A $60M settlement has been reached between The US Securities and Exchange Commission (SEC) and AR Capital, the real estate investment trust (REIT) manager’s founder Nicholas Schorsch, and American Realty Capital Properties Inc. (ARCP) ex-CFO Brian Block. The three of them are accused of “wrongfully obtaining” millions of dollars related to two mergers involving REITS that AR Capital managed and sponsored.
According to the regulator’s complaint, between the latter part of 2012 and the beginning of 2014, AR Capital took steps so that ARCP, a publicly traded REIT, would merge with American Realty Capital Trust III and American Realty Capital Trust IV, two non-traded REITS that were publicly held. Schorsch was the principal owner and CEO of all three REITs during the time of the merger, while Block was the CFO and a minority shareholder.
The Commission contends that without their board’s permission, the REIT manager, Schorsch, and Block “inflated an incentive fee” during the mergers, which made it possible for them to get another $2.92M in ARCP operating partnership units as a portion of their “incentive-based” compensation.” The SEC is also accusing the three defendants of “wrongfully obtaining” at least $7.2M in charges that were not supported from the sale and asset purchase agreements that were related to the mergers.
AR Capital, Block, and Schorsch allegedly failed to tell shareholders all of the details of the compensation they obtained even though it was their duty to do so. They also are accused making misrepresentations and omissions related to the mergers.
The three defendants are settling the SEC charges but without denying or admitting to the allegations brought against them. The $60M settlement includes disgorgement and prejudgment interest of more than $39M, including $2.9M in operating partnership units. The latter are real estate securities with a worth equivalent to that of REIT shares. However, they can’t be exchanged for cash or sold.
Also, the Commission imposed civil penalties of $14M, $7M, and $750K on AR Capital, Schosrch, and Block, respectively.
Block Appeals Fraud Conviction
Block, meantime, is continuing to battle a criminal fraud conviction against him for modifying a certain metric in a report to the SEC. This caused another $13M to be reported as adjusted fund from operations (AFFO) for ARCP. Although Block was sentenced to 18 months behind bars, an appeals court has placed the sentence on hold until that motion is resolved.
It was the accounting scandal involving ARCP, later named VEREIT, in which the company disclosed a $23M accounting error that caused inflated financial results and compelled investors to file fraud claims. Just late last year, VEREIT settled with eight entities, including BlackRock ACS US Equity Tracker Fund, Eton Park Fund, Clearline Capital Partners, Pentwater Equity Opportunities Master Fund, HG Vora Special Opportunities Master Fund, Reliance Standard Life Insurance Co., PIMCO Diversified Income Fund, and Twin Securities Inc. for $85M. Previous investor fraud claims were collectively settled for over $100M. More settlements are expected.
Shepherd Smith Edwards and Kantas, LLP (SSEK Law Firm) works with investors nationwide in filing their REIT fraud cases. Contact us today.