Ex-Cetera owner Nicholas Schorsch to pay part of $60M SEC settlement
There’s more regulatory fallout for non-traded REIT kingpin and former owner of Cetera Financial Group Nicholas Schorsch.
Schorsch, AR Capital, a firm he founded, and former CFO Brian Block, have settled with the SEC for $60 million over an alleged fraud involving a pair of REIT mergers. The commission charged that the pair and AR Capital collected millions of dollars in excess fees associated with two separate mergers of REITs managed and sponsored by their firm.
"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. "As we allege in our complaint, AR Capital and its partners Schorsch and Block failed to do so and benefited themselves greatly at the expense of shareholders."
In merging two non-traded REITs with their better-known publicly traded one, American Realty Capital Properties, Schorsch and Block "improperly inflated an incentive fee calculation which operated as a fraud or deceit on ARCP and its shareholders," the commission said in its complaint. In so doing, the men violated their fiduciary duty to investors, the SEC says.
Schorsch, Block and AR Capital settled the matter with the SEC without admitting or denying the allegations. The settlement now awaits approval in court. Schorsch's attorney did not respond to a request for comment. An attorney for Block declined to comment.
Anthony Galioto, a spokesman for AR Global, a sister company to AR Capital said, “We are pleased that AR Capital was able to amicably resolve this matter with the Securities and Exchange Commission. Having put this matter behind us, we will continue to focus on serving the interests of and creating value for the shareholders of the REITs that we manage."
Schorsch maintains ownership positions in AR Global and AR Capital, but is not active in the day-to-day management of either firm.
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The alleged fraud, which ran from late 2012 to early 2014, occurred at the same time Block allegedly inflated ARCP’s financial statements — he was convicted of securities fraud in 2017. Since then, Block has been trying to appeal his 18-month prison sentence while out on bail, according to court records. The accounting scandal is unrelated to the fraud charges settled this week.
Through their alleged REIT-mergers deception, Schorsch, Block and AR Capital acquired an additional 2.92 million operating partnership units in ARCP, which they controlled, the SEC says. They also obtained $7.27 million in excessive charges.
Under the settlement, the defendants agreed to disgorgement and prejudgment interest of $39 million. The SEC further secured civil penalties of $14 million against AR Capital, $7 million against Schorsch and $750,000 against Block.
RCS Capital, the onetime parent of Cetera Financial Group, declared bankruptcy in early 2016. It emerged later that year renamed Aretec – Cetera spelled backward. In 2018, Cetera Financial Group, the largest independent broker-dealer network, said it would organize its six firms into two separate channels.