AR Capital founder Nick Schorsch, former CFO Brian Block and the firm have agreed to pay $60 million to settle fraud charges with the SEC.
The SEC claimed that Schorsch and Block wrongfully obtained millions of dollars in connection with two mergers of real estate investment trusts managed by AR Capital between late 2012 and early 2014.
According to an SEC complaint, AR Capital arranged for American Realty Capital Properties Inc., a publicly traded REIT, to merge with two publicly held, nontraded REITs.
In the course of those mergers, the SEC alleged, AR Capital, Schorsch and Block inflated an incentive fee and wrongfully obtained at least $7.27 million in unsupported charges from asset purchase and sale agreements they entered into in connection with the mergers.
Schorsch was the REIT operator that poured millions of dollars into acquiring independent broker/dealers, including Cetera Financial, before a fall from grace that started with an October 2014 announcement of a $23 million accounting error at American Realty Capital Properties. Schorsch went from running AR Capital and building a b/d empire to leaving the companies he founded by December 2015. Cetera Financial was split off from Schorsch's other companies and eventually was acquired by private equity firm Genstar last year.
"REIT managers and their professionals have an obligation to tell the truth when making disclosures to shareholders about their compensation," said Marc P. Berger, director of the SEC's New York Regional Office. "As we allege in our complaint, AR Capital and its partners Schorsch and Block failed to do so and benefitted themselves greatly at the expense of shareholders."
AR Capital, Schorsch and Block have agreed to pay combined disgorgement and prejudgment interest on a joint-and-several basis of over $39 million, including cash and the return of the wrongfully obtained ARCP operating partnership units. AR Capital will also pay civil penalties of $14 million, Schorsch will pay $7 million, and Block will pay $750,000. The settlements are subject to court approval.