VEREIT and American Realty Capital to Pay Nearly $1 Billion to Settle Lawsuits
September 10, 2019 | James Sprow | Blue Vault
VEREIT, Inc. (NYSE: VER) announced Tuesday, September 8, that VEREIT, Inc. and VEREIT Operating Partnership, L.P. entered into agreements to settle certain outstanding litigation, including the pending class action litigation, In re American Realty Capital Properties, Inc. and the remaining opt out actions, Jet Capital Master Fund, L.P., et al. v. American Realty Capital Properties, Inc., et al., and Lakewood Capital Partners, LP v. American Realty Capital Properties, Inc., et al., (together, the “Opt Out Actions”) at a cost to the Company of approximately $765.5 million, comprised of a contribution of $738.5 million toward the Class Action settlement and $27.0 million toward the Opt Out Action settlements.
About the Company
VEREIT is a full-service real estate operating company which owns and manages one of the largest portfolios of single-tenant commercial properties in the U.S. The Company has total real estate investments of $15.0 billion including approximately 4,000 properties and 90.6 million square feet.
The company was formerly known as American Realty Capital Properties (“ARCP”), which was managed by American Realty Capital, a closely held real estate partnership led by Nicholas Schorsch. The nontraded REIT programs sponsored by ARC raised over $16 billion in public offerings of common stock beginning in 2008. Of the eleven nontraded REIT programs that have had liquidity-producing events, two were merged with ARCP.
The Class Action Settlement
On September 8, 2019, the Company signed a Memorandum of Understanding (“MOU”) providing for the settlement of the Class Action (the “Class Action MOU”). The Class Action settlement will resolve the claims by class plaintiffs relating to the disclosures made by the Company in October 2014 and March 2015 regarding its financial statements, which included the Company’s March 2015 restatement of certain of its previously issued financial statements. Pursuant to the terms of the Class Action MOU, certain defendants have agreed to pay in the aggregate $1.025 billion, comprised of contributions from the Company’s former external manager, American Realty Capital (“ARC”) and its principals (led by Nicholas Schorsch) totaling $225.0 million, $12.5 million from the Company’s former chief financial officer (Brian Block), $49.0 million from the Company’s former auditor (Grant Thornton), and the balance of $738.5 million from the VEREIT.
The contributions from ARC (the Company’s Former Manager) and Former CFO Brian Block can be satisfied by a combination of (i) cash, (ii) limited partner units of the Operating Partnership (“OP Units”) held by ARC and Block, and (iii) amounts due related to the dividends on such OP Units previously withheld from distribution. The contributions from ARC are inclusive of the value of substantially all of the OP Units and dividends surrendered to the Company in July 2019 as a result of a settlement by Schorsch and certain of its principals with the Securities and Exchange Commission, totaling approximately $32.0 million, which was recorded in the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2019.
The Derivative Action Settlement
At the same time, in conjunction with the Class Action settlement, the Company entered into an MOU (the “Derivative MOU”) providing for the settlement of the derivative action lawsuit currently pending in the Southern District of New York (the “SDNY”) captioned Witchko v. Schorsch, et al.
The Opt-Out Action Settlements and Remaining Litigations
On September 6 and September 9, 2019, the Company also entered into settlement agreements and releases to settle the Opt Out Actions for a total of $27.0 million, which are not subject to court approval. Three additional derivative actions remain pending in courts other than the SDNY. The Company expects to seek dismissal of these actions based upon the settlement of the Derivative Action.
Management Commentary
Glenn J. Rufrano, Chief Executive Officer, stated, “VEREIT is pleased to enter into agreements that we expect will bring these litigations to a conclusion. The Company believes the settlements are in the Company’s best interest and that of its shareholders, as they eliminate the risk of adverse judgments at trial, put an end to timing uncertainties, and remove the burdens and costs of these litigations.”
Additional Information
The Company has been cooperating with the SEC staff’s investigation related to the matters at issue in the Class Action since its inception and continues to have discussions with the staff regarding a resolution of potential charges the SEC may bring against the Company. In addition, the Company has advised the SEC that the Company plans to seek recovery of approximately $34.0 million paid by the Company’s Former Manager and the Former CFO to the SEC in connection with the previously announced settlement between them and the SEC. Any monies disbursed to the Company will be maintained by the Company and will not be paid as part of the settlements described above. There can be no assurance as to whether any of these funds will be disbursed to the Company, and the timing and substance of the ultimate resolution of these discussions is unknown. There can be no assurance as to the timing of the court’s approval of the Class Action and Derivative settlements, whether such approvals will be obtained, or how these settlements may affect any potential future resolution of the remaining derivative lawsuits, the SEC matter, or the timing of any such resolution. The Company will be required to fund its contribution to the Class Action settlement, along with the cash value of any OP Units and dividends surrendered by the Former Manager and the Former CFO in order to satisfy their contributions to the Class Action settlement, ten days after the court grants preliminary approval of both the Class Action and Derivative settlements.
Sources: VEREIT, SEC, Blue Vault
