Real estate advisory firm AR Capital LLC, its founder, and its chief financial officer have agreed to pay more than $60 million to settle SEC charges that they wrongfully obtained millions of dollars in connection with two separate mergers between real estate investment trusts (REITs) that AR Capital sponsored and externally managed.
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: American Realty Capital Trust III, Inc. and American Realty Capital Trust IV, Inc. The SEC alleges that AR Capital, its founder Nicholas Schorsch, and CFO Brian Block inflated an incentive fee in both mergers.
The SEC alleges that an “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.
“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.”
The defendants allegedly inflated the calculation of the American Realty Capital Trust III promote fee in three ways. First, they allegedly used a trailing five-day average price of ARCP stock instead of the ARCP closing price on the day prior to the merger closing. Second, they allegedly disregarded the actual cash stock elections by American Realty Capital Trust III’s shareholders. And thirdly, they allegedly used an unsupported multiplier in the conversion to operating partnership units portion of the calculation.
The SEC also accused the defendants of directing the creation of and/or approving misleading asset purchase and sale agreements in which AR Capital received $5.8 million from ARCP in connection with each merger. This was purportedly for ARCP’s purchase from AR Capital of furniture, fixtures, and equipment necessary for the post-merger operations of ARCP and the reimbursement to AR Capital of certain “unreimbursed expenses.” The SEC alleges that the defendants wrongfully obtained at least $7.27 million in unsupported charges through those agreements.
AR Capital, Schorsch, and Block, without admitting or denying the allegations in the complaint, have consented to entry of a final judgment that imposes permanent injunctions from violations of the charged provisions. The settlement includes combined disgorgement and prejudgment interest on a joint-and-several basis of more than $39 million, which includes cash and the return of the wrongfully obtained ARCP operating partnership units. It also imposes civil penalties of $14 million against AR Capital, $7 million against Schorsch, and $750,000 against Block. The settlement is subject to court approval.