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Articles Tagged with ARCP

Nicholas Schorsch’s former real estate investment trust (REIT) American Realty Capital Properties Inc. (ARCP) has arrived at a $1B settlement with investors who sued over the company’s accounting scandal that led to inflated financial results five years ago. Now called Vereit, the REIT will pay $738.5M of the class action securities fraud settlement, while Schorsch’s American Realty Capital (AR Capital) will pay $225M. American Realty Capital Property’s ex-CFO Brian Block will pay $12.5M of the settlement. Meantime, Grant Thornton, the firm’s auditor during the period of the scandal, will pay $49M.

American Realty Capital Properties admitted to a $23M accounting error in late 2014. After ARCP restated its financials, investors sold their shares, causing a $3B drop in the REIT’s value. At one point, ARCP held $20B in assets.

Investors sued, accusing the REIT of incorrectly stating financials so as to spur acquisitions and inflate financial results. Two years ago, Block pleaded guilty to securities fraud related to the accounting misstatements.

A federal jury has found ex-American Realty Capital Properties (ARCP) Inc. CEO Brian Block guilty of securities fraud, conspiracy to commit securities fraud and other offenses, and of submitting false certifications and filings to the US Securities and Exchange Commission. Block was convicted of overstating the adjusted funds from operations (AFFO) at the real estate investment trust. Following the rendering of the verdict in the REIT fraud case, a lawyer for Block said that his client plans to appeal.

According to the US Department of Justice, an employee notified Block, as well as then-accounting chief Lisa McAllister about the funds overstatement before the first quarter results were publicly released in 2014. However, neither of them reported the error to auditors or to the REIT’s board. Prosecutors contend that Block tried to cover up the incorrect figures in financial reports for the second quarter.

The Wall Street Journal, which reviewed ARCP’s filings, reports that during 2014’s first quarter, McAlister and Block overstated the AFFO by over $12M and by about $10.9M during the next quarter. McAlister pleaded guilty to securities fraud and other criminal charges last year.
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Former REIT CFO’s Criminal Trial is Under Way
Brian Block, the ex-American Realty Capital Properties CFO, is on trial over his alleged involvement in accounting errors that led to the former Nicholas Schorsch-controlled real estate investment trust’s release of inaccurate financial statements during the first two quarters of 2014. As a result of the inaccuracies, ARCP overstated its adjusted funds from operations (AFFO) by about $12M for the end of that first quarter and by about $10.9M for the second quarter while understating its net losses.

This week, Lisa McAlister, a key witness and ARCP’s ex-chief accounting officer gave testimony. She suggested that Schorsch, the REIT’s CEO and chairman at the time, instructed Block on how to distort the number in the books. Block was McAlister’s boss at ARCP.

McAlister said that she was in the room when Schorsch advised Block on how to hide the fraudulent accounting. McAlister said that Schorsch, who has not been charged with wrongdoing in the accounting mistakes, was instructing Block on how to compensate for a 3-cent shortfall in ARCP’s targeted AFFO/share by fudging a certain line item.

McAlister has already pleaded guilty to fraud charges over ARCP’s accounting irregularities.

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Brian S. Block, the ex-CFO of American Realty Capital Properties Inc., now called Vereit, has pleaded not guilty to criminal charges that accuse him making false filings with the SEC, making false certifications, securities fraud, and conspiracy to commit securities fraud. His criminal trial is scheduled for May 2017.
 
The U.S. Department of Justice had filed the charges against Block earlier this month. He was arrested at his home in September.
 
 According to a statement issued by Manhattan U.S. Attorney Preet Bharara, Block is accused of knowingly misleading the public and doing so through material misrepresentations about a key metric for evaluating the real estate investment trust’s 2014 financial performance. The government claims that Block overstated, by approximately $13M, the “adjusted funds from operations” for that year. As a result, the public thought that ARCP was performing better than how it was actually doing.  
 

 

Raymond James and Robert W. Baird Are Charged With Compliance Failures

The Securities and Exchange Commission said that Robert W. Baird and Co. and Raymond James & Associates (RJF) will pay $250K and $600K, respectively, to settle charges accusing them of compliance failures in their own wrap free programs. Both firms resolved the charges without admitting or denying to them. They did, however, consent to the regulator’s orders, which found that they violated the Investment Advisers Act of 1940 and Rule 206(4)-7.

According to the SEC’s investigation, Raymond James and Robert W. Baird did not put into place the necessary policies and procedures that would have allowed them to figure out how much in commissions  their clients were charged when sub-advisers “traded away” with a brokerage firm that was not part of the wrap fee programs. As a result, said the regulator, the advisers could not let clients know the “magnitude of the costs” nor did the firm consider these commissions when trying to figure out whether the wrap fee program or sub-advisers were appropriate for clients. Because of this, claims the SEC, some clients did not know that they were paying for more than the single wrap fee for investments that were bundled.

 

Two ARCP Ex-Accounting Executives Face SEC and Criminal Charges For Allegedly Inflating the REIT’s Performance

Brian S. Block and Lisa P. McAlister are facing criminal and civil charges for allegedly overstating the performance of the American Reality Capital Properties (ARCP), now called VEREIT Inc. The two former ARCP accounting executives are accused of inflating a key metric that investors and analysts used to evaluate the publicly-traded real estate investment trust.

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FINRA Expels Halcyon Cabot, Bars Chief Executives
Halcyon Cabot Partners, Ltd. has been expelled by FINRA. The regulator also has barred its CEO Michael Morris and CCO Ronald Heineman from the securities industry. The reasons for the expulsion and bars include fraud, abusive sales practices, the concealment of private placement fee kickbacks, and other purported acts.

According to the self-regulatory organization, Halcyon, the two men, and previously barred former registered rep. Craig Josephberg hid the discount the issuer gave to a venture capital firm when it bought a private placement in a company. The scam was executed using a fake placement fee deal after the venture capital firm agreed to buy all the offerings. However, FINRA said, because there already was a buyer, Halcyon didn’t conduct any work and gave back nearly all of its $1.75M fee to the investor via bogus consulting agreements. As a result, the company was able to hide that its shares were sold at a reduced rate.

FINRA contends that Halcyon did not properly supervise Josephberg, who was making unauthorized trades and churning retail accounts. The regulator is accusing Morris of falsifying Halcyon’s records to hide the securities sales that Josephberg made in states where he wasn’t registered, including Texas.

Blackstone Group to Pay Almost $39M Over Disclosure Failures
The Securities and Exchange Commission said that three private equity fund advisers that belong to The Blackstone Group have consented to pay close to $39 million to resolve charges that they did not fully inform investors about the benefits they received from discounts on legal fees and accelerated monitoring fees. While Blackstone is settling and has consented to the entry of the regulator’s order stating that it breached its fiduciary duty, failed to put into place policies and procedures that were reasonably designed, and failed to correctly disclose information to investors of the funds, it is not denying or admitting to allegations.

The three fund advisers are:

• Blackstone Management Partners
• Blackstone Management Partners IV
• Blackstone Management Partners II

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According to the amended complaint of an investor class action securities case, American Realty Capital Properties Inc. made over $900 million in commissions, fees and payments issued to company insiders after it started an acquisition binge to raise its share price and capital. The non-traded real estate investment trust purportedly started the buying frenzy, which lasted for three years, after completing its $69.8M IPO in 2011 and discovering that its share price was wallowing under the initial public offering price. The lead plaintiff in the case is the Teachers Insurance and Annuity Association of America, which is a retirement and annuities plan behemoth.

The securities lawsuit contends that because the lower than desired price was holding up ARCP’s ability to raise a significant amount of capital, the acquisition strategy allegedly involved artificially raising adjusted operation funds—a key metric for investors when evaluating an REIT’s performance. The plaintiffs believe that senior insiders at ARCP knew that the tactic was the only way to make the hefty fees. Over $917 million in payments went straight to ARCP insiders and the company’s affiliates.

Because of the acquisition binge, ARCP went from owning 63 properties and having $13 million in assets to owning over 4,400 properties and $21.3 billion in assets. The complaints claims that indirect and direct payments to ARCP insiders purportedly included $186.6 million subordinated distribution fees, and $333 million in fees and commissions. Some of the fees were allegedly triggered by ARCP’s buying of non-traded REITs American Realty Capital Trust IV Inc. and American Realty Capital Trust II, both defendants in the case. Other payments included $21.6 million for sales purportedly made to ARCP for equipment, fixtures, and furniture, $63.4 million for strategic advisory services, and $17.7 million for financing coordinating fees.

The New York City Retirement Systems and TIAA-CREF have joined other institutional investors in suing . They contend that the real estate investment trust violated federal securities laws when it allegedly made misleading and false statements that misrepresented the company’s business, as well as took part in a scam to fool the market and artificially inflate American Realty securities prices.

The securities laws claims are related to a $23 million accounting error that REIT made during last year’s first stated quarters, misstating the company’s adjusted operation funds. While ARCP eventually disclosed the mistakes, the plaintiffs claim that the company’s senior executives did not at first correct the error when it was discovered. The institutional investors believe that this was because executives wanted to get class members to buy American Realty securities at inflated prices.

TIAA-CREF and the $158.7 billion pension fund are seeking lead plaintiff class action securities status for their institutional investor fraud lawsuit.

American Realty Capital Properties’ (ARCP) credit rating was just downgraded to junk status by Moody’s Investors Service (MCO). The credit rater is now rating the real estate investment trust with a Ba1, which is just under investment grade. Moody’s has also given ARCP a negative outlook. The downgrade comes following this week’s management shakeup at the REIT and its disclosure several weeks ago of massive accounting irregularities that were covered up.

This week, American Reality Capital Properties’ chairman and founder Nicholas Schorsch stepped down, as did COO Lisa Beeson and chief executive David Kay. In October, ARCP’s chief accounting officer and CFO also resigned after an $23 million accounting mistake was announced.

The change in management comes weeks after the REIT disclosed that it misstated financial results in 2014’s first quarter and purposely concealed the error by misrepresenting second quarter results. After the REIT revealed the $23 million accounting error, a number of firms suspended trading in nontraded real estate investment trusts that were run and backed by companies under Schorsch. The firms included Fidelity, Charles Schwab (SCHW), Pershing, LPL Financial (LPLA), AIG Advisor Group, National Planning Holding, Securities America, and even Schorsch’s Cetera Financial Group broker-dealer network.

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