Vanguard has settled a 'multi-billion dollar' lawsuit with Vereit, the scandal-hit real estate investment trust (Reit) founded by Nicholas Schorsch.
Vereit, which was formerly known as American Realty Capital Properties (ARCP), is to pay Vanguard $90 million in a move that will bring an end to a long-running legal battle between the two firms.
The case dates back to October 2015, when Vanguard sued Vereit, Schorsch and other company officials in an Arizona federal court, claiming that it, along with other investors, had lost billions of dollars due to an accounting scandal at the Reit, court documents show.
Through a number of its funds, Vanguard owned a combined 13% stake in Schorsch's company.
The lawsuit was filed after Schorsch stepped down from his chairman role at ARCP in December 2014 and the company disclosed a $23 million accounting misstatement, having misrepresented its ‘adjusted funds from operations’ (AFFO) in its financial statements and restated seven quarters of financial results.
The scandal caused the company’s stock to slide more than 36%.
‘The company’s stock price plummeted by over 36% in response to the company’s disclosure of the fraud and attempted cover-up, causing plaintiffs and other investors to lose billions of dollars,’ Vanguard said in its complaint.
In its lawsuit, Vanguard also claimed Schorsch and ARCP used the misrepresented AFFO figures to justify an aggressive series of acquisitions, which grew the Reit from $132 million in assets in 2011 to $21.3 billion in 2014.
‘The true primary purpose in Schorsch’s buying spree, however, was to rob from shareholders and to give to himself and his friends,’ Vanguard said in its 2015 complaint. The claim also alleged Schorsch siphoned out ‘hundreds of millions of dollars’ from ARCP.
A Vanguard spokeswoman declined to comment on the settlement.
As part of the $90 million settlement, Vereit, Schorsch and the other company officials have been released from the lawsuit, without admitting liability or wrongdoing.
It is not the end of their legal battles, however, with a shareholder class-action lawsuit against Vereit and Schorsch, led by TIAA-CREF, potentially going to trial next year.
Vereit, which rebranded in July 2015 and now controls $14.5 billion, issued a statement in which it said that it had settled with Vanguard in an effort to mitigate legal risk.
‘In light of the fact that the Vanguard lawsuit was proceeding in a different federal district court than the other related cases pending against Veriet, Vereit believes that if the Vanguard lawsuit continued, it could find itself facing successive trials on similar factual and legal issues that could have subjected Vereit to increased legal risk,’ the company said in the statement.‘Based on these factors and others, we believe that the settlement with Vanguard is in Vereit's best interest.’
The ARCP accounting scandal also sparked a series of lawsuits against the firm and resulted in ARCP’s CFO, Brian Block, receiving a lifetime ban from serving as a director and officer from the Securities and Exchange Commission.
The scandal also precipitated the downfall of Schorsch’s wider business empire.
He was forced to resign as the chairman of brokerage house RCS Capital, which he had taken public in 2013. RCS Capital had purchased Cetera Financial Group for $1.15 billion in cash in early 2014 as part of its own expansionary push before filing a pre-arranged chapter 11 bankruptcy petition in January 2016.
The firm emerged from chapter 11 in May 2016 with Cetera as its only operating entity.
In October of 2017, RCS Capital's bankruptcy estate paid shareholders, led by the Oklahoma Police Pension Fund and Retirement System and the local government of Providence, RI, $31 million to settle a class-action lawsuit alleging securities fraud.