The crown of REIT and IBD King Nicholas Schorsch isn't shining very brightly right now.

While the long-term consequences of Schorsch's sudden resignation as executive chairman of the real estate company that is a crown jewel of his financial empire remains uncertain, the immediate impact of the unexpected move on his image -- and independent broker-dealer network -- was hardly positive.

"This throws an extremely negative shadow over his recent moves," says Alois Pirker, research director for Aite Group, the Boston-based consultancy. "For the past 18 months, adding broker-dealers to RCS Capital made him look like the architect of the next LPL. Now there is a steady flow of negative news, like Chinese water torture. He clearly wouldn't be walking way [from American Realty Capital Properties] if things were business as usual. The optics are just not very good."

Schorsch's withdrawal from American Realty, which included resigning from the board of directors and the boards of directors of the non-traded REITs managed by Cole Capital, a subsidiary of ARCP, also threw the viability of his business model into question, according to industry consultant Tim Welsh, president of Larkspur, Calif.-based Nexus Strategy.


"Through the sheer force of his will and charisma, Schorsch cobbled together a powerful REIT manufacturing and distribution empire that appeared on the surface to be an industry changer," Welsh explains. "The big question at the time was: should manufacturing and distribution of non-liquid, alternative assets be combined under one company?

"But doing it on such a massive scale left absolutely no margin for error, and it now appears that underneath his larger-than-life personality, the underlying framework, agreements and operations were in disarray.  As a result, the sustainability of that model has to be questioned."

RCS did not respond to requests for comment.


Adding to Schorsch's woes, Andrews & Springer, a Delaware law firm specializing in securities class action law suits, has begun an investigation into potential securities fraud claims and breach of fiduciary claims against Schorsch and the board of directors of RCS.

Schorsch's resignation from his REIT company says Craig Springer, a partner at the firm, "is really good evidence of how intertwined all his entities are."

According to Springer, the close business relationship between ARCP, where Schorsch remains a sizable shareholder, and RCS, where Schorsch holds controlling interest and is also the chairman, "highlights a potential conflict of interest that potential REIT investors should be aware of."

Combining manufacturing and distribution of alternative products under one roof is "an unusual combination," although "not necessarily bad," says the well-known industry consultant Philip Palaveev, chief executive of the Ensemble Practice, and former president of independent broker-dealer Fusion Advisor Network.


The real long-term significance of the latest executive moves at American Realty on RCS' massive broker-dealer network, the nation's second largest by advisor count, transcends Schorsch himself according to Palaveev.

"The question is where is the vision coming from?" Palaveev says. "Is it just a personal one or is it shared by a team of executives? Whatever role Schorsch plays or doesn't play, is there a vision shared by the [RCS] board?"

To be sure, Schorsch's top executives include "a very strong team of business executives like Larry Roth [Cetera] and Bill Dwyer [Realty Capital Securities] who have a proven record," Palaveev points out.

For RCS to have stability and sustainability, management has to "continue to invest capital" and have a clear strategy, according to Palaveev.


The good news for Schorsch, he says, is that his IBD companies are in a "dynamic space" that continues to "attract interest as an investment decision, and not necessarily a distribution strategy."

The bad news, says Pirker, is that "everyone is wondering if this is the tip of the iceberg and what comes next. If his reputation has been damaged, it's meaningful because reputation is important if you want to acquire companies and retain and attract advisors."

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