Suit: Schorsch, aides milked $900MM fees before real estate scandal

Attorneys for the giant TIAA-CREF retirement fund, New York City's pension funds, the Sheet Metal Workers Union's national pension plan and other institutional investors have expanded accusations in their civil lawsuit against the people who controlled American Realty Capital Properties, the publicly-traded, NYC-based, $30 billion-asset property investment company founded by Jenkintown metal-recycling heir Nicholas Schorsch, to allege fees exceeding $900 million were paid to Schorsch and other insiders, with support from Wall Street underswriters and auditors and Schorsch's own directors (including real estate pros Bill Kahane of New York and Bill Stanley of Berwyn, and ex-Pa. Gov. Ed Rendell) as the firm expanded, creating conflicts of interest leading up to an accounting scandal and forced replacement of Scorsch and other managers. Case is In re American Realty Capital Properties, U.S. District Court for the Southern District of New York, 1:15-mc-00040-AKH

Writes Investment News here: "During a three-year buying binge, American Realty Capital Properties Inc. generated more than $900 million in fees, commissions and payments made directly or indirectly to company insiders, according to an amended investor class action lawsuit.

"The complaint, initially filed in January and updated last Friday, alleges that months after ARCP completed its $69.8 million initial public offering in September 2011, its share price was languishing below the IPO price... That was impeding ARCP's ability to raise substantial capital, according to the complaint... The suit alleges that in an effort to raise the share price and raise more capital — and insider fees — ARCP set off on an acquisition binge, growing from a modest entity that owned 63 properties and had $132 million in assets into a behemoth that, three years later, owned more than 4,400 properties and had $21.3 billion in assets.

"The lawsuit alleges ARCP's acquisition strategy was aided by artificially inflating its 'adjusted funds from operations (AFFO)... ARCP's senior insiders recognized that the only way to generate the substantial fees, commissions and compensation payments they sought would be to supercharge ARCP's reported' adjusted funds from operations growth, according to the complaint.

"As part of ARCP's acquisition spree, ARCP's insiders ensured that more than $917 million was paid directly to ARCP insiders and their affiliates," according to the complaint, which names Schorsch, American Realty's former Chairman and CEO, and other executives...

"We believe the amended complaint is meritless. AR Capital and the AR Capital principals and employees named as defendants intend to defend against these meritless claims vigorously, and will be filing a motion to dismiss promptly," Schorsch spokesman Andrew Backman told Investment News. John Bacon, a spokesman for American Realty, said the company does not comment on legal affairs.

More on the Scorsch wreck and attempts to fix it: Schorsch execs out in financial scandal; Schorsch firms fight; Schorsch ouster urged; Philadelphia police and fire retirees, other Schorsch investors worried; Schorsch successors attempt turnaround.