National Planning Holding Temporarily Stops Selling American Reality Capital Properties’ Nontraded REIT sales After Disclosure of $23M Accounting Error

National Planning Holding, a broker-dealer network, says that it has temporarily stopped offering American Realty Capital Properties Inc.’s (ARCP) non-traded real estate investment trusts for sale. The move comes after the real estate investment trust, run by Nicholas Schorsch, disclosed a $23 million accounting mistake. American Realty Capital is the top sponsor of nontraded REITs. Schorsch is its chairman.

The National Planning Holding suspension impacts just one Schorsch product, the Phillips Edison – ARC Grocery Center REIT II. This is a new REIT with about $207 million in total assets.

The four brokerage firms who are temporarily suspending sponsorship and distribution of the nontraded REITs by American Realty Capital Properties and its affiliates are SII Investments Inc., National Planning Corp, Investment Centers of America Inc., and INVEST Financial Corp. They are asking for Realty Capital Securities, the wholesaling broker-dealer for ARC products, to return unprocessed sales orders from INVEST advisers. They don’t want the brokerage firm to process related new business.

However according to the memo from INVEST CEO Steve Dowden, the brokers also are not allowed to solicit trades in ARCP and RSC Capital Corp, Capital Healthcare Trust Inc., and another company associated with Schorsch. Unsolicited trades in securities may still go through but they need to be marked. Also, the NPH brokerage firms want American Reality Capital to discontinue dividend reinvestments on ARC nontraded REITs that are not for sale anymore.

Earlier this week, American Realty Capital Properties revealed that its financial statements are not accurate and that there had been a $23 million error. The company said the audit committee believes that when the mistake was first was discovered it was purposely not remedied and other financial statements and errors were created to cover up the initial mistake. Because of this, noted the company, a measure of flow was overstated while net losses were understated.

American Realty Capital Properties said that it would reduce adjusted funds from operations by some $12 million for the three months that concluded this past March, as well as $10.9 million for the following three months. According to ARCP once the audit committee found out about the mistake, the error was fixed right away.

Following this latest news, American Realty Capital Property’s chief financial officer, Michael Brian Block resigned. A new chief accounting officer, Gavin Brandon, was also named. He replaces Lisa McAlister.

Since the error disclosure was made public, American Realty Capital Properties’ stock has plunged 28%. Meantime, the U.S. Securities and Exchange Commission said it intends to start an inquiry into the matter. Schorsch, however, has downplayed the mistake for its potential to have any spillover effect. He said the issue would not affect his unlisted real estate investment trusts.

Yet, according to the Wall Street Journal, brokers are reporting a rise in the number of investors wanting to sell their shares in some of the unlisted REITs that are sponsored by companies that have an affiliation to Schorsch. Also, LPL Financial Holdings Inc. (LPLA), which is the biggest network of independent financial advisers in the country, has said that it is placing certain unlisted REITs on its “watch list.”

Our nontraded REIT fraud lawyers represent investors seeking to recoup their losses.

Schorsch’s American Realty Capital discloses serious accounting errors; CFO out, InvestmentNews, October 29, 2014

Investors Rethink American Realty-Linked REITs, The Wall Street Journal, October 31, 2014

Investors Rethink American Realty-Linked REITs, The Wall Street Journal, October 31, 2014

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SEC Approves Regulations Involving REIT Prices and Arbitration Fraud Intervention, Stockbroker Fraud Blog, October 18, 2014

California Regulators Probe Inland American Real Estate Trust REIT, Stockbroker Fraud Blog, May 15, 2014

Non-Traded REITs, Structured Products, and Private Placements Remain Under Regulator Scrutiny, Institutional Investor Securities Blog, July 7, 2014