The Vanguard Group’s various funds and investment entities filed a lawsuit in federal court this week against Nicholas Schorsch, AR Capital, RCS Capital Corp. (NYSE: RCAP), VEREIT (formerly American Realty Capital Properties, Inc.), and other current and former ARC-related entities and executives.
The suit stems from the highly publicized ARCP accounting scandal made public in October 2014. While the Vanguard entities do not list a specific dollar amount sought as restitution for the alleged misconduct, they did demand a jury trial.
According to the lawsuit, “the case arises from a multi-year fraud and attempted cover-up orchestrated by the top corporate executives of ARCP, one of the largest real estate investment trusts in the world.”
ARCP, the huge net lease REIT founded by Schorsch and his partners at AR Capital (William Kahane, Brian Block, Michael Weil and Peter Budko), restated seven consecutive quarters of financial information after accounting irregularities were disclosed. A wave of C-suite resignations, including that of Schorsch himself, followed the revelations, as did a massive deflation in the stock price. According to the lawsuit, “the company’s stock price plummeted by over 36 percent […] causing the plaintiffs and other investors to lose billions of dollars.”
During the period in question, ARCP experienced tremendous growth. The company purchased major real estate companies between February 2013 and July 2014 at an average price of more than $3 billion, and according to the lawsuit, “ARCP’s largest and by far its most important transaction was acquiring Arizona-based rival Cole Real Estate Investments Inc. for $11.2 billion.”
“As a result of these acquisitions,” the lawsuit claims, “ARCP ballooned from a moderate-sized company comprising $132 million worth of assets at year-end 2011 to a real-estate empire of $21.3 billion in assets by mid-2014.”
Vanguard also claims that “the true primary purpose in Schorsch’s buying spree, was to rob from shareholders and to give to himself and his friends: Schorsch transferred hundreds of millions of dollars to entities owned or controlled by him and by other senior insiders.”
In addition to Schorsch and Block, three other former ARCP executives were also named in the lawsuit: former president David Kay, former chief accounting officer Lisa McAlister, and former chief operating officer Lisa Beeson.
Following disclosure of the accounting scandal, McAlister filed a verified complaint in New York state court and sued Schorsch, Kay and ARCP. McAlister claimed that she was defamed and terminated for reporting the accounting malfeasance and alleges that “an undisclosed change to the method for calculating adjusted funds from operation (AFFO) – from ‘net’ to ‘gross’– was made ‘suddenly and without any apparent justification or basis.” She indicated that Schorch, Kay and Block “ordered” the change “to avoid public disclosure of [ARCP’s] faltering financial performance.” McAlister later withdrew her suit without prejudice, meaning she could refile at a later date.
Spokesmen for VEREIT declined to comment on the lawsuit, and requests for comment from AR Capital and RCS Capital were not returned at press time.