Former Schorsch REIT reaches $90 million settlement with Vanguard

The mutual fund giant was the largest shareholder of American Realty Capital Properties Inc. when it reported inflated financial results because of a $23 million accounting mistake

Jun 12, 2018 @ 2:42 pm

By Bruce Kelly

Vereit Inc., a net lease real estate investment trust, has agreed to pay mutual fund giant Vanguard $90 million as part of a settlement stemming from an accounting scandal four years ago when the company was controlled by Nicholas Schorsch, the former nontraded REIT czar.

Vanguard was the largest shareholder of Vereit, which was known as American Realthy Capital Properties Inc, or ARCP, when the scandal broke. Through various funds, the mutual fund company owned about 13% of the firm's outstanding shares.

In the fall of 2014, ARCP revealed a $23 million accounting error that had resulted in the company reporting inflated financial results. ARCP's stock plunged 21% on the day the accounting mistake was announced and has never recovered.

By the end of 2014, Mr. Schorsch had resigned from the company as its chairman. In March 2015, ARCP restated financial results going back to 2013, hired a new CEO and was eventually rechristened Vereit in order to distance itself from the scandal.

Vereit has been sued by other investment managers, notably TIAA-Creff, so other payments to shareholders could possibly happen in the future.

Vanguard sued Vereit, Mr. Schorsch and other past executives in October 2015, alleging "a multi-year fraud and attempted cover-up orchestrated by the top corporate executives at ARCP" when Mr. Schorsch was CEO and chairman of the company.

The settlement between Vereit and Vanguard also leaves open the potential for Vereit to sue Mr. Schorsch and other former senior executives of the company in the future. It gives Vereit the right to pursue claims against other named defendants in the Vanguard lawsuit, according to a press release from Vereit.

The company announced the settlement on Monday, saying that "Vereit is pleased to have brought Vanguard's lawsuit to a conclusion," according to a press release. Mr. Schorsch has no connection to Vereit at this time.

A spokesman for AR Global, the privately held real estate investment manager Mr. Schorsch controls, said it had no commnent on the Vereit-Vanguard settlement.

The fallout from the ARCP 2014 accounting scandal has been significant. Sales of nontraded REITs sponsored by Mr. Schorsch eventually collapsed, resulting in the 2016 bankruptcy of a broker-dealer holding company he controlled, RCS Capital Corp., or RCAP.

Brian Block, ARCP's former chief financial officer, was charged in 2016 by federal prosecutors with securities fraud and was later convicted and sentenced to 18 months and fined $100,000. The government had sought a sentence of at least seven years. Mr. Block is appealing the conviction.

Later that year, RCAP emerged from bankruptcy as Cetera Financial Group, a privately controlled network of six independent broker-dealers.

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