Behind the accounting errors that knocked $4 billion off American Realty Capital Properties Inc.’s market value was a hidden scheme that generated more than $900 million in managers’ fees and bonuses, investors said in a lawsuit against the company.

Ex-Chairman Nicholas Schorsch turned a small real estate investment trust into a massive engine of payments for himself and cronies, adding $20 billion of assets in two years and charging for services rendered by 47 entities he controlled, according to court documents filed this week.

As American Realty Capital Properties, or ARCP, grew, Schorsch was in line for $94 million in incentives over five years, on top of $28 million in potential 2014 compensation.

In their class action, begun in January, teachers’ pension funds that lost money on American Realty shares accused managers of manipulating cash-flow data to inflate the stock for takeovers. Those deals were “designed” to generate fees for the executives and didn’t deliver the promised benefits to the REIT or its shareholders, the funds said.

“This complex and opaque web of interrelated companies is permeated with conflicts of interest and was used to transfer hundreds of millions of dollars to Schorsch-controlled entities in connection with the acquisitions,” they said, pointing to $55 million in fees from two big deals alone.

Schorsch didn’t return messages seeking comment on the allegations. John Bacon, an American Realty spokesman, declined to comment.

$917 Million

The updated complaint, filed April 17 in Manhattan federal court, adds details on American Realty’s deals with other Schorsch entities, tracing the movement of $917 million in fees to insiders and their affiliates.

ARCP was charged $510 million in deal-related commissions and fees, $63 million for advice, and assorted sums for public relations work, “services relating to office supplies” and furniture, much of which had no record of being received, according to the complaint.

The chairman’s acquisitions quickly made American Realty, started in December 2010, the biggest U.S. owner of single- tenant buildings such as drugstores, banks and Red Lobster restaurants.

The U.S. Justice Department, Securities and Exchange Commission and state investigators in Massachusetts are probing American Realty’s accounting errors and coverups, the Phoenix- based company said in a March regulatory filing.

October Report

American Realty said in October that it inflated cash flow and wrote down assets by $406 million in the fourth quarter, mostly tied to an earlier takeover. A deal to sell its Cole Capital unit’s broker-dealer to a Schorsch firm fell apart after American Realty disclosed the concealed accounting errors, sticking it with a $309 million writedown.

After the October report, ARCP’s top five executives and most directors resigned or were fired.

Schorsch has resigned and ARCP says it’s putting its house in order, ending deals with the web of companies he controlled. It said in March that some payments to Schorsch entities “warrant scrutiny” and the compensation committee should only have approved $120 million of a $222 million incentive plan, keyed to the company’s growth.

The investors say there was “a multi-year long accounting fraud that ultimately required ARCP to admit that it had falsified its reported operating performance and/or financial statements for every reporting period since it went public in 2011.”

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