Securities Class Action Says ARCP Made Over $900M From Acquisition Binge

According to the amended complaint of an investor class action securities case, American Realty Capital Properties Inc. made over $900 million in commissions, fees and payments issued to company insiders after it started an acquisition binge to raise its share price and capital. The non-traded real estate investment trust purportedly started the buying frenzy, which lasted for three years, after completing its $69.8M IPO in 2011 and discovering that its share price was wallowing under the initial public offering price. The lead plaintiff in the case is the Teachers Insurance and Annuity Association of America, which is a retirement and annuities plan behemoth.

The securities lawsuit contends that because the lower than desired price was holding up ARCP’s ability to raise a significant amount of capital, the acquisition strategy allegedly involved artificially raising adjusted operation funds—a key metric for investors when evaluating an REIT’s performance. The plaintiffs believe that senior insiders at ARCP knew that the tactic was the only way to make the hefty fees. Over $917 million in payments went straight to ARCP insiders and the company’s affiliates.

Because of the acquisition binge, ARCP went from owning 63 properties and having $13 million in assets to owning over 4,400 properties and $21.3 billion in assets. The complaints claims that indirect and direct payments to ARCP insiders purportedly included $186.6 million subordinated distribution fees, and $333 million in fees and commissions. Some of the fees were allegedly triggered by ARCP’s buying of non-traded REITs American Realty Capital Trust IV Inc. and American Realty Capital Trust II, both defendants in the case. Other payments included $21.6 million for sales purportedly made to ARCP for equipment, fixtures, and furniture, $63.4 million for strategic advisory services, and $17.7 million for financing coordinating fees.

Also defendants are ex-ARCP chairman and CEO Nicholas Schorsch and other ex-executives. A Schorsch spokesman says that the amended lawsuit has no merit.

The original nontraded REIT fraud lawsuit was submitted in January. It accused ARCP of making statements that were misleading and false and misrepresenting its nontraded REITs business. It also claimed that ARCP took part in a scam to fool the market and artificially raise American Realty securities prices.

It was in October that ARCP disclosed that it purposely did not fix a $23 million accounting error that occurred during the first half of 2014. Schorsch resigned as ARCP chairman at the end of the year, as did then-CEO David and Kay and other leading executives.

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ARCP insiders generated $900M in fees during buying binge: lawsuit, InvestmentNews, April 20, 2015

Another Institutional Investor Fraud Lawsuit Accuses American Realty Capital Properties Of Violating Securities Laws, Institutional Investor Securities Blog, January 26, 2015

Fidelity, Schwab, and Pershing Suspend Trading of Schorsch Nontraded Real Estate Investment Trusts, Institutional Investor Securities Blog, November 13, 2014