Jacobson Law P.A. is investigating claims on behalf of investors who invested in real estate investment trusts (“REITS”) offered by American Realty Capital Properties, Inc. (“ARCP”) or its affiliated companies through or on the advice of a broker or brokerage firm.
What is ARCP?
Based in New York, ARCP is the biggest U.S. owner of single-tenant retail properties such as gas stations, fast food restaurants, and drugstore chains. Nicholas Schorsch, is one of ARCP’s co-founders; and until September 30, 2014, he was also its Chairman and chief executive officer (“CEO”). Mr. Schorsch is also the executive chairman of RCS Capital Securities Corp., the parent company of Boston-based Realty Capital Securities, which is the wholesaling broker-dealer for ARCP’s non-traded REITs.
In February 2013, ARCP merged with American Realty Capital Trust III, Inc., a similarly focused real estate investment company, in a deal valued at $3.1 billion. In January 2014, ARCP merged with American Realty Capital Trust IV, Inc., another real estate investment company, in a deal valued at $3 billion. In February 2014, ARCP merged with Cole Real Estate Investments, Inc., its largest competitor, in a transaction valued at $11.2 billion. That merger brought ARCP’s total enterprise value up to approximately $21.5 billion and effectively created the largest net lease REIT on the market. In July 2014, ARCP closed on the $1.5 billion purchase of seafood chain Red Lobster’s real-estate portfolio.
ARCP Discloses Intentional Account Fraud
On October 29, 2014, ARCP disclosed that its financial statements were inaccurate, and it replaced its chief financial officer (“CFO”), Brian Block, and chief account officer (“CAO”), Lisa McAlister. ARCP further stated that it would reduce its adjusted funds from operation by approximately $12 million for the first quarter of 2014 and by approximately $10.9 million for the second quarter of 2014.
Crucially, ARCP admitted in its official statement that these accounting mistakes had been intentionally made and deliberated covered up: “The audit committee believes that this error was identified but intentionally not corrected, and other AFFO and financial statement errors were intentionally made.” According to its official statement, ARCP only discovered these accounting improprieties after it was tipped off by an internal whistleblower.
On the day that ARCP made these disclosures, its shares dropped 20%; and following ARCP’s disclosure, a number of brokerage firms announced they would no longer support trading in ARCP’s REITS.
Firms Stop Trading ARCP REITs
On October 30, 2014, the four broker-dealers in National Planning Holdings Inc. broker-dealer network — INVEST Financial Corp., Investment Centers of America Inc., National Planning Corp., and SII Investments Inc. — issued a memorandum advising their 3,954 registered representative and advisors that they were “temporarily suspending non-traded REITs sponsored or distributed by [American Realty Capital] and its affiliated companies.” This suspension only affected the Phillips Edison-ARC Grocery Center REIT II; however, the memo also stated that brokers were prohibited from soliciting trades in ARCP and three other listed companies associated with Mr. Schorsch: RCS Capital Corp. (“RCAP”), American Realty Capital Healthcare Trust Inc. (“HCT”), and a third company that could not be immediately identified (“ARCPP”).
On October 31, 2014, Securities America, Inc., with 1,722 brokers and advisors, announced that it had temporarily suspended sales two ARCP-related REITs: the Phillips Edison-ARC Grocery Center REIT II and Cole Capital Properties V.
On November 3, 2014, AIG Advisors Group, with four broker-dealers that house approximately 6,000 registered representatives and advisers, told its sales force that it was suspending sales of two non-traded ARCP REITs: the American Realty Capital New York City REIT Inc. and the Phillips Edison-ARC Grocery Center REIT II.
On November 4, 2014, LPL Financial Holdings, the largest independent U.S. broker-dealer with nearly 14,000 advisers, announced that it would no longer sell products by ARCP and RCS Capital Corporation “and their respective affiliates.”
On November 5, 2014, Cetera Financial Group, a subsidiary of RCS Capital Corp., of which Mr. Schorsch is executive chairman, announced that it had suspended sales of non-traded REITs offered by Cole Capital Partners and Cole Capital Advisors Inc., both of which companies are owned by ARCP.
Also on November 5, 2014, Cambridge Investment Research Inc. (“Cambridge”) informed its 3,041 brokers that it was halting sales of three REITs related to the Cole brand; and on November 6, 2014, Cambridge said it was suspending sales of four REITs distributed by Realty Capital Securities.
The same day that ARCP disclosed its accounting improprieties, the U.S. Securities and Exchange Commission (“SEC”) announced that was launching an inquiry into ARCP’s accounting practices.
On October 30, 2014, two separate securities class action lawsuits were filed in the Southern District of New York against ARCP: Bernard Priever, individually and on behalf of all other similarly situations, v. American Realty Capital Properties, Inc., Lisa P. McAlister, and Brian S. Block, Civil Action No. 14-CV-8668 (S.D.N.Y. Oct. 30, 2014), and Perry Ciraulu, individually and on behalf of all others similarly situated, v. American Realty Capital Properties, Inc., Nicholas S. Schorsch, David S. Kay, Brian Block, and Lisa McAlister, Civil Action No. 14-CV-8659 (S.D.N.Y. Oct. 30, 2014).
On November 7, 2014, William Galvin, secretary of the Commonwealth of Massachusetts, announced that that his office, which includes the Massachusetts securities division, had launched an investigation into Realty Capital Securities and how it sold non-traded REITs. Mr. Galvin’s office is specifically looking at what information was given to investors who bought the REITs and what investors were told about accounting at the REITs
If you invested in REITS or any other investments related to American Realty Capital Properties, Inc. (or any of its affiliated companies) through or on the advice of a brokerage firm, contact Jacobson Law P.A. for a free consultation. You may have a claim and could be entitled to recover damages.