP separately gained 7.4 percent to $9.11 after activist investor Keith Meister’s Corvex Management LP reported a 7.1 percent stake in the company.
Investment products managed by AR Capital, primarily its nontraded REITs, have raised about $20 billion in equity mainly from individual investors since 2008, according to Stanger. AR Capital has generated more than $600 million in fees since it began in 2007, data from Stanger show.
“I am completely confident in our management teams and our independent directors,” Schorsch said in a statement from AR Capital today. “These changes are part of the natural evolution of our businesses given our size and continuing growth.”
The errors at ARCP have hurt companies tied to Schorsch and prompted some broker-dealers to suspend selling nontraded REITs sponsored by ARCP’s Cole Capital unit and some AR Capital nontraded REITs. AR Capital has said that Schorsch wasn’t involved in any unlawful conduct.
A telephone message and two e-mails to Schorsch weren’t immediately returned.
For Schorsch, suspensions of AR Capital-related sales are comparable to someone stepping on a hose and cutting off the air flow, Gannon said.
“The question is, when will they lift that foot?” he said.
In other management changes announced today, Michael Happel will become chief executive officer of New York REIT and William Kahane will become its executive chairman as well as chairman of ARC Realty Finance Trust Inc. Kahane will also resign as a director of RCS Capital, which he founded with Schorsch. Peter Budko will become chairman of Business Development Corp. I and II.
“These actions should greatly minimize distractions and immediately eliminate any perceived or potential conflicts created as a result of Mr. Schorsch’s involvement on the boards of AR Capital-sponsored programs or on the board of RCS Capital whose subsidiary, Realty Capital Securities, is the wholesale broker-dealer that distributes those programs,” AR Capital said in its statement.
Schorsch helped create RCS Capital, an investment bank and brokerage with at least $1.3 billion of deals closed or pending for nine companies, primarily broker-dealers, in the past year.
ARCP is reviewing its financial statements going back to last year after finding that accounting errors were deliberately hidden. ARCP’s CEO and chief operating, financial and accounting officers have left since the errors were disclosed.
ARCP earlier this month was sued by former Chief Accounting Officer Lisa P. McAlister, who alleged that she was fired after top executives including Schorsch ordered a concealment of the errors. AR Capital said the lawsuit was without merit and that Schorsch denies the allegations.
Corvex, which earlier this year was part of a successful campaign to oust the management of office landlord Commonwealth REIT, now known as Equity CommonWealth, said yesterday that it has had talks with the ARCP board to discuss ways to boost shareholder value. ARCP, in a separate statement, said it has had “constructive conversations” with the firm.