Nicholas Schorsch, the former nontraded real estate investment trust czar who in his heyday raised billions of dollars annually from retail investors, and his firm AR Capital agreed to pay $60 million in penalties to settle Securities and Exchange Commission charges that he, the firm and a partner wrongfully obtained millions of dollars in connection with REIT mergers that were managed by AR Capital.
According to the SEC's complaint, between late 2012 and early 2014, AR Capital arranged for American Realty Capital Properties Inc., a publicly traded REIT, to merge with two publicly held, nontraded REITs.
The SEC alleges that AR Capital, Mr. Schorsch and a partner at AR Capital, Brian Block, inflated an incentive fee in both mergers. This improper calculation allegedly 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.
Mr. Schorsch is the controlling partner of AR Capital.
"We are pleased that AR Capital was able to amicably resolve this matter with the United States Securities and Exchange Commission," said Anthony Galioto, deputy general counsel of AR Global, a separate REIT manager that Mr. Schorsch also controls. "Having put this matter behind us, we will continue to focus on serving the interest of and creating value for the shareholders of the REITs we manage."
AR Capital, Mr. Schorsch and Mr. Block agreed to the settlement without admitting to or denying the SEC's findings.
Mr. Block was convicted of securities fraud two years ago in connection with his role as chief financial officer at ARCP. He has appealed that conviction.
AR Capital, Mr. Schorsch and Mr. Block have agreed to pay disgorgement of more than $39 million, which includes cash and the return of the wrongfully obtained ARCP operating partnership units; and civil penalties of $14 million against AR Capital; $7 million against Mr. Schorsch, and $750,000 against Mr. Block.
The settlements are subject to court approval.