Former Reit Manager and Executives to Settle SEC Charges for More Than $60 Million
Litigation Release No. 24537 / July 17, 2019
Securities and Exchange Commission v. AR Capital, LLC, et al., No. 19 Civ. 6603 (AT) (S.D.N.Y. filed July 16, 2019)
On July 16, 2019, the Securities and Exchange Commission charged AR Capital LLC, its founder Nicholas S. Schorsch of Jenkintown, Pennsylvania, and its former CFO Brian Block of Hatfield, Pennsylvania, with wrongfully obtaining millions of dollars in connection with two separate mergers between real estate investment trusts (REITs) that were sponsored and externally managed by AR Capital. The defendants agreed to settle the matter by, among other things, cumulatively agreeing to over $60 million in disgorgement, prejudgment interest and civil penalties.
According to the SEC's complaint, between late 2012 and early 2014, AR Capital arranged for American Realty Capital Properties Inc. (ARCP), a publicly-traded REIT, to merge with two publicly-held, non-traded REITs. The SEC alleges that AR Capital, Schorsch, and Block, acting in breach of the relevant proxy disclosures, inflated an incentive fee in both mergers. As alleged, this improper calculation allowed them to obtain approximately 2.92 million additional ARCP operating partnership units as part of their incentive-based compensation. In addition, the complaint alleges that the defendants wrongfully obtained at least $7.27 million in unsupported charges from asset purchase and sale agreements entered into in connection with the mergers.
The SEC's complaint, filed in federal district court in Manhattan, charges AR Capital and Block with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, and falsifying books and records of ARCP in violation of Exchange Act Section 13(b)(5) and Rule 13b2-1. The complaint charges Schorsch with negligently violating the antifraud provisions of Sections 17(a)(2) and (3) of the Securities Act of 1933, as well as books and records violations in violation of Exchange Act Rule 13b2-1.
Without admitting or denying the allegations in the complaint, AR Capital, Schorsch, and Block have consented to entry of a final judgment that imposes permanent injunctions from violations of the charged provisions; orders combined disgorgement and prejudgment interest on a joint-and-several basis of over $39 million, which includes cash and the return of the wrongfully obtained ARCP operating partnership units; and imposes civil penalties of $14 million against AR Capital, $7 million against Schorsch, and $750,000 against Block. The settlements are subject to court approval.
The SEC's investigation has been conducted by Victor Suthammanont, Janna I. Berke, Hane L. Kim, Karen Willenken, Nancy A. Brown, and Wendy B. Tepperman of the SEC's New York office, and supervised by Sanjay Wadhwa.
For further information, see Press Release No. 2016-180 (Sept. 8 2016).