Securities and Exchange Commission v. Ar Capital, Llc, Nicholas S. Schorsch, and Brian S. Block

Marc
P.
Berger
S
anjay
Wadhwa
W
endy
B.
Tepperman
N
ancy
A.
Brown
J
anna
Berke
H
ane
Kim
V
ictor
Suthammanont
A
ttorneys
for
the
Plaintiff
S
ECURITIES
AND
EXCHANGE
COMMISSION
N
ew
York
Regional
Office
B
rookfield
Place
2
00
Vesey
Street,
Suite
400
N
ew
York,
New
York
10281-1022
(
212)
336-1023
(Brown)
E
mail:
[email protected]
U
NITED
STATES
DISTRICT
COURT
S
OUTHERN
DISTRICT
OF
NEW
YORK
S
ECURITIES
AND
EXCHANGE
COMMISSION,
19
Civ.
( )
P
laintiff,
ECF
Case
--
against
--
A
R
CAPITAL,
LLC,
NICHOLAS
S.
SCHORSCH
COMPLAINT
a
nd
BRIAN
S.
BLOCK,
Defendants.
P
laintiff
Securities
an
d
Exchange
Commission
("Commission"),
for
its
Complaint
against
D
efendants
AR
Capital,
LLC
("AR
Capital"),
Nicholas
S.
Schorsch
("Schorsch"),
an
d
Brian
S.
B
lock
("Block")
(together,
"Defendants"),
alleges:
P
RELIMINARY
STATEMENT
B
etween
late
2012
and
early
January
2014
(the
"Relevant
Period"),
Defendants
i
mproperly
obtained
millions
of
dollars
to
which
they
were
not
entitled
from
apublicly-traded

real
estate
investment
trust
("REIT")
managed
by
Defendants,
then
known
as
American
Realty
C
apital
Properties,
Inc.
("ARCP").
1
2
.
AR
Capital
sponsored
and
externally
managed
REITs,
including
ARCP
and
two
p
ublicly
-held,
non
-traded
REITs
("NTRs"),
American
Realty
Capital
Trust
III,
Inc.
("T3")
and
A
merican
Realty
Capital
Trust
IV,
Inc.
("T4"),
that
were
merged
into
ARCP.
At
all
relevant
t
imes,
Schorsch
was
AR
Capital's
chief
executive
officer
("CEO")
and
principal
owner,
and
B
lock
was
AR
Capital's
chief
financial
officer
("CFO")
and
a
minority
owner.
Schorsch
also
s
erved
as
the
CEO
and
chairman
of
ARCP,
T3,
and
T4,
while
Block
also
served
as
the
CFO
of
e
ach
REIT.
As
a
result,
Defendants
had
management
control
over
all
three
REITs
during
the
R
elevant
Period.
I
n
connection
with
separate
mergers,
first
between
ARCP
and
T3,
and
later
b
etween
ARCP
and
T4,
AR
Capital,
acting
through
Block
and
Schorsch—without
the
informed
c
onsent
of
the
relevant
REIT's
board,
in
contravention
of
the
governing
documents
and
d
isclosures
to
shareholders,
and
in
violation
of
their
fiduciary
duties
—improperly
inflated
an
i
ncentive
fee
calculation
which
operated
as
a
fraud
or
deceit
on
ARCP
and
its
shareholders.
T
hrough
their
actions,
Defendants
collected
more
than
2.9
million
operating
partnership
units
(
"OP
units")
of
ARCP
to
which
they
were
not
entitled.
4
.
Defendants
also
directed
the
creation
of
and/or
approved
misleading
asset
p
urchase
and
sale
agreements
in
which
AR
Capital
received
$5.8
million
from
ARCP
in
c
onnection
with
each
merger,
purportedly
for
ARCP's
purchase
from
AR
Capital
of
furniture,
f
ixtures,
and
equipment
("FF&E")
necessary
for
the
T3-
or
T4
-related
post
-merger
operations
of
I
n
2015,
ARCP
changed
its
name
to
VEREIT,
Inc.
2

ARCP
and
the
reimbursement
to
AR
Capital
of
certain
"unreimbursed
expenses."
Through
those
a
greements,
Defendants
wrongfully
obtained
at
least
$7.27
million
in
unsupported
charges.
5
.
In
connection
with
these
activities,
Defendants
made
material
misstatements
and
o
missions
about
the
incentive
fees
and
FF&E
agreements
relating
to
both
mergers.
V
IOLATIONS
6
.
By
engaging
in
the
conduct
described
in
this
Complaint,
AR
Capital
and
Block
v
iolated
Sections
17(a)(1),
(a)(2),
and
(a)(3)
of
the
Securities
Act
of
1933
("Securities
Act")
[15
U
.S.C.
§
77q(a)(1),
(a)(2),
and
(a)(3)]
and
Section
10(b)
of
the
Securities
Exchange
Act
of
1934
(
"Exchange
Act")
[15
U.S.C.
§
78j(b)]
and
Rule
lOb-5
thereunder
[17
C.F.R.
§
240.1Ob-5],
as
w
ell
as
Section
13(b)(5)
of
the
Exchange
Act
[15
U.S.C.
§
78m(b)(2)]
and
Rule
13b2-1
t
hereunder
[17
C.F.R.
§
240.13b2-1].
Schorsch,
by
engaging
in
the
conduct
described
in
this
C
omplaint,
violated
Sections
17(a)(2)
and
(a)(3)
of
the
Securities
Act
[15
U.S.C.
§
77q(a)(2)
and
(
a)(3)]
and
Exchange
Act
Rule
13b2-1
[17
C.F.R.
§
240.13b2-1].
N
ATURE
OF
THE
PROCEEDING
AND
RELIEF
SOUGHT
7
.
The
Commission
brings
this
action
pursuant
to
the
authority
conferred
on
it
by
S
ections
20(b)
and
20(d)
of
the
Securities
Act
[15
U.S.C.
§§
77t(b)
and
77t(d)]
and
Sections
2
1(d)(1),
(d)(3),
and
(d)(5)
of
the
Exchange
Act
[15
U.S.C.
§§
78u(d)(1),
(d)(3),
and
(d)(5)]
s
eeking
a
final
judgment:
(a)
permanently
restraining
and
enjoining
AR
Capital,
Schorsch,
and
B
lock
from
engaging
in
the
acts,
practices
and
courses
of
business
alleged
herein;
(b)
requiring
A
R
Capital,
Schorsch,
and
Block
to
disgorge
ill-gotten
gains
and
to
pay
prejudgment
interest
t
hereon;
and
(c)
imposing
civil
money
penalties
on
AR
Capital,
Schorsch,
and
Block
pursuant
to
S
ection
21(d)(3)
of
the
Exchange
Act
[15
U.S.C.
§
78u(d)(3)].
3

JURISDICTION
AND
VENUE
T
his
Court
has
subject
-matter
jurisdiction
over
this
action
pursuant
to
Sections
2
0(b)
and
22(a)
of
the
Securities
Act
[15
U.S.C.
§§
77t(b)
and
77v(a)]
and
Sections
21(d)
and
27
o
f
the
Exchange
Act
[15
U.S.C.
§§
78u(d)
and
78aa].
Defendants,
directly
or
indirectly,
have
m
ade
use
of
the
means
or
instruments
of
transportation
or
communication
in
interstate
c
ommerce,
or
of
the
mails,
or
of
a
facility
of
a
national
securities
exchange
in
connection
with
t
he
transactions,
acts,
practices
and
courses
of
business
alleged
in
this
Complaint.
9
.
Venue
is
proper
in
the
Southern
District
of
New
York
pursuant
to
22(a)
of
the
S
ecurities
Act
[15
U.S.C.
§
77v(a)]
and
Section
27
of
the
Exchange
Act
[15
U.S.C.
§
78aa].
C
ertain
of
the
transactions,
acts,
practices
and
courses
of
business
constituting
the
violations
a
lleged
herein
occurred
in
the
Southern
District
of
New
York,
including,
among
other
things,
c
ertain
of
Defendants'
communications
and
other
actions
concerning
the
incentive
fees
and
F
F&E
transactions
that
occurred
at
AR
Capital's
principal
office
in
New
York,
New
York.
T
HE
DEFENDANTS
1
0.
AR
Capital
is
a
Delaware
limited
liability
corporation
with
its
principal
place
of
b
usiness
in
New
York,
New
York.
Through
various
wholly
-owned
subsidiaries,
AR
Capital
s
ponsored
and
externally
managed
T3
and
T4
until
their
respective
mergers
with
ARCP,
as
well
a
s
sponsored
and
externally
managed
ARCP,
apublicly-traded
REIT,
until
January
8,
2014,
w
hen
ARCP
became
self-managed.
2
1
1.
Schorsch,
age
57,
resides
in
Newport,
Rhode
Island,
and
Meadowbrook,
P
ennsylvania.
Schorsch
directly
or
indirectly
owns
and
controls
a
majority
interest
in
AR
Capital
l

AR
Capital
and
its
wholly
-owned
subsidiaries
are
collectively
referred
to
as
"AR
Capital"
t
hroughout
this
Complaint.

and,
during the
Relevant Period, served
as CEO and
Chairman of T3 and
T4 until their mergers
with ARCP,
and as CEO and
Chairman of
ARCP. When
ARCP became self-managed in
January
2014,
Schorsch became directly
employed by ARCP
and continued to serve as CEO and
C
hairman. Schorsch resigned
from all roles
with ARCP on
December 14, 2014.
12.
Block, age 46, resides
in Hatfield,
Pennsylvania. During the
Relevant Period,
Block served
as CFO of T3 and
T4 from their
inceptions until their mergers
with ARCP, and as
CFO of
ARCP. When ARCP became
self-managed
in January
2014,
Block
became directly
employed by
ARCP and
continued
to
serve as CFO.
Block resigned
from all roles with ARCP on
O
ctober
28,
2014.
Block was a
CPA licensed
in Pennsylvania. His
license is currently inactive.
O
THER
RELEVANT
ENTITIES
13.
ARCP was incorporated
in Maryland
in 2010 as American Realty
Capital
Properties,
Inc. and, during the
Relevant
Period, its
principal
place
of business was in New York,
N
ew York.
ARCP conducted an initial
public
offering of its common stock and
began trading on
NASDAQ's
Global Select Market
in
September 2011 as a REIT sponsored
and externally
m
anaged by AR
Capital, and had no
employees of its
own. AR Capital continued as ARCP's
e
xternal
manager until January 8,
2014, when
ARCP became self-managed. In 2015, ARCP
c
hanged its
name
to
VEREIT, Inc.
and
its
common stock trades on the NYSE.
Notwithstanding
i
ts
name change,
the entity is referred
to as
ARCP in this Complaint.
14.
T3 was incorporated in
Maryland
and was
an NTR sponsored and
externally
managed by
AR
Capital from its inception
until the close of its
merger with ARCP on February
28,
2013. T3
commenced a public
offering of its
stock
in
March 2011 pursuant to an effective
Form
5-11
registration statement at a fixed
price of $10
per share (less concessions) and closed

the
offering
in
September
2012
after
raising
over
$1.5
billion.
T3
entered
into
a
merger
a
greement
with
ARCP
on
December
14,
2012,
which
closed
on
February
28,
2013.
1
5.
T4
was
incorporated
in
Maryland
and
was
an
NTR
sponsored
and
externally
m
anaged
by
AR
Capital
from
its
inception
until
the
close
of
its
merger
with
ARCP
in
January
3,
2
014.
T4
commenced
its
public
offering
in
June
2012
pursuant
to
an
effective
Form
5-11
r
egistration
statement
at
a
fixed
price
of
$25
per
share
(less
concessions)
and
closed
the
offering
i
n
April
2013
after
raising
more
than
$1.75
billion.
T4
entered
into
a
merger
agreement
with
A
RCP
on
July
1,
2013,
and
which
closed
(following
certain
amendments)
on
January
3,
2014.
F
ACTS
A
.
Defendants
Obtained
Improperly
Inflated
Promote
Fees
1
6.
AR
Capital's
business
primarily
involved
creating
and
sponsoring
NTRs
and
p
ublicly
-traded
REITs,
externally
managing
such
REITs,
and,
for
its
NTRs,
pursuing
liquidity
e
vents
such
as
mergers,
sales,
or
public
listings.
AR
Capital
was
contractually
entitled
to
receive
c
ertain
fees
from
the
REITs
for
each
of
these
activities
or
events.
1
7.
ARCP,
T3,
and
T4
were
REITs
whose
common
stock
was
offered
to
the
public
a
nd
registered
with
the
Commission.
Each
REIT
was
structured
as
a
corporation
that
conducted
m
ost
of
its
business
through
an
affiliated
operating
partnership
("OP")
entity
for
which
the
REIT
s
erved
as
general
partner
—ARC
Properties
Operating
Partnership,
L.P.
(the
"ARCP
OP"),
A
merican
Realty
Capital
Operating
Partnership
III,
L.P.
(the
"T3
OP"),
and
American
Realty
C
apital
Operating
Partnership
IV,
L.P.
(the
"T4
OP"),
respectively.
Limited
partnership
a
greements
("CPAs")
governed
the
T3
OP
and
T4
OP.
Schorsch
signed
the
CPAs
as
CEO
of
e
ach
REIT.

18.
The
relevant
REIT
owned
units
of
its
affiliated
OP
entity
("OP
units")
on
a
1:1
b
asis
with
the
number
of
shares
of
common
stock
outstanding
of
the
REIT,
which
generally
c
onstituted
in
excess
of
95%ownership
of
the
OP
entity.
The
remaining
OP
units
not
owned
by
t
he
REIT
were
primarily
issued
to
AR
Capital
and
its
members
and
employees
as
compensation.
S
ubject
to
certain
limitations,
including
but
not
limited
to
minimum
holding
periods,
OP
units
o
wned
by
AR
Capital
and
its
members
and
employees
could
be
converted
on
a
1:1
basis
into
s
hares
of
common
stock
of
the
REIT.
1
9.
Because
T3
and
T4
were
not
publicly
traded,
generally,
the
only
means
through
w
hich
the
NTR
could
generate
liquidity
opportunities
for
its
shareholders
(other
than
dividends
d
elivered
to
investors)
would
be
through
a
liquidity
event,
such
as
a
merger,
sale,
or
public
l
isting.
20.
Among
other
things,
the
T3
OP
and
T4
OP
LPAs
provided
that,
if
T3
or
T4
a
chieved
a
certain
level
of
return
for
its
common
stock
shareholders
through
a
liquidity
event
s
uch
as
a
merger
—AR
Capital
would
be
entitled
to
a
"subordinated
distribution,"
colloquially
r
eferred
to
as
a
"promote
fee."
The
terms
"subordinated
distribution"
and
"promote
fee"
are
used
i
nterchangeably
in
this
Complaint.
2
1.
Specifically,
the
LPAs
provided
that
if
the
liquidity
event
provided
shareholders
w
ith
a
return
in
excess
of
a
6%hurdle
rate,
AR
Capital
would
be
entitled
to
receive
15%
of
the
a
mount
that
was
above
the
hurdle
rate.
The
LPAs
further
specified
that
the
amount
of
the
return
t
o
shareholders
was
to
be
determined
by
T3
and
T4
"in
good
faith"
using
the
"fair
market
value"
o
f
all
issued
and
outstanding
shares
of
the
NTR
common
stock
(i.
e.,
the
total
merger
c
onsideration
received
by
the
NTR's
shareholders)
as
of
the
date
of
the
liquidity
event
(i.e.,
m
erger
closing
date).
7

22.
In
a
side
letter
that
was
executed
in
connection
with
each
merger,
AR
Capital
a
greed
to
take
the
promote
fee
in
OP
units
of
the
T3
or
T4
OP,
which
would
then
be
converted
i
nto
OP
units
of
the
ARCP
OP
in
the
merger.
The
LPAs,
as
confirmed
by
these
side
letters,
s
pecified
the
conversion
formula
to
calculate
the
number
of
T3
or
T4
OP
units
to
be
issued
for
t
he
promote
fee.
The
formula
involved
simple
division
using
the
same
fair
market
value
that
d
etermined
the
return
to
NTR
shareholders.
The
formula
did
not
provide
any
enhanced
value
for
a
greeing
to
receive
NTR
OP
units
instead
of
cash.
As
set
forth
in
the
side
letters
and
merger
a
greements,
the
T3
or
T4
OP
units
would
immediately
convert
to
ARCP
OP
units
at
the
specified
m
erger
exchange
ratio
in
accordance
with
the
merger
agreements.
2
3.
AR
Capital,
Schorsch,
and
Block
each
owed
a
fiduciary
duty
to
T3,
T4,
and
their
s
hareholders.
In
calculating
the
promote
fees,
Defendants
(as
external
managers
of
T3
and
T4)
a
cted
on
behalf
T3
and
T4,
the
entities
with
the
obligation
under
the
LPAs
to
perform
the
c
alculation.
Defendants
were
obligated
to
act
in
the
best
interests
of
the
REITs
an
d
their
s
hareholders
by
either
resolving
financial
conflicts
in
the
shareholders'
favor
or
by
obtaining
the
i
nformed
consent
of
the
NTR
board.
2
4.
AR
Capital,
acting
through
Block
and
Schorsch,
inflated
several
aspects
of
the
p
romote
fee
calculation
and
conversion
formula
in
the
T3
and
T4
mergers
that
enriched
the
D
efendants
at
the
expense
of
the
REITs
and
their
shareholders.
The
Defendants'
actions
were
c
ontrary
to
shareholder
disclosures,
the
LPAs,
and
the
relevant
merger
side
letters,
and
were
not
d
isclosed
to
the
boards
or
the
boards'
advisors.
1
.
Defendants
Inflated
the
T3
Promote
Fee
2
5.
T3
and
ARCP
entered
into
a
merger
agreement
and
related
agreements
on
D
ecember
14,
2012.
The merger
agreement
provided
that
T3
shareholders
could
elect
to
receive,

for
every
share
of
T3
common
stock
they
held,
either
(i)
0.95
shares
of
ARCP
common
stock
or
(
ii)
$12.00
in
cash
(capped
at
30%
of
the
aggregate
merger
consideration).
2
6.
Similar
to
the
conversion
of
the
T3
common
stock,
the
merger
agreement
further
p
rovided
that
T3
OP
units,
such
as
those
held
or
to
be
received
by
AR
Capital
for
the
promote
f
ee,
would
be
automatically
converted
into
0.95
ARCP
OP
units.
2
7.
As
the
external
manager
for
both
T3
and
ARCP,
AR
Capital
members,
including
S
chorsch
(who
also
served
as
Chairman
and
CEO
of
ARCP,
T3
and
T4)
and
Block
(who
also
s
erved
as
CFO
of
ARCP,
T3
an
d
T4),
were
heavily
involved
in
discussions
relating
to
the
m
erger,
including
by
participating
in
board
meetings
and
providing
the
outside
investment
b
ankers
retained
by
each
REIT
board
with
financial
models
and
other
information.
Schorsch
and
B
lock
also
received
memoranda
from
outside
counsel
for
the
REIT
boards
in
connection
with
the
m
erger
that,
among
other
things,
set
out
the
governing
provisions
from
the
LPA
for
the
promote
f
ee
calculation
an
d
reminded
that,
as
set
forth
in
guidelines
established
by
the
North
American
S
ecurities
Administrators
Association,
a
majority
of
the
independent
directors
must
approve
all
m
atters
relating
to
the
promote
fee.
2
8.
As
authorized
by
both
the
T3
and
ARCP
boards,
the
related
agreements
entered
i
nto
included
a
side
letter
with
AR
Capital
(the
"T3
side
letter")
in
which
T3
(and
the
T3
OP),
A
RCP
(and
the
ARCP
OP),
and
AR
Capital
agreed
upon
the
governing
provisions
of
the
T3
OP
L
PA
for
the
promote
fee
and
that
AR
Capital
would
take
the
promote
fee
in
T3
OP
units.
The
T3
O
P
units
would
then
be
converted
into
0.95
ARCP
OP
units
as
set
forth
in
the
merger
agreement.
T
he
specified
provision
in
the
LPA
with
the
formula
for
converting
the
cash
value
of
the
promote
f
ee
into
T3
OP
units
involved
simple
division
using
the
same
fair
market
value
that
determined
t
he
return
to
T3
shareholders.
This
formula
did
not
provide
any
enhanced
value
for
AR
Capital

agreeing
to
receive
T3
OP
units
instead
of
cash.
Schorsch
signed
the
T3
side
letter
on
behalf
of
A
R
Capital
and
ARCP.
2
9.
The
merger
was
announced
on
December
17,
2012,
including
in
an
ARCP
Form
8
-K
filed
with
the
Commission
that
Schorsch
signed.
Among
other
things,
the
Form
8-K
i
ncluded
a
description
of
the
merger
agreement
terms
and
the
T3
side
letter,
and
included
both
a
greements
as
exhibits.
3
0.
The
merger
was
contingent
on
approval
by
a
majority
of
each
of
ARCP's
and
T
3's
shareholders.
To
solicit
ARCP
and
T3
shareholders,
ARCP
and
T3
issued
a
joint
proxy
s
tatement/prospectus
(the
"T3
Proxy"),
filed
with
the
Commission
on
January
22,
2013,
which
s
et
the
shareholder
voting
meeting
date
for
February
26,
2013.
Among
other
things,
the
T3
Proxy
i
ncorporated
the
T3
side
letter
and
made
certain
disclosures
about
the
promote
fee.
In
order
to
r
egister
the
shares
of
ARCP
common
stock
to
be
issued
to
T3
shareholders
in
connection
with
t
he
merger,
ARCP
also
filed
a
registration
statement
with
the
Commission
on
January
18,
2013,
s
igned
by
Schorsch,
Block,
and
other
directors
of
the
company,
which
repeated
the
information
a
nd
disclosures
appearing
in
the
T3
Proxy
(the
"T3
Merger
Registration
Statement")
3
1.
Because
of
their
roles
and
affiliations
with
T3
and
ARCP,
AR
Capital,
Schorsch,
a
nd
Block
were
required
to
disclose
their
interests
in
the
merger
in
the
T3
Proxy.
The
T3
Proxy
d
isclosures
designated
to
describe
such
interests
made
representations
about
how
the
promote
fee
(
referred
to
as
the
subordinated
distribution)
would
be
calculated:
[
AR
Capital]
...
will
be
entitled
to
subordinated
distributions
of
net
s
ales
proceeds
from
the
[T3]
OP
in
an
amount
estimated
to
be
e
qual
to
approximately
$59.0
million,
assuming
an
implied
price
of
[
T3J
common
stock
of
$12.26
per
share
in
the
merger
(which
a
ssumes
that
70%
of
the
merger
consideration
is
ARCP
common
s
tock
based
on
a
per
share
price
of
$12.90,
the
closing
price
of
A
RCP
common
stock
the
last
trading
day
before
public
a
nnouncement
of
the
merger,
and
30%
of
the
merger
consideration
~
~17

is
cash).
Such subordinated
distributions
of net
sales
proceeds is to
be
finalized based on the
closing price
of ARCP common stock
on
the day
immediately prior to the
closing of the merger,
payable in
[
T3]
OP Units
that will
automatically convert into
ARCP OP Units
a
nd will
be payable upon
the
consummation of the partnership
m
erger in accordance
with the
merger agreement.
32. The
T3 Merger
Registration
Statement included an
identical disclosure.
33. These
disclosures set
forth an
understanding that the promote fee
calculation
would involve the
actual cash
stock elections by T3
shareholders, consistent
with the LPA's
requirement to
calculate the fair
market value of
all issued and
outstanding shares of T3
common
stock at the time
of the
merger closing. The
disclosures also set
forth that the promote fee
would
be "finalized
based on the
closing price of
ARCP
common stock on the day
immediately prior to
the
closing of the
merger"i. e. ,the
determinative date
for setting the implied price
of
T3
common
stock for shares that
elected to receive
ARCP stock
in
the
merger. According to the
T3
P
roxy and T3
Merger Registration
Statement, AR
Capital therefore would be
entitled to a
promote fee of
approximately $59.0 million if,
among other things, (a)
30% of T3 shares elected
c
ash;
and
(b) ARCP's
closing price
on the day
immediately prior to the closing of
the merger
was
$12.90 per share.
3
4.
Following the February 26, 2013
shareholder meetings, the companies
announced
that a
majority of
stockholders of
both companies had
approved the merger, that
the preliminary
T
3
shareholder
voting results showed
approximately 15.5% of the outstanding T3
shares elected
c
ash, and that the
transaction was
expected to close on
February 28, 2013. The
merger closed,
as
expected,
on February 28, 2013,
with final
tabulations for T3
shareholder elections of 16.5% of
shares electing
cash
(resulting in 83.5%
receiving ARCP shares at
the 0.95 exchange ratio).
35.
In contravention
of the T3 OP
LPA, T3 side letter, and
disclosures to
s
hareholders, and
without the informed
consent of
either the T3 or ARCP boards,
the
Defendants
11

inflated
the
calculation
of
the
T3
promote
fee
in
three
ways:
(i)
using
a
trailing
five-day
average
p
rice
of
ARCP
stock
instead
of
the
ARCP
closing
price
on
the
day
prior
to
the
merger
closing,
(
ii)
disregarding
the
actual
cash
stock
elections
by
T3's
shareholders,
and
(iii)
using
an
u
nsupported
multiplier
in
the
conversion
to
OP
units
portion
of
the
calculation.
a
.
Improper
Change
to
a
Trailing
5
-Day
Average
Price
Per
Share
3
6.
As
specified
in
the
T3
Proxy
and
T3
Merger
Registration
Statement,
the
promote
f
ee
payable
to
AR
Capital
"is
to
be
finalized
based
on
the
closing
price
of
ARCP
common
stock
o
n
the
day
immediately
prior
to
the
closing
of
the
merger"
(emphasis
added),
and
the
estimate
p
rovided
used
asingle-day
ARCP
closing
price
per
share.
ARCP's
closing
price
was
$13.90
on
F
ebruary
27,
2013,
the
day
immediately
prior
to
the
closing
of
the
merger.
3
7.
Block
prepared
numerous
model
calculations
of
the
promote
fee
leading
up
to
and
i
ncluding
the
merger
closing
date
of
February
28,
2013,
and
provided
certain
versions
to
S
chorsch.
In
each
of
these
models,
Block
used
asingle-day
closing
price,
consistent
with
the
d
isclosure.
3
8.
For
example,
on
February
21,
2013,
shortly
before
the
merger
vote
date,
Block
s
ent
Schorsch
an

email,
attaching
a
projected
promote
fee
calculation
spreadsheet
that
used
the
s
ingle
day
ARCP
closing
price
on
February
20,
2013,
and
stating:
"The
attachment
reflects
all
u
pdated
numbers
just
ensuring
we
have
no
hiccups
when
this
calculation
is
run
final
next
w
eek.
We
were
pretty
close
so
I'm
feeling
good
about
the
computation.
I'm
feeling
even
better
a
bout
the
current
schedule
with
a
closing
price
of
$14.19......
($96.SMM)."
Schorsch
replied
to
t
he
email,
acknowledging
its
receipt
and
indicating
that
he
read
and
understood
it:
"Agreed
it
l
ooks
[sic]
[.]"
12

39.
Schorsch
and
Block
tracked
ARCP's
closing
share
price
in
the
days
leading
up
to
t
he
merger.
Although
ARCP's
share
price
reached
a
high
in
closing
at
$14.54
on
February
26,
2
013,
it
closed
down
on
heavier
than
average
trading
volume
at
$13.90
on
February
27,
2013,
the
d
ay
immediately
prior
to
the
merger
closing.
4
0.
On
February
28,
2013
at
8:50
p.m.,
Schorsch
sent
Block
an
email
with
the
subject
l
ine
"Call
re
promote."
4
1.
By
mid
-day
on
March
1,
2013,
AR
Capital,
acting
through
Block,
decided
to
i
nflate
the
promote
fee
by
using
an
unweighted
average
of
the
closing
prices
on
each
of
the
five
d
ays
prior
to
the
merger
closing
("5
-day
average")
of
$14.264
—instead
of
the
ARCP
closing
p
rice
on
the
day
immediately
prior
to
the
merger
closing
of
$13.90.
Also
on
March
1,
Block
p
rovided
a
spreadsheet
with
the
final
calculation
to
Schorsch.
4
2.
In
taking
this
unauthorized
unilateral
action
that
inflated
(at
the
expense
of
A
RCP's
shareholders)
the
promote
fee
they
would
receive,
AR
Capital
did
not
inform
or
obtain
t
he
consent
of
the
T3
or
ARCP
boards.
b
.
Improper
Change
from
Use
of
the
Actual
Merger
Consideration
4
3.
The
final
tabulation
of
the
shareholder
elections
was
that
16.5%
of
T3
common
s
tock
shares
elected
to
receive
$12
in
cash
for
each
T3
share,
an
d
the
remaining
83.5%
of
shares
r
eceived
0.95
shares
of
ARCP
common
stock
in
exchange
for
each
T3
share.
Accordingly,
D
efendants
should
have
calculated
the
T3
total
merger
proceeds
using
the
actual
consideration
p
aid
for
the
T3
common
stock
shares
—including
cash.
4
4.
As
set
forth
in
the
formulas
disclosed
in
the
T3
Proxy
and
T3
Merger
Registration
S
tatement,
and
using
the
actual
inputs
of
the
16.5%
cash
elections
and
the
ARCP
closing
share
p
rice
on
the
day
immediately
prior
to
the
merger
closing
of
$13.90,
the
implied
T3
share
price
1
3

should have been
$13.01 per share (i. e. ,the
product of the cash amount ($12.00) multiplied by
the
percentage of cash elections
(16.5%) plus the product
of
ARCP's
share price the day prior to
the merger closing
($13.90) multiplied by the
exchange ratio (0.95) multiplied by the stock-
election percentage (83.5%)).
4
5.
Defendants disregarded these
formulas and disclosures.
Instead, Schorsch
instructed
AR Capital and Block to
ignore the actual
cash
elections
and
instead
calculate the
merger
proceeds as if 100% of T3
shares had been
exchanged for ARCP stock. This ran afoul of
b
oth the shareholder disclosures as
well as the T3
OP LPA, which required that the promote fee
b
e calculated using the
fair market value of
all issued and outstanding shares of T3 common
stock—which
included those shares
exchanged for $12.00 in cash. In effect, AR Capital's
d
ecision was to
calculate the purported fair
market value by assuming that the approximately
16.5% of T3
shares that received
cash instead received
shares of ARCP that AR Capital valued
at more than
$394.4 million (including
Defendants' use of the 5-day average price
for ARCP
s
tock)~lespite the fact that those
shareholders received
only
$350.7
million in cash.
46.
Following the merger
closing, and as Schorsch and he discussed,
Block
performed the
calculation as if 100% of the T3
shares were exchanged for
ARCP
shares,
resulting in
an inflated implied T3
price per share of $13.55 (inclusive of the
inflation caused by
AR Capital's
unauthorized
decision to use a 5-day
average price)
versus
the actual of $13.01,
and a
promote fee cash value
of $98,359,915 versus the
actual value of $83,872,012.
47.
Once again, Defendants did
not inform or seek approval
from
the
T3 or ARCP
boards
of their decision to change
the calculation of the
merger
proceeds to
assume 100% of the
T
3'shareholders had elected
ARCP stock, a change that benefited Defendants
at the expense of
s
hareholders of the
post-merger
ARCP.
14

48.
Moreover,
on
February
28,
2013,
the
same
date
as
the
merger
closing,
Block
and
S
chorsch
each
signed
ARCP's
Form
10-K
filed
with
the
Commission
for
the
fiscal
year
ended
D
ecember
31,
2012,
that
reiterated
that
the
merger
was
expected
to
close
on
that
date
and
r
eiterated
the
T3
Proxy
and
T3
Merger
Registration
Statement
disclosure
concerning
the
promote
f
ee,
inclusive
of
the
estimate
being
calculated
with
the
assumption
of
70%
stock
and
30%cash
e
lections.
This
disclosure
was
materially
misleading
in
light
of
the
decision
of
Block
and
S
chorsch
to
perform
the
promote
calculation
without
consideration
of
the
actual
stock
and
cash
e
lections.
c.
Improper
Conversion
of
the
Promote
Fee
into
ARCP
OP
Units
4
9.
The
T3
OP
LPA,
as
confirmed
by
the
T3
side
letter,
specified
the
formula
for
c
onverting
the
promote
fee
value
into
T3
OP
units.
The
conversion
formula
was
simply
to
divide
t
he
cash
value
of
the
promote
fee
by
the
same
fair
value
of
one
T3
share
used
to
determine
the
t
otal
merger
proceeds.
In
other
words,
whatever
implied
T3
price
per
share
was
used
to
calculate
t
he
total
merger
proceeds
(which
Defendants
here
—albeit
wrongfully
—had
calculated
as
$13.55
p
er
T3
share)
in
the
calculation
of
the
cash
value
of
the
promote
fee,
that
same
implied
T3
price
p
er
share
should
have
been
used
to
divide
the
cash
value
of
promote
fee
to
determine
the
T3
OP
u
nits
to
issue.
Schorsch
and
Block
each
received
legal
memoranda
that
outside
counsel
provided
t
o
the
boards
of
ARCP
and
T3
in
connection
with
the
merger
negotiations,
which
summarized
t
he
promote
fee
and
the
conversion
to
OP
units
consistent
with
this
method.
5
0.
As
the
investment
banking
firms
engaged
by
the
respective
boards
were
modeling
t
he
merger
and
preparing
to
provide
a
fairness
opinion
in
early
December
2012,
AR
Capital
e
mployees,
including
Block
—as
the
management
for
both
companies
—were
specifically
asked
b
y
the
investment
bankers
engaged
by
the
T3
board
in
an
email:
"When
calculating
the
number
1
5

of
OP
units
to
be
issued
for
the
promote,
...
should
we
simply
divide
the
total
equity
value
of
the
p
romote
by
the
implied
offer
price
per
share?"
Block,
copying
Schorsch,
responded
by
h
ighlighting
the
phrase
"simply
divide
the
total
equity
value
of
the
promote
by
the
implied
offer
p
rice
per
share"
and
confirmed
that
the
highlighted
phrase
was
appropriate.
5
1.
After
the
closing
of
the
T3
merger,
AR
Capital,
acting
through
Block,
instead
t
ook
a
third
manipulative
measure
by
changing
the
conversion
formula
to
inflate
the
number
of
O
P
units
AR
Capital
received,
and
further
increase
the
value
of
the
promote
fee
owing
to
AR
C
apital.
Using
the
division
conversion
formula
set
forth
in
the
T3
OP
LPA
(and
T3
side
letter)
a
nd
the
multiplication
by
the
merger
exchange
ratio
of
0.95
set
forth
in
the
T3
merger
agreement
(
and
T3
side
letter)
would
have
resulted
in
6,895,675
ARCP
OP
units
(i.e.,
dividing
the
i
mproperly
derived
$98,359,915
by
the
purported
$13.55
implied
T3
price
per
share
for
the
c
onversion
to
T3
OP
units,
and
then
multiplying
by
the
merger
exchange
ratio
of
0.95}
—versus
t
he
6,126,199
ARCP
OP
units
to
which
AR
Capital
was
actually
entitled
for
the
promote
fee
(
i.e.,
dividing
the
properly
calculated
promote
fee
cash
value
of
$83,872,012
by
$13.01,
the
p
roperly
calculated
implied
T3
price
per
share
used
to
calculate
the
promote
fee
cash
value,
and
t
hen
multiplying
by
the
merger
exchange
ratio
of
0.95).
5
2.
However,
Block
—without
an
y
basis
—took
additional
manipulative
measures
that
i
ncreased
the
number
ARCP
OP
units
that
AR
Capital
received.
Block
instead
first
multiplied
his
i
nflated
promote
fee
cash
value
of
$98,359,915
by
1.02618705.
Then,
rather
than
using
the
i
nflated
5
-day
average
price
that
he
had
used
to
calculate
the
promote
fee
cash
value,
he
reverted
t
o
the
lower
closing
price
per
share
on
the
day
prior
to
the
merger
as
the
divisor,
yielding
7
,261,559
ARCP
OP
units.
16

53.
These actions not only contravened
the T3 OP LPA,
T3
side letter,
disclosures to
boards and investors,
and
communications
with the investment bankers, but also reflect Block's
manipulative intent in the simultaneous use of
different "fair market
values"
for the identical
T3
shares measured as
of the same date. Block's actions on behalf of AR Capital also served to
further inflate the
number
of
OP
units for
AR Capital's benefit at the expense of ARCP and its
shareholders. Once
again,
no one from AR
Capital informed the T3 or ARCP boards or
shareholders of
their
actions to
calculate the promote fee or conversion in this manner.
5
4. Block circulated
to
Schorsch a spreadsheet of the fi
nal
promote fee calculation
incorporating the manipulative calculations
described above.
d. Impact of the
Defendant's Improper T3 Promote Fee Calculation
55. Collectively, the three forms of
manipulation
resulted
in AR
Capital's receipt of
1,135,360 more
ARCP OP
units
than AR Capital was entitled to receive (i.e., 7,261,559 ARCP
O
P units received vs. 6,126,199 ARCP OP units to
which AR Capital
was
entitled).
56.
On March 1,
2013, Block
circulated to Schorsch a spreadsheet with the final
calculation of promote fee that showed
each steps of the calculation, including the
three
manipulations alleged above. The
final calculation spreadsheet
was
never provided
to the boards
o
f T3 or ARCP.
57. Instead,
after Block finalized the spreadsheet on March 1, 2013, Defendants
participated in
creating or approving a "Contribution and Exchange Agreement" for AR Capital
t
o
enter into with the T3 OP and the
ARCP OP (the "T3 Contribution and Exchange
Agreement").
Block signed the agreement on behalf of AR Capital and Schorsch signed the
agreement on
behalf of the ARCP OP, in his capacity as the CEO of ARCP, the general
partner
17

of
the
ARCP
OP.
The
agreement
was
included
as
an
exhibit
to
a
Form
8-K
signed
by
Schorsch
t
hat
described
the
agreement
and
was
filed
with
the
Commission
on
March
6,
2013.
5
8.
The
agreement
represented
that,
under
the
T3
OP
LPA,
AR
Capital
"will
be
e
ntitled
to
receive"
a
promote
fee
of
$98,359,915,
and
that
the
conversion
to
OP
units
was
c
alculated
in
accordance
with
the
T3
OP
LPA
and
T3
side
letter.
AR
Capital
further
represented
t
hat
nothing
in
the
agreement
violated
or
conflicted
with
any
governing
document
or
agreement
b
y
which
it
was
bound
—which
included
the
T3
OP
LPA
and
the
T3
side
letter.
5
9.
These
representations
were
materially
false
and
misleading.
AR
Capital
was
not
e
ntitled
to
receive
a
promote
fee
with
a
cash
value
of
more
than
$83,872,012;
nor
was
the
c
onversion
of
the
promote
fee
cash
value
to
OP
units
calculated
in
accordance
with
the
T3
OP
L
PA
and
T3
side
letter,
which
resulted
in
further
inflation
of
the
value
of
the
promote
fee.
6
0.
Similar
misrepresentations
were
made
in
subsequent
ARCP
quarterly
and
annual
r
eports
filed
with
the
Commission
on
Forms
10-Q
an
d
10-K
beginning
with
the
first
quarter
of
2
013
(filed
May
6,
2013)
through
the
second
quarter
of
2014
(filed
July
29,
2014),
each
of
which
B
lock
and
Schorsch
signed
in
their
capacities
as
ARCP's
CFO
and
CEO,
respectively.
For
e
xample,
the
ARCP
Form
10-Q
for
the
first
quarter
of
2013
stated
that
upon
the
consummation
o
f
the
T3
merger,
AR
Capital
was
"entitled
to"
a
promote
fee
"which
resulted
in
the
issuance
of
[
T3]
OP
units
in
the
[T3]
OP,
when
after
applying
the
Exchange
Ratio,
resulted
in
the
issuance
o
f
an
additiona17.3
million
[ARCP]
OP
Units."
In
fact,
AR
Capital
was
only
entitled
to
receive
6
,126,199
ARCP
OP
Units
for
the
promote
fee.
6
1.
Block,
who
personally
performed
the
calculation
of
the
promote
fee
and
c
onversion
to
ARCP
OP
units
in
a
spreadsheet
that
he
maintained
on
behalf
of
AR
Capital,
knew
o
r
recklessly
disregarded
that
each
of
the
three
manipulations
alleged
above
contravened
the
1
8

disclosures to
shareholders, the T3 OP
LPA, the side
letter, legal
memoranda prepared by outside
c
ounsel to the T3
and ARCP boards
concerning the promote
fee, presentations to the
T3
and
ARCP
boards, and
information
provided
to
T3's and
ARCP's investment
bankers. Block also
k
new or
recklessly
disregarded that his
actions improperly
inflated the number of
ARCP OP
units
that AR
Capital would
receive for the
promote fee, from
which he would also personally
b
enefit. As the CFO
of AR
Capital, Block's
actions and
scienter are attributable to AR
Capital.
62.
Schorsch was at
least negligent
when he
approved the promote fee and authorized
t
he issuance
of the ARCP
OP units after
receiving Block's
spreadsheet with the
final calculation
of
promote fee that showed
each step
of the
calculation, including the
three manipulations
alleged
above.
Schorsch had
participated in all of
the merger-related
board meetings for both the
T3  and
ARCP boards,
received the
legal memoranda
that explained how
the promote fee
c
alculation was to
be
performed, and signed
the T3 OP
LPA, the T3 side letter, the T3
Merger
R
egistration Statement,
the T3
Contribution and
Exchange Agreement, and
the subsequent Form
10
-Qs and Form
10-K.
Schorsch knew or
should have known
that the calculation he approved
did not
conform to
what was
authorized by the T3
OP LPA and side
letter, the presentation to the
boards,
and the
disclosures to the
investors.
2.
Defendants
Inflated the T4
Promote Fee
6
3.
Four months
after ARCP closed
the merger
with
T3,
ARCP and T4 entered into a
m
erger
agreement and related
agreements
on July 1, 2013 (the
"T4 merger").
6
4. At
the time, both
ARCP and
T4 were externally managed by
AR Capital. As the
e
xternal
manager for both
T4
and
ARCP, AR
Capital members,
including Schorsch (who also
served
as
Chairman and CEO
of each REIT)
and Block (who also
served as CFO of each
REIT),
were
heavily involved
in discussions
relating to
the merger, including by
participating in board
1
9

meetings and
providing the
outside investment bankers
retained by each
REIT board with
f
inancial models and
other information.
Schorsch and Block also
received memoranda from
o
utside
counsel for the REIT
boards in connection
with the merger that,
among other things, set
out
the governing
provisions for the promote
fee
calculation
and
reminded that a
majority of the
i
ndependent directors
must approve all matters
relating to the
promote fee.
6
5.   The
promote fee provisions
in the T4 OP LPA were
identical to those in the T3
OP LPA.
Schorsch
had signed the operative
amended and restated
T3 OP LPA and
T4
OP
LPA
on
November 13,
2013, and November
12, 2013,
respectively—approximately one
month prior
to
the T3
merger
announcement. Among other things,
the T4 OP LPA
provision governing the
c
onversion
of the promote
fee
to
T4 OP units was
identical to that in the T3
OP LPA. The T4 OP
LPA
conversion formula was
simply
to
divide the
cash value of the
promote fee by the same fair
value
of one T4
share used to determine the
total merger proceeds.
In other words,
whatever
implied
T4 price per share was
used to calculate
the total merger proceeds
in the calculation of
the
cash value of the
promote fee, that same
implied T4 price
per share was required to be used
to divide
the cash value
of the promote fee to
determine the T4 OP units to
issue.
66.
Similarly, as
authorized by both
the T4 and ARCP boards,
the merger-related
agreements
entered into
on July 1, 2013,
included a side letter with AR
Capital (the "T4 side
letter")
in which
T4 (and the T4 OP),
ARCP (and the
ARCP OP), and AR Capital agreed
upon
the
governing
provisions of the
T4 OP
LPA
for the promote
fee (including the simple
division
c
onversion formula set
forth above) and that
AR Capital would take the
promote fee in T4 OP
units,
which would
then be converted into
ARCP OP units
at the merger exchange ratio
specified
in the
merger
agreement. Schorsch signed
the T4 side letter.
20

67.
The T4 merger was
announced on
July 2,
2013,
including in
an ARCP Form 8-K
filed
with the
Commission that Schorsch
signed. Among other things,
the Form 8-K included a
d
escription
of the merger agreement
terms and the
T4 side letter, and
included both agreements
as exhibits.
The
Form 8-K also estimated
that the promote fee
would be
approximately $65.2
million,
assuming an implied
price of T4
common stock of $30.47
per share in the merger, and
would be
payable in the
form of T4 OP units
that would
automatically convert into ARCP OP
units
upon the
consummation of the T4
merger.
68. The
T4 merger was
contingent on
approval
by
a majority of T4's shareholders
and an effective
ARCP registration
statement to
issue ARCP shares to
T4 shareholders (the "T4
Merger
Registration Statement"). To
solicit T4
shareholder votes,
T4
and
ARCP issued a proxy
s
tatement/prospectus (the "T4 Proxy")
on
December 4, 2013.
6
9.
Because of their roles and
affiliations with
T4 and ARCP, AR Capital,
Schorsch,
and Block
were required to
disclose their
interests in the merger in the
T4 Proxy. The T4 Proxy
d
isclosures describing
such interests made
representations
about how the promote fee (referred to
as the
subordinated
distribution) would be
calculated:
The amount of
such subordinated
distribution is estimated to
equal
a
pproximately $62.7
million,
assuming
a
value of $30.43 for the
nominal
consideration to
[T4] stockholders in the
merger (based on
the
closing price of
ARCP
common stock of $12.70 per share on
O
ctober 4, 2013). The
amount of such subordinated
distributions
of net sales
proceeds is to be
finalized based on the
closing price of
ARCP
common stock on
the day
immediately prior
to
the closing
o
f the merger, and
will be payable
in [T4] OP Units that will
automatically
convert into
ARCP OP Units upon
consummation of
the
mergers in accordance
with the [T4] side
letter.
70.
All of the
relevant representations
in the T4 Proxy were repeated
in the T4 Merger
R
egistration Statement signed by
Schorsch and
Block and filed with the
Commission.
2
1

71.
As
set
forth
in
the
T4
side
letter
in
reference
to
the
T4
OP
LPA,
as
well
as
the
d
isclosures
to
shareholders
in
the
T4
Proxy
and
T4
Merger
Registration
Statement,
the
cash
v
alue
of
the
promote
fee
was
to
be
determined
by
the
implied
value
per
share
of
T4
common
s
tock
derived
from
the
closing
price
of
ARCP
common
stock
on
the
day
immediately
prior
to
the
c
losing
of
the
merger;
the
conversion
into
T4
OP
units
would
be
calculated
by
dividing
the
cash
v
alue
of
the
promote
fee
by
that
same
implied
value
per
share
of
T4
common
stock;
an
d
the
T4
O
P
units
would
be
automatically
converted
into
ARCP
OP
units
at
the
merger
exchange
ratio
set
f
orth
in
the
T4
merger
agreement.
7
2.
Nevertheless,
Defendants
improperly
disregarded
the
operative
agreements
and
s
hareholder
disclosures,
instead
using
a
$22.50
per
share
insider
initial
T4
offering
price
(the
"
insider
T4
initial
price")
solely
for
purpose
of
dividing
the
cash
value
of
the
promote
fee
to
y
ield
the
number
of
T4
OP
units,
rather
than
using
the
fair
value
of
one
share
of
T4
common
s
tock
on
the
date
of
the
merger
closing
(which
they
had
represented
was
$30.43
assuming
an
A
RCP
closing
price
of
$12.70
per
share).
The
improper
use
of
$22.50
per
share
as
the
d
enominator
significantly
inflated
the
number
of
OP
units
Defendants
received
—by
a
pproximately
one-third.
Moreover,
once
again,
Defendants'
unauthorized
actions
were
not
d
isclosed
to
the
boards
and
shareholders.
7
3.
Schorsch
approved
AR
Capital's
use
of
the
$22.50
insider
T4
initial
price
for
the
c
onversion
despite
having
signed
the
T4
side
letter
that
specified
the
conversion
must
use
the
fair
v
alue
of
one
share
of
T4
common
stock
on
the
date
of
the
merger
closing.
Block
carried
out
AR
C
apital's
use
of
the
$22.50
rate
as
the
denominator
for
the
conversion,
despite
knowledge
of
all
o
f
the
agreements
and
his
prior
experience
with
the
T3
merger,
which
included
representing
to
2
2

investment bankers
on the
T3 merger that the appropriate method was "simply divide the total
equity value of the promote by the implied offer price per share."
7
4. On January 3, 2014,
the date
of
the
closing of
the
T4
merger, in addition to the
improper use of $22.50 as the conversion denominator, Block also took one additional
m
anipulative
step to further inflate the promote fee. As of noon on January 3, 2014, Block
updated his spreadsheet for the calculation of the promote fee using
ARCP's
closing price
of
$
12.87
from January 2, 2014, the day immediately prior to the merger closing—the key
date set
forth in the T4 Proxy and T4 Merger Registration Statement—to calculate an implied T4
price
per share of
$30.52. But
ARCP's share price closed higher at $12.91 on January 3, 2014—the
h
ighest
price
it had achieved in approximately
a
month.
Instead
of calculating
the promote fee
using the
closing price the
day prior to the merger closing, as disclosures to investors dictated,
Block recalculated it using the higher closing price on January 3, 2014, yielding an
implied T4
price per
share
of $30.54
and thereby inflating the cash value of the promote fee by over $1
million.
75.
Block then
implemented the use of the $22.50 per share
value
as the purported
fair
market
value
of one
share of
T4 common
stock for the conversion to OP units, wholly
d
isregarding the implied T4 price per share of $30.54
he had just
calculated.
By doing so, Block
substantially inflated the T4 OP units issued in exchange for the cash value of the
promote fee,
which would then be converted into ARCP OP units at the applicable merger
exchange ratio.
B
lock's
calculation yielded
6,734,148
ARCP OP
units-1,787,085 more ARCP OP units
than
what AR Capital was entitled to under the T4 OP LPA
and
T4 side letter.
76.
On or about January
7,
2014, Block shared
his
promote
fee calculation
s
preadsheet with Schorsch
for discussion
that
showed his use
of
the incorrect ARCP closing
23

price
date
and
the
conversion
that
used
a
$22.50
denominator.
Schorsch
approved
this
T4
p
romote
fee
calculation.
No
one
from
AR
Capital
provided
this
final
calculation
spreadsheet
to
e
ither
the
T4
or
ARCP
board
or
shareholders
of
either
company.
7
7.
Instead,
similar
to
the
T3
merger,
after
their
T4
promote
fee
spreadsheet
was
f
inalized,
Defendants
participated
in
creating
or
approving
a
"Contribution
and
Exchange
A
greement"
for
AR
Capital
to
enter
into
with
the
T4
OP
an
d
the
ARCP
OP
(the
"T4
C
ontribution
and
Exchange
Agreement").
Block
signed
the
agreement
on
behalf
of
AR
Capital.
S
chorsch
signed
the
agreement
on
behalf
of
the
T4
OP
and
the
ARCP
OP,
in
his
capacity
as
the
C
EO
of
T4
and
ARCP.
The
agreement
was
included
as
an
exhibit
to
a
Form
8-K,
also
signed
by
S
chorsch,
that
described
the
agreement
and
was
filed
with
the
Commission
at
approximately
5
:30
p.m.
on
January
3,
2014.
7
8.
This
agreement
represented
that
under
the
T4
OP
LPA,
AR
Capital
"will
be
e
ntitled
to
receive"
a
promote
fee
of
$63,235,388,
and
that
the
conversion
to
6,734,148
ARCP
O
P
units
was
calculated
in
accordance
with
the
T4
OP
LPA
and
the
T4
side
letter.
AR
Capital
f
urther
represented
that
nothing
in
the
agreement
violated
or
conflicted
with
any
governing
d
ocument
or
agreement
by
which
it
was
bound
—which
included
the
T4
OP
LPA
and
the
T4
side
l
etter.
These
representations
were
materially
false
and
misleading.
AR
Capital
was
not
entitled
to
r
eceive
more
than
4,947,063
ARCP
OP
units
for
the
promote
fee.
7
9.
Similar
misrepresentations
regarding
the
promote
fee
were made
in
subsequent
A
RCP
quarterly
and
annual
reports
filed
with
the
Commission
on
Forms
10-K
and
10-Q
b
eginning
with
the
Form
10-K
for
the
fiscal
year
2014
(filed
February
27,
2014)
through
the
s
econd
quarter
of
2014
(filed
July
29,
2014),
each
of
which
Block
and
Schorsch
signed
in
their
c
apacities
as
CFO
and
CEO,
respectively,
of
ARCP.
The
statements
regarding
the
promote
fee
2
4

omitted
material
information
that
the
T4
OP
LPA,
the
T4
merger
agreement,
and
the
T4
side
l
etter
prohibited
using
a
$22.50
insider
T4
initial
price
in
converting
the
promote
fee
to
OP
units
a
nd
that
AR
Capital's
calculation
was
in
contravention
of
those
agreements,
what
was
authorized
b
y
the
two
boards,
and
what
was
disclosed
to
shareholders.
8
0.
Block,
who
personally
performed
the
calculation
of
the
T4
promote
fee
and
c
onversion
to
ARCP
OP
units
in
a
spreadsheet
that
he
maintained
on
behalf
of
AR
Capital,
knew
o
r
recklessly
disregarded
that
the
manipulated
calculations
contravened
the
disclosures
to
s
hareholders,
the
T4
OP
LPA,
the
T4
side
letter,
presentations
to
the
T4
and
ARCP
boards,
and
i
nformation
provided
to
the
respective
investment
bankers
retained
by
the
T4
and
ARCP
boards.
B
lock
also
knew
or
recklessly
disregarded
that
his
actions
improperly
inflated
the
number
of
A
RCP
OP
units
that
AR
Capital
would
receive
for
the
promote
fee,
from
which
he
would
also
p
ersonally
benefit.
As
the
CFO
of
AR
Capital,
Block's
actions
and
scienter
are
attributable
to
A
R
Capital.
8
1.
Schorsch
was
at
least
negligent
when
he
approved
the
use
of
the
$22.50
d
enominator
for
the
conversion
and
approved
the
T4
promote
fee
calculation
performed
by
B
lock
despite
the
fact
that
Schorsch
signed
the
T4
side
letter
that
specified
the
relevant
T4
OP
L
PA
provision
that
set
forth
the
conversion
formula.
Schorsch
was
also
present
at
all
of
the
r
elevant
ARCP
and
T4
board
meetings
and
was
aware
or
should
have
been
aware
that
neither
b
oard
had
authorized
the
use
of
a
different
formula.
Schorsch
also
knew
or
should
have
known
t
hat
the
impact
from
the
use
of
a
$22.50
denominator
for
the
conversion
would
result
in
a
far
g
reater
number
of
OP
units
being
issued
versus
the
cash
value
of
the
promote
fee,
and
s
ignificantly
altered
the
promote
fee
calculation
from
what
was
authorized
by
the
agreements
2
5

and
from
what
was
disclosed
to
the
investors
in
the
T4
Proxy
and
the
T4
Merger
Registration
S
tatement.
B
.
Defendants
Improperly
Obtained
Payments
Purportedly
for
FF&E
8
2.
In
connection
with
both
the
T3
and
T4
mergers,
Defendants
directed
the
creation
o
f
and/or
approved
misleading
asset
purchase
and
sale
agreements
with
ARCP
pursuant
to
which
A
RCP
would
purportedly
purchase
from
AR
Capital
furniture,
fixtures,
and
equipment
necessary
f
or
the
T3-
and
T4
-related
post
-merger
operations
of
ARCP
and
reimburse
AR
Capital
for
certain
"
unreimbursed
expenses"
(the
"FF&E
Agreements").
Each
FF&E
agreement
required
ARCP
to
p
ay
$5.8
million
to
AR
Capital.
Schorsch,
on
behalf
of
AR
Capital,
presented
the
first
agreement,
r
elated
to
the
T3
merger,
to
the
ARCP
board
on
December
14,
2012
("T3
FF&E
Agreement"),
a
nd
the
second,
related
to
the
T4
merger,
to
the
ARCP
board
on
July
1,
2013
("T4
FF&E
A
greement").
8
3.
Schorsch
approved
the
$5.8
million
price
for
each
FF&E
Agreement
and
knew
or
s
hould
have
known
that
the
$5.8
million
price
for
each
did
not
reflect
the
actual
items
being
t
ransferred,
the
cost
of
such
items,
and
the
actual
unreimbursed
expenses
purportedly
being
r
eimbursed
by
ARCP—if
any.
8
4.
By
creating
and
entering
into
these
two
FF&E
Agreements,
Defendants
arranged
t
o
receive
additional
cash
payments
totaling
$11.6
million,
and
wrongfully
obtained
at
least
$
7.27
million
dollars
in
unsupported
compensation.
8
5.
The
T3
FF&E
Agreement
was
an
exhibit
to
the
December
17,
2012
Form
8-K
that
a
nnounced
the
T3
merger,
and
the
Form
8-K
described
that
under
the
T3
FF&E
Agreement,
"
concurrently
with
the
closing
of
the
Merger
and
in
connection
with
the
internalization
by
[
ARCP]
of
certain
property
level
management
and
accounting
activities,
[AR
Capital]
will
sell
to
[
ARCP]
certain
furniture,
fixtures,
equipment
and
other
assets
used
by
[AR
Capital]
in
2
6

connection
with managing the
property level business and operations
and accounting functions
o
f
[T3 and
the T3
OP] at
the
cost of such
assets, for an aggregate price of $5.8
million, which
includes the
reimbursement of
certain costs and expenses
incurred by [AR Capital]." The
referenced
"internalization" related to
approximately 8non-executive employees
who would be
p
erforming certain
property level
management and accounting functions for
ARCP.
86.
The T3
FF&E Agreement
included an exhibit of the purported
"Purchased Assets
and
Reimbursed Expenses."
That exhibit
listed items such as capitalized
furniture, fixtures, and
e
quipment (desks, chairs,
computers,
software, postage and
binding
machines),
capitalized and
o
ther soft costs
(such as
marketing or software
customization),
and
transaction costs both from
the T3
offering and the T3
merger (such as legal,
accounting, investor relations, marketing,
employee
handbooks, and help
desk support manuals). No
one from AR Capital took any
m
eaningful steps to
confirm the accuracy
of the Exhibit.
87.
Schorsch signed
the Form 8-K as well as the T3
FF&E Agreement on behalf of
ARCP as
its CEO.
88.
Similarly, the
T4 FF&E Agreement was
an exhibit to the July 2, 2013 Form 8-K
announcing
the T4 merger, and
the Form 8-K described
that under the T4 FF&E Agreement,
"
concurrently with the closing
of the Merger, [AR
Capital] will sell to [ARCP] certain
furniture,
fixtures,
equipment and
other assets used by
[AR Capital] in connection with managing the
property
level business and
operations and
accounting functions of [T4 and the T4 OP], at
the
c
ost of
such assets, for an aggregate
price of $5.8 million,
which includes the reimbursement of
certain
costs and expenses
incurred by [AR
Capital]." The T4 FF&E Agreement included a
purported
"Purchased Assets
and Reimbursed
Expenses" exhibit that was identical to the exhibit
2
7

in the T3 FF&E
Agreement. No
one from AR
Capital took any
meaningful steps to confirm
the
accuracy
of the Exhibit.
89.
Schorsch signed
the Form 8-K as
well as the
T4 FF&E Agreement on
behalf of
ARCP
as its CEO.
90.
The purported
"Purchased
Assets and
Reimbursed Expenses"
exhibit appended to
the FF&E
Agreements
listing the
purportedly transferred
assets and expenses did
not accurately
reflect the
items that
AR Capital's
accounting
department (at Block's direction)
recorded as
being
transferred.
9
1.   In
the T4
merger, the final
schedule allocating the
transaction amounts
between
cost
and expense
categories
in the FF&E
Agreement was not completed by
AR Capital's
a
ccounting
department (at Block's
direction)
until approximately six
months after AR
Capital
and
Schorsch presented
the agreement to
ARCP's
board for approval.
9
2.
Moreover, the
purportedly
unreimbursed expenses were
far in excess of
actually
incurred
reimbursable
expenses by T3 or
T4 or
duplicated services that were
previously
r
eimbursed.
For example,
although ARCP
purportedly paid AR
Capital for items such as
"
Employee
Handbook
development and
continuous update" and a "Process
and Procedures
M
anual
development" in
the
T3
FF&E
Agreement, those same items
were again "sold" to ARCP
in the T4
FF&E
Agreement.
93.
Schorsch
knew
or should have
known
that he
was
omitting
material information
w
hen presenting
the T3 and
T4 FF&E Agreements
to the ARCP board by
not informing them
that
(i) the
transaction amounts
were determined
without
regard
to
the actual cost
of the
assets
p
urchased or
expenses
purportedly being
reimbursed, and
(ii) that
no
one at AR
Capital
had
taken steps
to
confirm the
accuracy of the exhibits
appended to the
FF&E agreements. Schorsch
28

therefore knew or should have known that the T3 and
T4 FF&E
Agreements would result in false
recordings
on the books and
records of
ARCP with respect to the
purported assets
being
transferred and expenses being reimbursed.
9
4.   Because ARCP
was
externally managed by AR Capital at all relevant
times, AR
Capital was responsible
for making
and
keeping ARCP's financial
books and records. Block, as
AR Capital's CFO, knew that AR
Capital had proposed the
$5.8
million
consideration amounts
for the
FF&E
Agreements
without regard to the actual FF&E and actual
reimbursable costs or
expenses
incurred by AR Capital, but nevertheless proceeded to direct AR Capital
employees
responsible for recording entries on ARCP's books and records to falsely record the
transactions
in order to conceal that fact. As the CFO of AR
Capital,
Block's actions and scienter are
a
ttributable to AR Capital.
95.
For
example, a few days
after the T3 FF&E
Agreement was presented to ARCP's
b
oard and received approval, Block and accounting personnel reporting to him exchanged
emails
to try to identify assets
on
AR Capital's
books that could
be recorded as having been transferred
to
ARCP. Block selected the specific assets to falsely record as transferred—including certain
assets
that were not actually transferred to ARCP or used by the approximately 8
internalized
e
mployees. Other purportedly transferred FF&E assets were items such as
improvements to the
b
asement of AR Capital's New York office
building
that AR Capital continued to own.
9
6.   With respect to the T4 FF&E Agreement, although the agreement was
presented
and
signed on July 1, 2013, Block and the AR Capital accounting staff did not
attempt to identify
assets to
be transferred or expenses to be reimbursed until after the closing of the T4
merger
in
January
2014. As with T3, Block selected the assets to falsely record as transferred
—most of
2
9

which did not tie out to
the specific items listed in the "Purchased Assets and Reimbursed
Expenses" exhibit to the agreement.
FIRST CLAIM FOR
RELIEF
Violations of
Section
17(a)
of the Securities Act
(AR Capital and Block)
97.
The Commission realleges and
incorporates by reference Paragraphs 1 through
96, above.
9
8.   By engaging in the
conduct described above, Defendants AR Capital and Block,
with scienter, directly or
indirectly,
by
use of the means or instruments of transportation or
communication in
interstate commerce, or of the mails, in connection with the offer or sale of
securities: (a) employed
devices, schemes and artifices to defraud; (b) obtained money
or
property by means of untrue statements
of material fact, or omitted to state material facts
n
ecessary in order to make statements made,
in light of
the circumstances
under which they were
made, not misleading; and (c) engaged
in transactions, acts, practices and courses of business
which would operate as
a fraud or deceit upon the
purchaser.
99.
By
reason of
the acts,
omissions, practices, and courses of business set forth in
this Complaint, Defendants
AR Capital and Block have violated, and, unless restrained and
enjoined, will continue
to violate, Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].
S
ECOND CLAIM FOR RELIEF
V
iolations of Section 10(b) of the
Exchange
Act and Rule lOb-5
(AR Capital and Block)
100.  The
Commission realleges and incorporates by reference Paragraphs
1 through
9
6, above.
101.  By
engaging in the conduct described above, Defendants AR
Capital
and Block,
with
scienter, directly or
indirectly,
by the use
of any
means
or instrumentality of interstate
30

commerce or of the mails, and in connection
with the purchase or sale of securities, have:
(a) employed devices, schemes
or artifices to defraud; (b)
made
untrue statements
of
material
fact or one or more omissions of material
fact necessary to make the statements made, in light of
the circumstances
under which they were made, not
misleading; and (c) engaged in
acts,
practices or courses of business
which operated or would operate as a fraud or deceit upon any
person.
102. By
reason
of the acts,
omissions, practices, and courses
of
business set forth in
this Complaint, Defendants
AR Capital and Block have violated, and, unless restrained and
enjoined,
will continue to violate, Section 10(b)
of
the
Exchange Act [15
U.S.C. §  78j(b)] and
Rule lOb-5
thereunder [17 C.F.R.§ 240.1Ob-5].
THIRD CLAIM
FOR RELIEF
Violations of Sections
17(a)(2) and (a)(3) of the Securities Act
(Schorsch)
103. The
Commission realleges and incorporates by reference Paragraphs
1
through
96, above.
1
04. By engaging in the conduct described above,
Defendant Schorsch, acting
at least
negligently,
directly or indirectly, by use of the means or instruments
of transportation
or
c
ommunication in interstate commerce, or of the mails,
in connection with the offer or sale of
securities:
(i) obtained money or property by means
of untrue statements of material fact, or
omitted to
state material facts necessary in
order
to make statements
made, in light of the
c
ircumstances under which they
were made, not misleading; and (ii) engaged in transactions,
a
cts,
practices and courses
of business which would operate as
a fraud or
deceit
upon
the
p
urchaser.
31

105. By reason of the acts, omissions, practices, and courses of business set forth in
this Complaint, Defendant Schorsch has violated,
and, unless restrained and
enjoined,
will
c
ontinue to violate,
Sections
17(a)(2) and (a)(3) of the Securities Act [1 S U.S.C. §  77q(a)(2) and
(a)(3)].
FOURTH
CLAIM FOR RELIEF
Violations
of Section 13(b)(5) of the Exchange Act
(AR
Capital
and
Block)
106. The Commission realleges and
incorporates
by
reference
Paragraphs
1 through
96, above.
1
07.
By engaging in the conduct described above, Defendants AR Capital and Block,
k
nowingly
falsified
books, records and accounts of ARCP that were subject to Section
13(b)(2)(A) of the Exchange Act [15 U.S.C. §
78m(b)(2)(A)].
108.
As
a result, Defendants AR Capital and Block have violated, and, unless
restrained and enjoined, will continue to violate,
Section 13(b)(5) of the
Exchange Act [15
U.S.C. §
78m(b)(2)(5)].
FIFTH CLAIM FOR RELIEF
Violations of Exchange Act Rule 13b2-1
(All Defendants)
109. The
Commission
realleges
and incorporates by
reference
Paragraphs 1 through
9
6, above.
110. By engaging in the conduct described above, Defendants AR Capital, Block, and
Schorsch, directly
or indirectly,
falsified
or caused
to
be falsified, books, records and accounts of
ARCP that were
subject
to
Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)].
32

111. As a result,
Defendants AR Capital, Block,
and Schorsch have
violated, and,
u
nless restrained and enjoined, will
continue to violate, Exchange Act
Rule 13b2-1 [17
C.F.R.
§ 240.13b2-1].
PRAYER FOR
RELIEF
WHEREFORE,
the Commission respectfully
requests that the Court enter
a Final
Judgment:
I.
P
ermanently enjoining AR Capital
and Block, and each of their
agents, servants,
employees,
att
orneys and other persons in active
concert
or
participation with them
who receive actual
notice of
the injunction by personal
service or otherwise from violating
Section 17(a) of
the Securities Act
[15 U.S.C. § 77q(a)].
II.
P
ermanently enjoining AR Capital
and Block, and each of their
agents, servants,
employees,
attorneys and other
persons
in
active concert or participation
with them who
receive actual notice
of
the injunction by personal service
ar otherwise from violating Section
10(b) of the
Exchange Act,
[15 U.S.C. §§ 78j(b)] and
Rule lOb-5 thereunder [17 C.F.R. §
240.1Ob-5].
III.
Permanently
enjoining AR Capital and Block,
and each of their
agents, servants,
employees,
attorneys
and
other
persons in active concert or
participation with them
who receive actual
notice of
t
he
injunction by personal service or
otherwise
from
violating Section
13(b)(5) of the
Exchange Act,
[15 U.S.C. §
78m(b)(5)] and Rule 13b2-1 thereunder
[17
C.F.R. §
240.13b2-1].
I
V.
Permanently enjoining Schorsch,
and each of his
agents, servants,
employees, attorneys an
d
o
ther
persons
in
active concert or participation with
him who receive
actual notice of the
injunction
33

by personal service or otherwise from violating Sections 17(a)(2) and (a)(3) of the Securities Act
[15 U.S.C. §
77q(a)(2) and (a)(3)].
V.
Permanently enjoining Schorsch, and each of his agents, servants, employees, attorneys and
o
ther persons in active concert or participation with him who receive actual notice of the injunction
by personal service or otherwise from violating Exchange Act Rule 13b2-1 [17 C.F.R.
§ 240.13b2-1].
VI.
O
rdering AR Capital, Schorsch, and Block to disgorge ill-gotten gains received from the
c
onduct alleged
in this Complaint an
d to
pay prejudgment interest thereon.
V
II.
Ordering AR
Capital,
Schorsch, and
Block
to
pay civil
money penalties pursuant to Section
20(d)(2)
of the
Securities Act
[15 U.S.C. §
77t(d)(2)] and Section 21(d)(3) of the
Exchange Act
[15 U.S.C. § 78u(d)(3)].
3!

VIII.
G
ranting
such
other
and
further
relief
as
this
Court
deems
just
an
d
appropriate.
D
ated:
July
16,
2019
N
ew
York,
New
York
By.
~
~~~~
M
arc
P.
Berger
S
anjay
Wadhwa
W
endy
B.
Tepperman
N
ancy
A.
Brown
J
anna
Berke
H
ane
Kim
V
ictor
Suthammanont
A
tt
orneys
for
the
Plaintiff
S
ECURITIES
AND
EXCHANGE
COMMISSION
N
ew
York
Regional
Office
B
rookfield
Place
2
00
Vesey
Street,
Suite
400
N
ew
York,
New
York
10281-1022
(
212)
336-1023
(Brown)
E
mail:
BrownN(a~sec.
~o
v
3
5

Marc P. Berger
Sanjay Wadhwa
Wendy B. Tepperman
Nancy A. Brown
Janna Berke
Hane Kim
Victor Suthammanont
Attorneys for the Plaintiff
SECURITIES AND EXCHANGE COMMISSION
New York Regional Office
Brookfield Place
200 Vesey Street, Suite 400
New York, New York 10281-1022
(212) 336-1023 (Brown)
Email: [email protected]

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION, 19 Civ. ( )

Plaintiff, ECF Case

-- against --

AR CAPITAL, LLC, NICHOLAS S. SCHORSCH COMPLAINT

and BRIAN S. BLOCK,

Defendants.

Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint against

Defendants AR Capital, LLC ("AR Capital"), Nicholas S. Schorsch ("Schorsch"), and Brian S.

Block ("Block") (together, "Defendants"), alleges:

PRELIMINARY STATEMENT

Between late 2012 and early January 2014 (the "Relevant Period"), Defendants

improperly obtained millions of dollars to which they were not entitled from apublicly-traded

Case 1:19-cv-06603   Document 1   Filed 07/16/19   Page 1 of 35



real estate investment trust ("REIT") managed by Defendants, then known as American Realty

Capital Properties, Inc. ("ARCP").1

2. AR Capital sponsored and externally managed REITs, including ARCP and two

publicly-held, non-traded REITs ("NTRs"), American Realty Capital Trust III, Inc. ("T3") and

American Realty Capital Trust IV, Inc. ("T4"), that were merged into ARCP. At all relevant

times, Schorsch was AR Capital's chief executive officer ("CEO") and principal owner, and

Block was AR Capital's chief financial officer ("CFO") and a minority owner. Schorsch also

served as the CEO and chairman of ARCP, T3, and T4, while Block also served as the CFO of

each REIT. As a result, Defendants had management control over all three REITs during the

Relevant Period.

In connection with separate mergers, first between ARCP and T3, and later

between ARCP and T4, AR Capital, acting through Block and Schorsch—without the informed

consent of the relevant REIT's board, in contravention of the governing documents and

disclosures to shareholders, and in violation of their fiduciary duties—improperly inflated an

incentive fee calculation which operated as a fraud or deceit on ARCP and its shareholders.

Through their actions, Defendants collected more than 2.9 million operating partnership units

("OP units") of ARCP to which they were not entitled.

4. Defendants also directed the creation of and/or approved misleading asset

purchase and sale agreements in which AR Capital received $5.8 million from ARCP in

connection with each merger, purportedly for ARCP's purchase from AR Capital of furniture,

fixtures, and equipment ("FF&E") necessary for the T3- or T4-related post-merger operations of

In 2015, ARCP changed its name to VEREIT, Inc.

2

Case 1:19-cv-06603   Document 1   Filed 07/16/19   Page 2 of 35



ARCP and the reimbursement to AR Capital of certain "unreimbursed expenses." Through those

agreements, Defendants wrongfully obtained at least $7.27 million in unsupported charges.

5. In connection with these activities, Defendants made material misstatements and

omissions about the incentive fees and FF&E agreements relating to both mergers.

VIOLATIONS

6. By engaging in the conduct described in this Complaint, AR Capital and Block

violated Sections 17(a)(1), (a)(2), and (a)(3) of the Securities Act of 1933 ("Securities Act") [15

U.S.C. § 77q(a)(1), (a)(2), and (a)(3)] and Section 10(b) of the Securities Exchange Act of 1934

("Exchange Act") [15 U.S.C. § 78j(b)] and Rule lOb-5 thereunder [17 C.F.R. § 240.1Ob-5], as

well as Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(2)] and Rule 13b2-1

thereunder [17 C.F.R. § 240.13b2-1]. Schorsch, by engaging in the conduct described in this

Complaint, violated Sections 17(a)(2) and (a)(3) of the Securities Act [15 U.S.C. § 77q(a)(2) and

(a)(3)] and Exchange Act Rule 13b2-1 [17 C.F.R. § 240.13b2-1].

NATURE OF THE PROCEEDING AND RELIEF SOUGHT

7. The Commission brings this action pursuant to the authority conferred on it by

Sections 20(b) and 20(d) of the Securities Act [15 U.S.C. §§ 77t(b) and 77t(d)] and Sections

21(d)(1), (d)(3), and (d)(5) of the Exchange Act [15 U.S.C. §§ 78u(d)(1), (d)(3), and (d)(5)]

seeking a final judgment: (a) permanently restraining and enjoining AR Capital, Schorsch, and

Block from engaging in the acts, practices and courses of business alleged herein; (b) requiring

AR Capital, Schorsch, and Block to disgorge ill-gotten gains and to pay prejudgment interest

thereon; and (c) imposing civil money penalties on AR Capital, Schorsch, and Block pursuant to

Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].

3

Case 1:19-cv-06603   Document 1   Filed 07/16/19   Page 3 of 35



JURISDICTION AND VENUE

This Court has subject-matter jurisdiction over this action pursuant to Sections

20(b) and 22(a) of the Securities Act [15 U.S.C. §§ 77t(b) and 77v(a)] and Sections 21(d) and 27

of the Exchange Act [15 U.S.C. §§ 78u(d) and 78aa]. Defendants, directly or indirectly, have

made use of the means or instruments of transportation or communication in interstate

commerce, or of the mails, or of a facility of a national securities exchange in connection with

the transactions, acts, practices and courses of business alleged in this Complaint.

9. Venue is proper in the Southern District of New York pursuant to 22(a) of the

Securities Act [15 U.S.C. § 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa].

Certain of the transactions, acts, practices and courses of business constituting the violations

alleged herein occurred in the Southern District of New York, including, among other things,

certain of Defendants' communications and other actions concerning the incentive fees and

FF&E transactions that occurred at AR Capital's principal office in New York, New York.

THE DEFENDANTS

10. AR Capital is a Delaware limited liability corporation with its principal place of

business in New York, New York. Through various wholly-owned subsidiaries, AR Capital

sponsored and externally managed T3 and T4 until their respective mergers with ARCP, as well

as sponsored and externally managed ARCP, apublicly-traded REIT, until January 8, 2014,

when ARCP became self-managed.2

11. Schorsch, age 57, resides in Newport, Rhode Island, and Meadowbrook,

Pennsylvania. Schorsch directly or indirectly owns and controls a majority interest in AR Capital

l AR Capital and its wholly-owned subsidiaries are collectively referred to as "AR Capital"
throughout this Complaint.

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and, during the Relevant Period, served as CEO and Chairman of T3 and T4 until their mergers

with ARCP, and as CEO and Chairman of ARCP. When ARCP became self-managed in January

2014, Schorsch became directly employed by ARCP and continued to serve as CEO and

Chairman. Schorsch resigned from all roles with ARCP on December 14, 2014.

12. Block, age 46, resides in Hatfield, Pennsylvania. During the Relevant Period,

Block served as CFO of T3 and T4 from their inceptions until their mergers with ARCP, and as

CFO of ARCP. When ARCP became self-managed in January 2014, Block became directly

employed by ARCP and continued to serve as CFO. Block resigned from all roles with ARCP on

October 28, 2014. Block was a CPA licensed in Pennsylvania. His license is currently inactive.

OTHER RELEVANT ENTITIES

13. ARCP was incorporated in Maryland in 2010 as American Realty Capital

Properties, Inc. and, during the Relevant Period, its principal place of business was in New York,

New York. ARCP conducted an initial public offering of its common stock and began trading on

NASDAQ's Global Select Market in September 2011 as a REIT sponsored and externally

managed by AR Capital, and had no employees of its own. AR Capital continued as ARCP's

external manager until January 8, 2014, when ARCP became self-managed. In 2015, ARCP

changed its name to VEREIT, Inc. and its common stock trades on the NYSE. Notwithstanding

its name change, the entity is referred to as ARCP in this Complaint.

14. T3 was incorporated in Maryland and was an NTR sponsored and externally

managed by AR Capital from its inception until the close of its merger with ARCP on February

28, 2013. T3 commenced a public offering of its stock in March 2011 pursuant to an effective

Form 5-11 registration statement at a fixed price of $10 per share (less concessions) and closed

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the offering in September 2012 after raising over $1.5 billion. T3 entered into a merger

agreement with ARCP on December 14, 2012, which closed on February 28, 2013.

15. T4 was incorporated in Maryland and was an NTR sponsored and externally

managed by AR Capital from its inception until the close of its merger with ARCP in January 3,

2014. T4 commenced its public offering in June 2012 pursuant to an effective Form 5-11

registration statement at a fixed price of $25 per share (less concessions) and closed the offering

in April 2013 after raising more than $1.75 billion. T4 entered into a merger agreement with

ARCP on July 1, 2013, and which closed (following certain amendments) on January 3, 2014.

FACTS

A. Defendants Obtained Improperly Inflated Promote Fees

16. AR Capital's business primarily involved creating and sponsoring NTRs and

publicly-traded REITs, externally managing such REITs, and, for its NTRs, pursuing liquidity

events such as mergers, sales, or public listings. AR Capital was contractually entitled to receive

certain fees from the REITs for each of these activities or events.

17. ARCP, T3, and T4 were REITs whose common stock was offered to the public

and registered with the Commission. Each REIT was structured as a corporation that conducted

most of its business through an affiliated operating partnership ("OP") entity for which the REIT

served as general partner—ARC Properties Operating Partnership, L.P. (the "ARCP OP"),

American Realty Capital Operating Partnership III, L.P. (the "T3 OP"), and American Realty

Capital Operating Partnership IV, L.P. (the "T4 OP"), respectively. Limited partnership

agreements ("CPAs") governed the T3 OP and T4 OP. Schorsch signed the CPAs as CEO of

each REIT.

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18. The relevant REIT owned units of its affiliated OP entity ("OP units") on a 1:1

basis with the number of shares of common stock outstanding of the REIT, which generally

constituted in excess of 95%ownership of the OP entity. The remaining OP units not owned by

the REIT were primarily issued to AR Capital and its members and employees as compensation.

Subject to certain limitations, including but not limited to minimum holding periods, OP units

owned by AR Capital and its members and employees could be converted on a 1:1 basis into

shares of common stock of the REIT.

19. Because T3 and T4 were not publicly traded, generally, the only means through

which the NTR could generate liquidity opportunities for its shareholders (other than dividends

delivered to investors) would be through a liquidity event, such as a merger, sale, or public

listing.

20. Among other things, the T3 OP and T4 OP LPAs provided that, if T3 or T4

achieved a certain level of return for its common stock shareholders through a liquidity event

such as a merger—AR Capital would be entitled to a "subordinated distribution," colloquially

referred to as a "promote fee." The terms "subordinated distribution" and "promote fee" are used

interchangeably in this Complaint.

21. Specifically, the LPAs provided that if the liquidity event provided shareholders

with a return in excess of a 6%hurdle rate, AR Capital would be entitled to receive 15% of the

amount that was above the hurdle rate. The LPAs further specified that the amount of the return

to shareholders was to be determined by T3 and T4 "in good faith" using the "fair market value"

of all issued and outstanding shares of the NTR common stock (i. e., the total merger

consideration received by the NTR's shareholders) as of the date of the liquidity event (i.e.,

merger closing date).

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22. In a side letter that was executed in connection with each merger, AR Capital

agreed to take the promote fee in OP units of the T3 or T4 OP, which would then be converted

into OP units of the ARCP OP in the merger. The LPAs, as confirmed by these side letters,

specified the conversion formula to calculate the number of T3 or T4 OP units to be issued for

the promote fee. The formula involved simple division using the same fair market value that

determined the return to NTR shareholders. The formula did not provide any enhanced value for

agreeing to receive NTR OP units instead of cash. As set forth in the side letters and merger

agreements, the T3 or T4 OP units would immediately convert to ARCP OP units at the specified

merger exchange ratio in accordance with the merger agreements.

23. AR Capital, Schorsch, and Block each owed a fiduciary duty to T3, T4, and their

shareholders. In calculating the promote fees, Defendants (as external managers of T3 and T4)

acted on behalf T3 and T4, the entities with the obligation under the LPAs to perform the

calculation. Defendants were obligated to act in the best interests of the REITs and their

shareholders by either resolving financial conflicts in the shareholders' favor or by obtaining the

informed consent of the NTR board.

24. AR Capital, acting through Block and Schorsch, inflated several aspects of the

promote fee calculation and conversion formula in the T3 and T4 mergers that enriched the

Defendants at the expense of the REITs and their shareholders. The Defendants' actions were

contrary to shareholder disclosures, the LPAs, and the relevant merger side letters, and were not

disclosed to the boards or the boards' advisors.

1. Defendants Inflated the T3 Promote Fee

25. T3 and ARCP entered into a merger agreement and related agreements on

December 14, 2012. The merger agreement provided that T3 shareholders could elect to receive,

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for every share of T3 common stock they held, either (i) 0.95 shares of ARCP common stock or

(ii) $12.00 in cash (capped at 30% of the aggregate merger consideration).

26. Similar to the conversion of the T3 common stock, the merger agreement further

provided that T3 OP units, such as those held or to be received by AR Capital for the promote

fee, would be automatically converted into 0.95 ARCP OP units.

27. As the external manager for both T3 and ARCP, AR Capital members, including

Schorsch (who also served as Chairman and CEO of ARCP, T3 and T4) and Block (who also

served as CFO of ARCP, T3 and T4), were heavily involved in discussions relating to the

merger, including by participating in board meetings and providing the outside investment

bankers retained by each REIT board with financial models and other information. Schorsch and

Block also received memoranda from outside counsel for the REIT boards in connection with the

merger that, among other things, set out the governing provisions from the LPA for the promote

fee calculation and reminded that, as set forth in guidelines established by the North American

Securities Administrators Association, a majority of the independent directors must approve all

matters relating to the promote fee.

28. As authorized by both the T3 and ARCP boards, the related agreements entered

into included a side letter with AR Capital (the "T3 side letter") in which T3 (and the T3 OP),

ARCP (and the ARCP OP), and AR Capital agreed upon the governing provisions of the T3 OP

LPA for the promote fee and that AR Capital would take the promote fee in T3 OP units. The T3

OP units would then be converted into 0.95 ARCP OP units as set forth in the merger agreement.

The specified provision in the LPA with the formula for converting the cash value of the promote

fee into T3 OP units involved simple division using the same fair market value that determined

the return to T3 shareholders. This formula did not provide any enhanced value for AR Capital

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agreeing to receive T3 OP units instead of cash. Schorsch signed the T3 side letter on behalf of

AR Capital and ARCP.

29. The merger was announced on December 17, 2012, including in an ARCP Form

8-K filed with the Commission that Schorsch signed. Among other things, the Form 8-K

included a description of the merger agreement terms and the T3 side letter, and included both

agreements as exhibits.

30. The merger was contingent on approval by a majority of each of ARCP's and

T3's shareholders. To solicit ARCP and T3 shareholders, ARCP and T3 issued a joint proxy

statement/prospectus (the "T3 Proxy"), filed with the Commission on January 22, 2013, which

set the shareholder voting meeting date for February 26, 2013. Among other things, the T3 Proxy

incorporated the T3 side letter and made certain disclosures about the promote fee. In order to

register the shares of ARCP common stock to be issued to T3 shareholders in connection with

the merger, ARCP also filed a registration statement with the Commission on January 18, 2013,

signed by Schorsch, Block, and other directors of the company, which repeated the information

and disclosures appearing in the T3 Proxy (the "T3 Merger Registration Statement")

31. Because of their roles and affiliations with T3 and ARCP, AR Capital, Schorsch,

and Block were required to disclose their interests in the merger in the T3 Proxy. The T3 Proxy

disclosures designated to describe such interests made representations about how the promote fee

(referred to as the subordinated distribution) would be calculated:

[AR Capital] ... will be entitled to subordinated distributions of net
sales proceeds from the [T3] OP in an amount estimated to be
equal to approximately $59.0 million, assuming an implied price of
[T3J common stock of $12.26 per share in the merger (which
assumes that 70% of the merger consideration is ARCP common
stock based on a per share price of $12.90, the closing price of
ARCP common stock the last trading day before public
announcement of the merger, and 30% of the merger consideration

~~17

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is cash). Such subordinated distributions of net sales proceeds is to
be finalized based on the closing price of ARCP common stock on
the day immediately prior to the closing of the merger, payable in
[T3] OP Units that will automatically convert into ARCP OP Units
and will be payable upon the consummation of the partnership
merger in accordance with the merger agreement.

32. The T3 Merger Registration Statement included an identical disclosure.

33. These disclosures set forth an understanding that the promote fee calculation

would involve the actual cash stock elections by T3 shareholders, consistent with the LPA's

requirement to calculate the fair market value of all issued and outstanding shares of T3 common

stock at the time of the merger closing. The disclosures also set forth that the promote fee would

be "finalized based on the closing price of ARCP common stock on the day immediately prior to

the closing of the merger" i. e. ,the determinative date for setting the implied price of T3

common stock for shares that elected to receive ARCP stock in the merger. According to the T3

Proxy and T3 Merger Registration Statement, AR Capital therefore would be entitled to a

promote fee of approximately $59.0 million if, among other things, (a) 30% of T3 shares elected

cash; and (b) ARCP's closing price on the day immediately prior to the closing of the merger

was $12.90 per share.

34. Following the February 26, 2013 shareholder meetings, the companies announced

that a majority of stockholders of both companies had approved the merger, that the preliminary

T3 shareholder voting results showed approximately 15.5% of the outstanding T3 shares elected

cash, and that the transaction was expected to close on February 28, 2013. The merger closed, as

expected, on February 28, 2013, with final tabulations for T3 shareholder elections of 16.5% of

shares electing cash (resulting in 83.5% receiving ARCP shares at the 0.95 exchange ratio).

35. In contravention of the T3 OP LPA, T3 side letter, and disclosures to

shareholders, and without the informed consent of either the T3 or ARCP boards, the Defendants

11

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inflated the calculation of the T3 promote fee in three ways: (i) using a trailing five-day average

price of ARCP stock instead of the ARCP closing price on the day prior to the merger closing,

(ii) disregarding the actual cash stock elections by T3's shareholders, and (iii) using an

unsupported multiplier in the conversion to OP units portion of the calculation.

a. Improper Change to a Trailing 5-Day Average Price Per Share

36. As specified in the T3 Proxy and T3 Merger Registration Statement, the promote

fee payable to AR Capital "is to be finalized based on the closing price of ARCP common stock

on the day immediately prior to the closing of the merger" (emphasis added), and the estimate

provided used asingle-day ARCP closing price per share. ARCP's closing price was $13.90 on

February 27, 2013, the day immediately prior to the closing of the merger.

37. Block prepared numerous model calculations of the promote fee leading up to and

including the merger closing date of February 28, 2013, and provided certain versions to

Schorsch. In each of these models, Block used asingle-day closing price, consistent with the

disclosure.

38. For example, on February 21, 2013, shortly before the merger vote date, Block

sent Schorsch an email, attaching a projected promote fee calculation spreadsheet that used the

single day ARCP closing price on February 20, 2013, and stating: "The attachment reflects all

updated numbers just ensuring we have no hiccups when this calculation is run final next

week. We were pretty close so I'm feeling good about the computation. I'm feeling even better

about the current schedule with a closing price of $14.19...... ($96.SMM)." Schorsch replied to

the email, acknowledging its receipt and indicating that he read and understood it: "Agreed it

looks [sic] [.]"

12

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39. Schorsch and Block tracked ARCP's closing share price in the days leading up to

the merger. Although ARCP's share price reached a high in closing at $14.54 on February 26,

2013, it closed down on heavier than average trading volume at $13.90 on February 27, 2013, the

day immediately prior to the merger closing.

40. On February 28, 2013 at 8:50 p.m., Schorsch sent Block an email with the subject

line "Call re promote."

41. By mid-day on March 1, 2013, AR Capital, acting through Block, decided to

inflate the promote fee by using an unweighted average of the closing prices on each of the five

days prior to the merger closing ("5-day average") of $14.264—instead of the ARCP closing

price on the day immediately prior to the merger closing of $13.90. Also on March 1, Block

provided a spreadsheet with the final calculation to Schorsch.

42. In taking this unauthorized unilateral action that inflated (at the expense of

ARCP's shareholders) the promote fee they would receive, AR Capital did not inform or obtain

the consent of the T3 or ARCP boards.

b. Improper Change from Use of the Actual Merger Consideration

43. The final tabulation of the shareholder elections was that 16.5% of T3 common

stock shares elected to receive $12 in cash for each T3 share, and the remaining 83.5% of shares

received 0.95 shares of ARCP common stock in exchange for each T3 share. Accordingly,

Defendants should have calculated the T3 total merger proceeds using the actual consideration

paid for the T3 common stock shares—including cash.

44. As set forth in the formulas disclosed in the T3 Proxy and T3 Merger Registration

Statement, and using the actual inputs of the 16.5% cash elections and the ARCP closing share

price on the day immediately prior to the merger closing of $13.90, the implied T3 share price

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should have been $13.01 per share (i. e. ,the product of the cash amount ($12.00) multiplied by

the percentage of cash elections (16.5%) plus the product of ARCP's share price the day prior to

the merger closing ($13.90) multiplied by the exchange ratio (0.95) multiplied by the stock-

election percentage (83.5%)).

45. Defendants disregarded these formulas and disclosures. Instead, Schorsch

instructed AR Capital and Block to ignore the actual cash elections and instead calculate the

merger proceeds as if 100% of T3 shares had been exchanged for ARCP stock. This ran afoul of

both the shareholder disclosures as well as the T3 OP LPA, which required that the promote fee

be calculated using the fair market value of all issued and outstanding shares of T3 common

stock—which included those shares exchanged for $12.00 in cash. In effect, AR Capital's

decision was to calculate the purported fair market value by assuming that the approximately

16.5% of T3 shares that received cash instead received shares of ARCP that AR Capital valued

at more than $394.4 million (including Defendants' use of the 5-day average price for ARCP

stock)~lespite the fact that those shareholders received only $350.7 million in cash.

46. Following the merger closing, and as Schorsch and he discussed, Block

performed the calculation as if 100% of the T3 shares were exchanged for ARCP shares,

resulting in an inflated implied T3 price per share of $13.55 (inclusive of the inflation caused by

AR Capital's unauthorized decision to use a 5-day average price) versus the actual of $13.01,

and a promote fee cash value of $98,359,915 versus the actual value of $83,872,012.

47. Once again, Defendants did not inform or seek approval from the T3 or ARCP

boards of their decision to change the calculation of the merger proceeds to assume 100% of the

T3'shareholders had elected ARCP stock, a change that benefited Defendants at the expense of

shareholders of the post-merger ARCP.

14

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48. Moreover, on February 28, 2013, the same date as the merger closing, Block and

Schorsch each signed ARCP's Form 10-K filed with the Commission for the fiscal year ended

December 31, 2012, that reiterated that the merger was expected to close on that date and

reiterated the T3 Proxy and T3 Merger Registration Statement disclosure concerning the promote

fee, inclusive of the estimate being calculated with the assumption of 70% stock and 30%cash

elections. This disclosure was materially misleading in light of the decision of Block and

Schorsch to perform the promote calculation without consideration of the actual stock and cash

elections.

c. Improper Conversion of the Promote Fee into ARCP OP Units

49. The T3 OP LPA, as confirmed by the T3 side letter, specified the formula for

converting the promote fee value into T3 OP units. The conversion formula was simply to divide

the cash value of the promote fee by the same fair value of one T3 share used to determine the

total merger proceeds. In other words, whatever implied T3 price per share was used to calculate

the total merger proceeds (which Defendants here—albeit wrongfully—had calculated as $13.55

per T3 share) in the calculation of the cash value of the promote fee, that same implied T3 price

per share should have been used to divide the cash value of promote fee to determine the T3 OP

units to issue. Schorsch and Block each received legal memoranda that outside counsel provided

to the boards of ARCP and T3 in connection with the merger negotiations, which summarized

the promote fee and the conversion to OP units consistent with this method.

50. As the investment banking firms engaged by the respective boards were modeling

the merger and preparing to provide a fairness opinion in early December 2012, AR Capital

employees, including Block—as the management for both companies—were specifically asked

by the investment bankers engaged by the T3 board in an email: "When calculating the number

15

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of OP units to be issued for the promote, ... should we simply divide the total equity value of the

promote by the implied offer price per share?" Block, copying Schorsch, responded by

highlighting the phrase "simply divide the total equity value of the promote by the implied offer

price per share" and confirmed that the highlighted phrase was appropriate.

51. After the closing of the T3 merger, AR Capital, acting through Block, instead

took a third manipulative measure by changing the conversion formula to inflate the number of

OP units AR Capital received, and further increase the value of the promote fee owing to AR

Capital. Using the division conversion formula set forth in the T3 OP LPA (and T3 side letter)

and the multiplication by the merger exchange ratio of 0.95 set forth in the T3 merger agreement

(and T3 side letter) would have resulted in 6,895,675 ARCP OP units (i.e., dividing the

improperly derived $98,359,915 by the purported $13.55 implied T3 price per share for the

conversion to T3 OP units, and then multiplying by the merger exchange ratio of 0.95}—versus

the 6,126,199 ARCP OP units to which AR Capital was actually entitled for the promote fee

(i.e., dividing the properly calculated promote fee cash value of $83,872,012 by $13.01, the

properly calculated implied T3 price per share used to calculate the promote fee cash value, and

then multiplying by the merger exchange ratio of 0.95).

52. However, Block—without any basis—took additional manipulative measures that

increased the number ARCP OP units that AR Capital received. Block instead first multiplied his

inflated promote fee cash value of $98,359,915 by 1.02618705. Then, rather than using the

inflated 5-day average price that he had used to calculate the promote fee cash value, he reverted

to the lower closing price per share on the day prior to the merger as the divisor, yielding

7,261,559 ARCP OP units.

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53. These actions not only contravened the T3 OP LPA, T3 side letter, disclosures to

boards and investors, and communications with the investment bankers, but also reflect Block's

manipulative intent in the simultaneous use of different "fair market values" for the identical T3

shares measured as of the same date. Block's actions on behalf of AR Capital also served to

further inflate the number of OP units for AR Capital's benefit at the expense of ARCP and its

shareholders. Once again, no one from AR Capital informed the T3 or ARCP boards or

shareholders of their actions to calculate the promote fee or conversion in this manner.

54. Block circulated to Schorsch a spreadsheet of the final promote fee calculation

incorporating the manipulative calculations described above.

d. Impact of the Defendant's Improper T3 Promote Fee Calculation

55. Collectively, the three forms of manipulation resulted in AR Capital's receipt of

1,135,360 more ARCP OP units than AR Capital was entitled to receive (i.e., 7,261,559 ARCP

OP units received vs. 6,126,199 ARCP OP units to which AR Capital was entitled).

56. On March 1, 2013, Block circulated to Schorsch a spreadsheet with the final

calculation of promote fee that showed each steps of the calculation, including the three

manipulations alleged above. The final calculation spreadsheet was never provided to the boards

of T3 or ARCP.

57. Instead, after Block finalized the spreadsheet on March 1, 2013, Defendants

participated in creating or approving a "Contribution and Exchange Agreement" for AR Capital

to enter into with the T3 OP and the ARCP OP (the "T3 Contribution and Exchange

Agreement"). Block signed the agreement on behalf of AR Capital and Schorsch signed the

agreement on behalf of the ARCP OP, in his capacity as the CEO of ARCP, the general partner

17

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of the ARCP OP. The agreement was included as an exhibit to a Form 8-K signed by Schorsch

that described the agreement and was filed with the Commission on March 6, 2013.

58. The agreement represented that, under the T3 OP LPA, AR Capital "will be

entitled to receive" a promote fee of $98,359,915, and that the conversion to OP units was

calculated in accordance with the T3 OP LPA and T3 side letter. AR Capital further represented

that nothing in the agreement violated or conflicted with any governing document or agreement

by which it was bound—which included the T3 OP LPA and the T3 side letter.

59. These representations were materially false and misleading. AR Capital was not

entitled to receive a promote fee with a cash value of more than $83,872,012; nor was the

conversion of the promote fee cash value to OP units calculated in accordance with the T3 OP

LPA and T3 side letter, which resulted in further inflation of the value of the promote fee.

60. Similar misrepresentations were made in subsequent ARCP quarterly and annual

reports filed with the Commission on Forms 10-Q and 10-K beginning with the first quarter of

2013 (filed May 6, 2013) through the second quarter of 2014 (filed July 29, 2014), each of which

Block and Schorsch signed in their capacities as ARCP's CFO and CEO, respectively. For

example, the ARCP Form 10-Q for the first quarter of 2013 stated that upon the consummation

of the T3 merger, AR Capital was "entitled to" a promote fee "which resulted in the issuance of

[T3] OP units in the [T3] OP, when after applying the Exchange Ratio, resulted in the issuance

of an additiona17.3 million [ARCP] OP Units." In fact, AR Capital was only entitled to receive

6,126,199 ARCP OP Units for the promote fee.

61. Block, who personally performed the calculation of the promote fee and

conversion to ARCP OP units in a spreadsheet that he maintained on behalf of AR Capital, knew

or recklessly disregarded that each of the three manipulations alleged above contravened the

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disclosures to shareholders, the T3 OP LPA, the side letter, legal memoranda prepared by outside

counsel to the T3 and ARCP boards concerning the promote fee, presentations to the T3 and

ARCP boards, and information provided to T3's and ARCP's investment bankers. Block also

knew or recklessly disregarded that his actions improperly inflated the number of ARCP OP

units that AR Capital would receive for the promote fee, from which he would also personally

benefit. As the CFO of AR Capital, Block's actions and scienter are attributable to AR Capital.

62. Schorsch was at least negligent when he approved the promote fee and authorized

the issuance of the ARCP OP units after receiving Block's spreadsheet with the final calculation

of promote fee that showed each step of the calculation, including the three manipulations

alleged above. Schorsch had participated in all of the merger-related board meetings for both the

T3 and ARCP boards, received the legal memoranda that explained how the promote fee

calculation was to be performed, and signed the T3 OP LPA, the T3 side letter, the T3 Merger

Registration Statement, the T3 Contribution and Exchange Agreement, and the subsequent Form

10-Qs and Form 10-K. Schorsch knew or should have known that the calculation he approved

did not conform to what was authorized by the T3 OP LPA and side letter, the presentation to the

boards, and the disclosures to the investors.

2. Defendants Inflated the T4 Promote Fee

63. Four months after ARCP closed the merger with T3, ARCP and T4 entered into a

merger agreement and related agreements on July 1, 2013 (the "T4 merger").

64. At the time, both ARCP and T4 were externally managed by AR Capital. As the

external manager for both T4 and ARCP, AR Capital members, including Schorsch (who also

served as Chairman and CEO of each REIT) and Block (who also served as CFO of each REIT),

were heavily involved in discussions relating to the merger, including by participating in board

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meetings and providing the outside investment bankers retained by each REIT board with

financial models and other information. Schorsch and Block also received memoranda from

outside counsel for the REIT boards in connection with the merger that, among other things, set

out the governing provisions for the promote fee calculation and reminded that a majority of the

independent directors must approve all matters relating to the promote fee.

65. The promote fee provisions in the T4 OP LPA were identical to those in the T3

OP LPA. Schorsch had signed the operative amended and restated T3 OP LPA and T4 OP LPA

on November 13, 2013, and November 12, 2013, respectively—approximately one month prior

to the T3 merger announcement. Among other things, the T4 OP LPA provision governing the

conversion of the promote fee to T4 OP units was identical to that in the T3 OP LPA. The T4 OP

LPA conversion formula was simply to divide the cash value of the promote fee by the same fair

value of one T4 share used to determine the total merger proceeds. In other words, whatever

implied T4 price per share was used to calculate the total merger proceeds in the calculation of

the cash value of the promote fee, that same implied T4 price per share was required to be used

to divide the cash value of the promote fee to determine the T4 OP units to issue.

66. Similarly, as authorized by both the T4 and ARCP boards, the merger-related

agreements entered into on July 1, 2013, included a side letter with AR Capital (the "T4 side

letter") in which T4 (and the T4 OP), ARCP (and the ARCP OP), and AR Capital agreed upon

the governing provisions of the T4 OP LPA for the promote fee (including the simple division

conversion formula set forth above) and that AR Capital would take the promote fee in T4 OP

units, which would then be converted into ARCP OP units at the merger exchange ratio specified

in the merger agreement. Schorsch signed the T4 side letter.

20

Case 1:19-cv-06603   Document 1   Filed 07/16/19   Page 20 of 3567. The T4 merger was announced on July 2, 2013, including in an ARCP Form 8-K

filed with the Commission that Schorsch signed. Among other things, the Form 8-K included a

description of the merger agreement terms and the T4 side letter, and included both agreements

as exhibits. The Form 8-K also estimated that the promote fee would be approximately $65.2

million, assuming an implied price of T4 common stock of $30.47 per share in the merger, and

would be payable in the form of T4 OP units that would automatically convert into ARCP OP

units upon the consummation of the T4 merger.

68. The T4 merger was contingent on approval by a majority of T4's shareholders

and an effective ARCP registration statement to issue ARCP shares to T4 shareholders (the "T4

Merger Registration Statement"). To solicit T4 shareholder votes, T4 and ARCP issued a proxy

statement/prospectus (the "T4 Proxy") on December 4, 2013.

69. Because of their roles and affiliations with T4 and ARCP, AR Capital, Schorsch,

and Block were required to disclose their interests in the merger in the T4 Proxy. The T4 Proxy

disclosures describing such interests made representations about how the promote fee (referred to

as the subordinated distribution) would be calculated:

The amount of such subordinated distribution is estimated to equal
approximately $62.7 million, assuming a value of $30.43 for the
nominal consideration to [T4] stockholders in the merger (based on
the closing price of ARCP common stock of $12.70 per share on
October 4, 2013). The amount of such subordinated distributions
of net sales proceeds is to be finalized based on the closing price of
ARCP common stock on the day immediately prior to the closing
of the merger, and will be payable in [T4] OP Units that will
automatically convert into ARCP OP Units upon consummation of
the mergers in accordance with the [T4] side letter.

70. All of the relevant representations in the T4 Proxy were repeated in the T4 Merger

Registration Statement signed by Schorsch and Block and filed with the Commission.

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71. As set forth in the T4 side letter in reference to the T4 OP LPA, as well as the

disclosures to shareholders in the T4 Proxy and T4 Merger Registration Statement, the cash

value of the promote fee was to be determined by the implied value per share of T4 common

stock derived from the closing price of ARCP common stock on the day immediately prior to the

closing of the merger; the conversion into T4 OP units would be calculated by dividing the cash

value of the promote fee by that same implied value per share of T4 common stock; and the T4

OP units would be automatically converted into ARCP OP units at the merger exchange ratio set

forth in the T4 merger agreement.

72. Nevertheless, Defendants improperly disregarded the operative agreements and

shareholder disclosures, instead using a $22.50 per share insider initial T4 offering price (the

"insider T4 initial price") solely for purpose of dividing the cash value of the promote fee to

yield the number of T4 OP units, rather than using the fair value of one share of T4 common

stock on the date of the merger closing (which they had represented was $30.43 assuming an

ARCP closing price of $12.70 per share). The improper use of $22.50 per share as the

denominator significantly inflated the number of OP units Defendants received—by

approximately one-third. Moreover, once again, Defendants' unauthorized actions were not

disclosed to the boards and shareholders.

73. Schorsch approved AR Capital's use of the $22.50 insider T4 initial price for the

conversion despite having signed the T4 side letter that specified the conversion must use the fair

value of one share of T4 common stock on the date of the merger closing. Block carried out AR

Capital's use of the $22.50 rate as the denominator for the conversion, despite knowledge of all

of the agreements and his prior experience with the T3 merger, which included representing to

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investment bankers on the T3 merger that the appropriate method was "simply divide the total

equity value of the promote by the implied offer price per share."

74. On January 3, 2014, the date of the closing of the T4 merger, in addition to the

improper use of $22.50 as the conversion denominator, Block also took one additional

manipulative step to further inflate the promote fee. As of noon on January 3, 2014, Block

updated his spreadsheet for the calculation of the promote fee using ARCP's closing price of

$12.87 from January 2, 2014, the day immediately prior to the merger closing—the key date set

forth in the T4 Proxy and T4 Merger Registration Statement—to calculate an implied T4 price

per share of $30.52. But ARCP's share price closed higher at $12.91 on January 3, 2014—the

highest price it had achieved in approximately a month. Instead of calculating the promote fee

using the closing price the day prior to the merger closing, as disclosures to investors dictated,

Block recalculated it using the higher closing price on January 3, 2014, yielding an implied T4

price per share of $30.54 and thereby inflating the cash value of the promote fee by over $1

million.

75. Block then implemented the use of the $22.50 per share value as the purported

fair market value of one share of T4 common stock for the conversion to OP units, wholly

disregarding the implied T4 price per share of $30.54 he had just calculated. By doing so, Block

substantially inflated the T4 OP units issued in exchange for the cash value of the promote fee,

which would then be converted into ARCP OP units at the applicable merger exchange ratio.

Block's calculation yielded 6,734,148 ARCP OP units-1,787,085 more ARCP OP units than

what AR Capital was entitled to under the T4 OP LPA and T4 side letter.

76. On or about January 7, 2014, Block shared his promote fee calculation

spreadsheet with Schorsch for discussion that showed his use of the incorrect ARCP closing

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price date and the conversion that used a $22.50 denominator. Schorsch approved this T4

promote fee calculation. No one from AR Capital provided this final calculation spreadsheet to

either the T4 or ARCP board or shareholders of either company.

77. Instead, similar to the T3 merger, after their T4 promote fee spreadsheet was

finalized, Defendants participated in creating or approving a "Contribution and Exchange

Agreement" for AR Capital to enter into with the T4 OP and the ARCP OP (the "T4

Contribution and Exchange Agreement"). Block signed the agreement on behalf of AR Capital.

Schorsch signed the agreement on behalf of the T4 OP and the ARCP OP, in his capacity as the

CEO of T4 and ARCP. The agreement was included as an exhibit to a Form 8-K, also signed by

Schorsch, that described the agreement and was filed with the Commission at approximately

5:30 p.m. on January 3, 2014.

78. This agreement represented that under the T4 OP LPA, AR Capital "will be

entitled to receive" a promote fee of $63,235,388, and that the conversion to 6,734,148 ARCP

OP units was calculated in accordance with the T4 OP LPA and the T4 side letter. AR Capital

further represented that nothing in the agreement violated or conflicted with any governing

document or agreement by which it was bound—which included the T4 OP LPA and the T4 side

letter. These representations were materially false and misleading. AR Capital was not entitled to

receive more than 4,947,063 ARCP OP units for the promote fee.

79. Similar misrepresentations regarding the promote fee were made in subsequent

ARCP quarterly and annual reports filed with the Commission on Forms 10-K and 10-Q

beginning with the Form 10-K for the fiscal year 2014 (filed February 27, 2014) through the

second quarter of 2014 (filed July 29, 2014), each of which Block and Schorsch signed in their

capacities as CFO and CEO, respectively, of ARCP. The statements regarding the promote fee

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omitted material information that the T4 OP LPA, the T4 merger agreement, and the T4 side

letter prohibited using a $22.50 insider T4 initial price in converting the promote fee to OP units

and that AR Capital's calculation was in contravention of those agreements, what was authorized

by the two boards, and what was disclosed to shareholders.

80. Block, who personally performed the calculation of the T4 promote fee and

conversion to ARCP OP units in a spreadsheet that he maintained on behalf of AR Capital, knew

or recklessly disregarded that the manipulated calculations contravened the disclosures to

shareholders, the T4 OP LPA, the T4 side letter, presentations to the T4 and ARCP boards, and

information provided to the respective investment bankers retained by the T4 and ARCP boards.

Block also knew or recklessly disregarded that his actions improperly inflated the number of

ARCP OP units that AR Capital would receive for the promote fee, from which he would also

personally benefit. As the CFO of AR Capital, Block's actions and scienter are attributable to

AR Capital.

81. Schorsch was at least negligent when he approved the use of the $22.50

denominator for the conversion and approved the T4 promote fee calculation performed by

Block despite the fact that Schorsch signed the T4 side letter that specified the relevant T4 OP

LPA provision that set forth the conversion formula. Schorsch was also present at all of the

relevant ARCP and T4 board meetings and was aware or should have been aware that neither

board had authorized the use of a different formula. Schorsch also knew or should have known

that the impact from the use of a $22.50 denominator for the conversion would result in a far

greater number of OP units being issued versus the cash value of the promote fee, and

significantly altered the promote fee calculation from what was authorized by the agreements

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and from what was disclosed to the investors in the T4 Proxy and the T4 Merger Registration

Statement.

B. Defendants Improperly Obtained Payments Purportedly for FF&E

82. In connection with both the T3 and T4 mergers, Defendants directed the creation

of and/or approved misleading asset purchase and sale agreements with ARCP pursuant to which

ARCP would purportedly purchase from AR Capital furniture, fixtures, and equipment necessary

for the T3- and T4-related post-merger operations of ARCP and reimburse AR Capital for certain

"unreimbursed expenses" (the "FF&E Agreements"). Each FF&E agreement required ARCP to

pay $5.8 million to AR Capital. Schorsch, on behalf of AR Capital, presented the first agreement,

related to the T3 merger, to the ARCP board on December 14, 2012 ("T3 FF&E Agreement"),

and the second, related to the T4 merger, to the ARCP board on July 1, 2013 ("T4 FF&E

Agreement").

83. Schorsch approved the $5.8 million price for each FF&E Agreement and knew or

should have known that the $5.8 million price for each did not reflect the actual items being

transferred, the cost of such items, and the actual unreimbursed expenses purportedly being

reimbursed by ARCP—if any.

84. By creating and entering into these two FF&E Agreements, Defendants arranged

to receive additional cash payments totaling $11.6 million, and wrongfully obtained at least

$7.27 million dollars in unsupported compensation.

85. The T3 FF&E Agreement was an exhibit to the December 17, 2012 Form 8-K that

announced the T3 merger, and the Form 8-K described that under the T3 FF&E Agreement,

"concurrently with the closing of the Merger and in connection with the internalization by

[ARCP] of certain property level management and accounting activities, [AR Capital] will sell to

[ARCP] certain furniture, fixtures, equipment and other assets used by [AR Capital] in

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connection with managing the property level business and operations and accounting functions

of [T3 and the T3 OP] at the cost of such assets, for an aggregate price of $5.8 million, which

includes the reimbursement of certain costs and expenses incurred by [AR Capital]." The

referenced "internalization" related to approximately 8non-executive employees who would be

performing certain property level management and accounting functions for ARCP.

86. The T3 FF&E Agreement included an exhibit of the purported "Purchased Assets

and Reimbursed Expenses." That exhibit listed items such as capitalized furniture, fixtures, and

equipment (desks, chairs, computers, software, postage and binding machines), capitalized and

other soft costs (such as marketing or software customization), and transaction costs both from

the T3 offering and the T3 merger (such as legal, accounting, investor relations, marketing,

employee handbooks, and help desk support manuals). No one from AR Capital took any

meaningful steps to confirm the accuracy of the Exhibit.

87. Schorsch signed the Form 8-K as well as the T3 FF&E Agreement on behalf of

ARCP as its CEO.

88. Similarly, the T4 FF&E Agreement was an exhibit to the July 2, 2013 Form 8-K

announcing the T4 merger, and the Form 8-K described that under the T4 FF&E Agreement,

"concurrently with the closing of the Merger, [AR Capital] will sell to [ARCP] certain furniture,

fixtures, equipment and other assets used by [AR Capital] in connection with managing the

property level business and operations and accounting functions of [T4 and the T4 OP], at the

cost of such assets, for an aggregate price of $5.8 million, which includes the reimbursement of

certain costs and expenses incurred by [AR Capital]." The T4 FF&E Agreement included a

purported "Purchased Assets and Reimbursed Expenses" exhibit that was identical to the exhibit

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in the T3 FF&E Agreement. No one from AR Capital took any meaningful steps to confirm the

accuracy of the Exhibit.

89. Schorsch signed the Form 8-K as well as the T4 FF&E Agreement on behalf of

ARCP as its CEO.

90. The purported "Purchased Assets and Reimbursed Expenses" exhibit appended to

the FF&E Agreements listing the purportedly transferred assets and expenses did not accurately

reflect the items that AR Capital's accounting department (at Block's direction) recorded as

being transferred.

91. In the T4 merger, the final schedule allocating the transaction amounts between

cost and expense categories in the FF&E Agreement was not completed by AR Capital's

accounting department (at Block's direction) until approximately six months after AR Capital

and Schorsch presented the agreement to ARCP's board for approval.

92. Moreover, the purportedly unreimbursed expenses were far in excess of actually

incurred reimbursable expenses by T3 or T4 or duplicated services that were previously

reimbursed. For example, although ARCP purportedly paid AR Capital for items such as

"Employee Handbook development and continuous update" and a "Process and Procedures

Manual development" in the T3 FF&E Agreement, those same items were again "sold" to ARCP

in the T4 FF&E Agreement.

93. Schorsch knew or should have known that he was omitting material information

when presenting the T3 and T4 FF&E Agreements to the ARCP board by not informing them

that (i) the transaction amounts were determined without regard to the actual cost of the assets

purchased or expenses purportedly being reimbursed, and (ii) that no one at AR Capital had

taken steps to confirm the accuracy of the exhibits appended to the FF&E agreements. Schorsch

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therefore knew or should have known that the T3 and T4 FF&E Agreements would result in false

recordings on the books and records of ARCP with respect to the purported assets being

transferred and expenses being reimbursed.

94. Because ARCP was externally managed by AR Capital at all relevant times, AR

Capital was responsible for making and keeping ARCP's financial books and records. Block, as

AR Capital's CFO, knew that AR Capital had proposed the $5.8 million consideration amounts

for the FF&E Agreements without regard to the actual FF&E and actual reimbursable costs or

expenses incurred by AR Capital, but nevertheless proceeded to direct AR Capital employees

responsible for recording entries on ARCP's books and records to falsely record the transactions

in order to conceal that fact. As the CFO of AR Capital, Block's actions and scienter are

attributable to AR Capital.

95. For example, a few days after the T3 FF&E Agreement was presented to ARCP's

board and received approval, Block and accounting personnel reporting to him exchanged emails

to try to identify assets on AR Capital's books that could be recorded as having been transferred

to ARCP. Block selected the specific assets to falsely record as transferred—including certain

assets that were not actually transferred to ARCP or used by the approximately 8 internalized

employees. Other purportedly transferred FF&E assets were items such as improvements to the

basement of AR Capital's New York office building that AR Capital continued to own.

96. With respect to the T4 FF&E Agreement, although the agreement was presented

and signed on July 1, 2013, Block and the AR Capital accounting staff did not attempt to identify

assets to be transferred or expenses to be reimbursed until after the closing of the T4 merger in

January 2014. As with T3, Block selected the assets to falsely record as transferred—most of

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which did not tie out to the specific items listed in the "Purchased Assets and Reimbursed

Expenses" exhibit to the agreement.

FIRST CLAIM FOR RELIEF
Violations of Section 17(a) of the Securities Act

(AR Capital and Block)

97. The Commission realleges and incorporates by reference Paragraphs 1 through

96, above.

98. By engaging in the conduct described above, Defendants AR Capital and Block,

with scienter, directly or indirectly, by use of the means or instruments of transportation or

communication in interstate commerce, or of the mails, in connection with the offer or sale of

securities: (a) employed devices, schemes and artifices to defraud; (b) obtained money or

property by means of untrue statements of material fact, or omitted to state material facts

necessary in order to make statements made, in light of the circumstances under which they were

made, not misleading; and (c) engaged in transactions, acts, practices and courses of business

which would operate as a fraud or deceit upon the purchaser.

99. By reason of the acts, omissions, practices, and courses of business set forth in

this Complaint, Defendants AR Capital and Block have violated, and, unless restrained and

enjoined, will continue to violate, Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].

SECOND CLAIM FOR RELIEF
Violations of Section 10(b) of the Exchange Act and Rule lOb-5

(AR Capital and Block)

100. The Commission realleges and incorporates by reference Paragraphs 1 through

96, above.

101. By engaging in the conduct described above, Defendants AR Capital and Block,

with scienter, directly or indirectly, by the use of any means or instrumentality of interstate

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commerce or of the mails, and in connection with the purchase or sale of securities, have:

(a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material

fact or one or more omissions of material fact necessary to make the statements made, in light of

the circumstances under which they were made, not misleading; and (c) engaged in acts,

practices or courses of business which operated or would operate as a fraud or deceit upon any

person.

102. By reason of the acts, omissions, practices, and courses of business set forth in

this Complaint, Defendants AR Capital and Block have violated, and, unless restrained and

enjoined, will continue to violate, Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and

Rule lOb-5 thereunder [17 C.F.R.§ 240.1Ob-5].

THIRD CLAIM FOR RELIEF
Violations of Sections 17(a)(2) and (a)(3) of the Securities Act

(Schorsch)

103. The Commission realleges and incorporates by reference Paragraphs 1 through

96, above.

104. By engaging in the conduct described above, Defendant Schorsch, acting at least

negligently, directly or indirectly, by use of the means or instruments of transportation or

communication in interstate commerce, or of the mails, in connection with the offer or sale of

securities: (i) obtained money or property by means of untrue statements of material fact, or

omitted to state material facts necessary in order to make statements made, in light of the

circumstances under which they were made, not misleading; and (ii) engaged in transactions,

acts, practices and courses of business which would operate as a fraud or deceit upon the

purchaser.

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105. By reason of the acts, omissions, practices, and courses of business set forth in

this Complaint, Defendant Schorsch has violated, and, unless restrained and enjoined, will

continue to violate, Sections 17(a)(2) and (a)(3) of the Securities Act [1 S U.S.C. § 77q(a)(2) and

(a)(3)].

FOURTH CLAIM FOR RELIEF
Violations of Section 13(b)(5) of the Exchange Act

(AR Capital and Block)

106. The Commission realleges and incorporates by reference Paragraphs 1 through

96, above.

107. By engaging in the conduct described above, Defendants AR Capital and Block,

knowingly falsified books, records and accounts of ARCP that were subject to Section

13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)].

108. As a result, Defendants AR Capital and Block have violated, and, unless

restrained and enjoined, will continue to violate, Section 13(b)(5) of the Exchange Act [15

U.S.C. § 78m(b)(2)(5)].

FIFTH CLAIM FOR RELIEF
Violations of Exchange Act Rule 13b2-1

(All Defendants)

109. The Commission realleges and incorporates by reference Paragraphs 1 through

96, above.

110. By engaging in the conduct described above, Defendants AR Capital, Block, and

Schorsch, directly or indirectly, falsified or caused to be falsified, books, records and accounts of

ARCP that were subject to Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)].

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111. As a result, Defendants AR Capital, Block, and Schorsch have violated, and,

unless restrained and enjoined, will continue to violate, Exchange Act Rule 13b2-1 [17 C.F.R.

§ 240.13b2-1].

PRAYER FOR RELIEF

WHEREFORE, the Commission respectfully requests that the Court enter a Final Judgment:

I.

Permanently enjoining AR Capital and Block, and each of their agents, servants, employees,

attorneys and other persons in active concert or participation with them who receive actual notice of

the injunction by personal service or otherwise from violating Section 17(a) of the Securities Act

[15 U.S.C. § 77q(a)].

II.

Permanently enjoining AR Capital and Block, and each of their agents, servants, employees,

attorneys and other persons in active concert or participation with them who receive actual notice of

the injunction by personal service ar otherwise from violating Section 10(b) of the Exchange Act,

[15 U.S.C. §§ 78j(b)] and Rule lOb-5 thereunder [17 C.F.R. § 240.1Ob-5].

III.

Permanently enjoining AR Capital and Block, and each of their agents, servants, employees,

attorneys and other persons in active concert or participation with them who receive actual notice of

the injunction by personal service or otherwise from violating Section 13(b)(5) of the Exchange Act,

[15 U.S.C. § 78m(b)(5)] and Rule 13b2-1 thereunder [17 C.F.R. § 240.13b2-1].

IV.

Permanently enjoining Schorsch, and each of his agents, servants, employees, attorneys and

other persons in active concert or participation with him who receive actual notice of the injunction

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by personal service or otherwise from violating Sections 17(a)(2) and (a)(3) of the Securities Act

[15 U.S.C. § 77q(a)(2) and (a)(3)].

V.

Permanently enjoining Schorsch, and each of his agents, servants, employees, attorneys and

other persons in active concert or participation with him who receive actual notice of the injunction

by personal service or otherwise from violating Exchange Act Rule 13b2-1 [17 C.F.R.

§ 240.13b2-1].

VI.

Ordering AR Capital, Schorsch, and Block to disgorge ill-gotten gains received from the

conduct alleged in this Complaint and to pay prejudgment interest thereon.

VII.

Ordering AR Capital, Schorsch, and Block to pay civil money penalties pursuant to Section

20(d)(2) of the Securities Act [15 U.S.C. § 77t(d)(2)] and Section 21(d)(3) of the Exchange Act

[15 U.S.C. § 78u(d)(3)].

3!

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VIII.

Granting such other and further relief as this Court deems just and appropriate.

Dated: July 16, 2019
New York, New York

By. ~ 
~~~~

Marc P. Berger
Sanjay Wadhwa
Wendy B. Tepperman
Nancy A. Brown
Janna Berke
Hane Kim
Victor Suthammanont
Attorneys for the Plaintiff
SECURITIES AND EXCHANGE COMMISSION
New York Regional Office
Brookfield Place
200 Vesey Street, Suite 400
New York, New York 10281-1022
(212) 336-1023 (Brown)
Email: BrownN(a~sec. ~ov

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