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.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

3 Questions to ask yourself when making your succession plan

Michael Futterman from Janus Henderson Investors has sage advice for advisers as they approach retirement.

Latest news & opinion

Cetera brokers may go elsewhere with no stay bonuses on horizon

Some may feel spurned and leave, while others will simply shrug off latest slight and stay.

Fidelity backs away from being 'point in time' fiduciary for 401(k) plans

Some advisers think this indicates other providers will pivot in light of DOL fiduciary rule's death.

Morgan Stanley CEO is happy that brokers are staying put

Firm has seen little attrition since it dumped the broker protocol last fall, Gorman says.

Bills to reform adviser regulation, increase sophisticated investors and protect seniors pass House

Measures included in package of 32 bipartisan bills meant to ease rules, spur investment

Genstar Capital buys majority stake in Cetera Financial Group

The private-equity firm has previously invested in such companies as Mercer Advisors and AssetMark.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print