REIT Settles With SEC Over Fee Inflation Charges

The Securities and Exchange Commission claims that American Realty Capital “wrongfully obtained” millions of dollars in additional fees.

Nicholas Schorsch (Patrick T. Fallon/Bloomberg

Nicholas Schorsch

(Patrick T. Fallon/Bloomberg

The U.S. Securities and Exchange Commission has settled with a REIT manager and two of its former executives over charges that the firm inflated fees.

The SEC announced Tuesday that it had settled with American Realty Capital, its co-founder Nicholas Schorsch, and its former CFO Brian Block after charging them with “wrongfully obtaining millions of dollars in connection with two separate mergers between real estate investment trusts” that AR Capital managed.

As part of the settlement, AR Capital and the two former executives have agreed to pay over $60 million in fines, including civil penalties of $14 million against AR Capital, $7 million against Schorsch, and $750,000 against Block, according to the SEC. AR Capital, Schorsch, and Block neither admitted nor denied the allegations against them, the SEC said.

“REIT managers and their professionals have an obligation to tell the truth when making disclosures to shareholders about their compensation,” Marc Berger, director of the SEC’s New York regional office, said in a statement. “AR Capital and its partners Schorsch and Block failed to do so and benefitted themselves greatly at the expense of shareholders.”

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According to the SEC, AR Capital arranged between 2012 and 2014 to merge American Realty Capital Properties, which was publicly traded, with two other publicly-held but non-traded REITs.

Block, Schorsch, and AR Capital allegedly manipulated the incentive fee math to inflate the share price of American Realty Capital Properties, which would, in turn, inflate their incentive-based compensation, per the SEC’s complaint.

The SEC also claimed that Block, Schorsch, and AR Capital inflated the furniture, fixtures, and equipment budget related to the mergers, allowing them to “wrongfully obtain” an additional $7.27 million.

“We are pleased that AR Capital was able to amicably resolve this matter with the United States Securities and Exchange Commission,” Anthony Galioto, deputy general counsel for AR Capital, said by phone Tuesday. “Having put this matter behind us, we will continue to focus on serving the interests of and creating values for the shareholders of the REITs we managed.”

Schorsch, who had been serving on the board of trustees at Drexel University, is no longer in that post, a spokesperson for the school confirmed Tuesday.