Investment Funds File Lawsuit Against Schorsch, Block, and ARCP
Five investment funds affiliated with Blackstone Strategic Opportunity Associates and Fir Tree Partners filed a lawsuit against American Realty Capital Properties (now known as Vereit, Inc.) and a handful of its former executives to recover losses they suffered as a result of “numerous false and misleading statements made in ARCP’s public filings with the Securities and Exchange Commission.”
The funds were invested in security-based swaps based on ARCP common stock when the company acquired Cole Real Estate Investments in February 2014, as well as subsequent purchases later that year. The funds filed the lawsuit against ARCP, which later changed its name to Vereit Inc. (NYSE: VER) and severed ties with the legacy firm, as well as its former chairman and CEO Nicholas Schorsch, chief financial officer Brian Block, president David Kay, and chief accounting officer Lisa McAlister.
The lawsuit follows last week’s conviction of Block, who was found guilty of securities fraud and related crimes stemming from his role in the accounting fraud scandal that rocked the company in October 2014.
Block and his former colleague McAlister manipulated the company’s second quarter 2014 financial results at the direction of Schorsch by inflating the company’s adjusted funds from operations, or AFFO, hours before filing the results with the SEC. According to the complaint, Kay was aware of the improper accounting and expressly instructed Block and McAlister not to disclose it to others.
McAlister, who cooperated with federal prosecutors during Block’s criminal trial, pled guilty to fraud last year and is expected to be sentenced later this summer. Schorsch has not been named in any federal indictments regarding the ARCP affair or other AR Global-related scandals.
In the days following the public disclosure of the accounting cover-up and subsequent firings of Block and McAlister, ARCP stock dropped precipitously – losing nearly 30 percent of its value.
The plaintiffs argue that there was a “rampant lack of effective internal controls” at ARCP, and that the internal controls created by Schorsch, Block, Kay and McAlister were “vastly ineffective and severely flawed.”
“ARCP common stock traded at artificially inflated prices…,”according to the complaint. “The artificial inflation continued until the time the market came to realize the truth about ARCP’s overstated AFFO, net loss, GAAP errors, and ineffective internal controls.”
The plaintiffs said that they acquired the security-based swaps at artificially high prices, and had they been aware of the financial health of the company and its lack of internal controls, they either would not have purchased the swaps in the first place or would not have paid the prices that they did.
The plaintiffs allege that ARCP committed common law fraud and violated sections of the Exchange Act and are seeking compensatory and punitive damages, lawyer’s fees, and other relief deemed proper by the court.
