PhillyDeals: Schorsch real estate empire dogged by lawsuits and lies

The speedy growth of

Nicholas Schorsch

's real estate empire of 4,000

Walmarts,

Red Lobsters

, and other chain locations stalled last fall, when his publicly traded investment firm,

American Realty Capital Properties

, admitted falsely inflating profits.

Last month, the company restated three years of earnings, acknowledged millions in unreported losses, and replaced top bosses.

American Realty's admission - amid what the company said are investigations by federal prosecutors in New York, securities regulators in Massachusetts, and the Securities and Exchange Commission - has given investors ammunition to fix blame for the $3 billion decline in the company's share value since last fall.

In a lawsuit filed last week in federal court in Manhattan, investors led by the TIAA-CREF college retirement fund alleged a list of frauds by Schorsch and other past managers, directors, auditors and bankers. The complaint is illustrated by a drawing of a spider's web bearing the names of 36 Schorsch-related firms and investment funds, with Schorsch's name in the spider's place.

American Realty "lies at the center of a complex web of interrelated companies," the suit says. "The Schorsch empire was structured to help conceal defendants' fraudulent scheme."

Schorsch, scion of a Montgomery County family that made money in metals and property, declined to comment.

Investors also are suing the firm's auditors and the Wall Street and Pennsylvania banks that sold more than $3 billion in American Realty-related bonds, collecting nearly $100 million in fees.

Emil Toften, a Bucks County lawyer, said he put his retirement savings in American Realty and associated retail and health-care funds after people he knew bought them. Tofton was alarmed to see American Realty shares lose value in last year's bull market - and to learn some of his other Schorsch-backed funds are now illiquid and can't be sold.

The broker who sold Tofton the funds, Austin Dutton, declined comment, citing policy at his firm, Florida-based Newbridge Securities.

When American Realty shares fell after its 2011 initial public stock offering, the suit alleges, Schorsch led an "acquisition spree" and bought more than $20 billion in real estate. "This is not growth for growth's sake," but "an all-out effort to gain competitive advantage," Schorsch said in a 2013 investors call.

But the suit alleges the "dizzying array" of acquisitions enabled Schorsch-related firms to charge one another fees that enriched him and other insiders. "ARCP paid ARC Advisors and its affiliates over $917 million," with little value for shareholders, the suit says.

Expanding American Realty enabled Schorsch to boost a bonus pool for himself and insiders to more than $200 million, with half the payments scheduled to kick in "even if returns were zero percent."

The firm violated accounting standards and SEC rules: Its reports were "riddled with accounting errors and/or financial manipulation," the suit alleges.

The company overstated property values; understated expenses; falsely declared some recurring expenses were one-time-only, creating a "slush fund" from accounting goodwill to cover losses; wrongly folded operating expenses into its capital statement, and inaccurately certified that financial controls were "effective."

American Realty's then-acting chair, Berwyn investor William Stanley, last month named new leaders and said the company was poised for a turnaround.

But the company also acknowledges it has been downgraded to junk-bond status and hasn't yet been able to resume issuing dividends to shareholders, or to take other steps that might rebuild depressed asset prices. The lawsuit shows some big investors don't want to wait.