Real estate losses: Schorsch sued in Delaware

"A group of investors has accused Nicholas Schorsch, the former nontraded REIT czar, and his partners of siphoning off revenue in RCS Capital, or RCAP, a company once controlled by Mr. Schorsch that went into bankruptcy," in a Delaware Chancery Court suit filed last week, writes Investment News here.

Schorsch, who once controlled a real estate empire worth over $30 billion, has left investors complaining they lost money tying up their cash in real estate securities they are unable to sell without deep discounts. 

"I made a $100,000 investment in one of those companies, Business Development Co. of America," Emil Tofton, a Montgomery County attorney told me. He held the shares, which he purchased at $10.90 a share in Feb. 2013, until he was able to sell some of them last month, at $8.50, at a loss of 21 percent, he told me. "It was hard to sell. It never gained value after I bought it," Tofton told me. 
Tofton's broker, Austin Dutton, who has sold Schorsch-related real estate securities to scores of Philadelphia police officers and other city retirees, declined to comment, his assistant said. His Doylestown office is associated with Bridge Valley Financial Services LLC. 
Tofton said family members also own shares of another Schorsch vehicle, Retail Centers of America. Those are also listing below what they paid, Tofton said. "The company seems to control the price. There are no other bidders. They got you," and management fees add up, he added.  

Schorsch, formerly based in the Jenkintown area, converted his family's former metal-recycling and processing companies in Philadelphia and South Jersey into a constellation of real estate companies based largely in New York over the past 15 years.

The Delaware suit claims Schorsch and his partners "enriched themselves by funneling revenue from RCAP to AR Capital, another company they controlled." Schorsch took RCAP public in 2013, then declared bankruptcy last year after it couldn't pay debt Schorsch used to buy a string of retail brokerages and other assets. The company is now known as Aretec, doing business as broker Cetera Financial Group.

The investors, through RCS Creditor Trust, say their investment was wiped out. They say Schorsch and fellow RCS officers, veteran investment bankers William Kahane, Peter Budko, Edward "Michael" Weil and Brian Block, "exploited their control of RCAP to 'enrich' their wholly owned, nontraded REIT business, AR Capital," according to Investment News.

The suit says Schorsch and his partners "raised hundreds of millions of dollars in public stakeholder investments, then caused RCAP to operate unprofitably for AR Capital's benefit, and to make boldly imprudent investments that served only AR Capital's interests," while wiping out $1 billion in shareholders' investments.  "The defendants have collected and continue to reap hundreds of millions of dollars in ongoing fees," at least some of which "fairly belong" to the shareholders.

"Starting in the 2008 recession, Schorsch and AR Capital began selling a series of non-traded real estate investment trusts focusing on pools of real estate assets in New York and across the U.S., citing prospects for high returns despite large fees. Block faces federal indictment alleging conspiracy and securities fraud from his time as CFO at American Realty Capital Properties Inc., one of Schorsch's REITs which he took public. That trial is scheduled to begin in June. After Block's indictment, Schorsch left the company, now known as Vereit."

More from veteran Delaware reporter Jeff Montgomery at 360law.com here.