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Sep 08 2017

Vereit Files Suit Against Schorsch and Colleagues

Vereit (NYSE: VER), the publicly-traded real estate investment trust formerly known as American Realty Capital Properties and parent company of Cole Capital, has filed a complaint in U.S District Court for the Southern District Of New York against former directors and officers of the company over the payment of litigation expenses relating to the 2014 accounting scandal that nearly took down the company. Defendants include co-founder and CEO Nicholas Schorsch, chief investment officer Peter Budko, director William Kahane, and president Edward Weil.

In September 2011, Vereit entered into indemnification agreements with Schorsch, Budko, Kahane, and Weil, agreeing to advance “reasonable” legal expenses in the event of actions taken against them.

In October 2014, chief financial officer Brian Block and chief accounting officer Lisa McAlister manipulated the company’s second quarter 2014 financial results, at the alleged urging of Schorsch, by inflating its adjusted funds from operations hours before filing the results with the SEC.

Block was later found guilty of securities fraud and related crimes for his role in the fraud and is awaiting sentencing. Numerous lawsuits have been filed against the company and its officers following the public disclosure of the accounting manipulation and Block’s subsequent criminal conviction.

According to the complaint, Schorsch is seeking $5 million in litigation expenses, while the other defendants are seeking an undetermined amount. Vereit, which has advanced more than $10 million to Schorsch for his legal troubles, is not disputing that the defendants are entitled to such fees. However, Vereit rejected invoices submitted by the defendants it felt were “unreasonable” or that failed to itemize litigation expenses with particularity.

“Schorsch has consistently submitted invoices requesting unreasonable advancements without an adequate basis,” said Vereit in the complaint. “In response, Vereit has declined to pay certain portions of the amounts Schorsch has demanded. Budko’s, Kahane’s, and Weil’s invoices have, without exception, inexplicably failed to segregate their legal expenses from expenses incurred by their counsel’s other clients, most notably AR Capital LLC, the parent company of ARC Properties Advisors LLC, Vereit’s former external manager.”

Vereit said that it has repeatedly asked the defendants to comply with the requirements of the indemnification agreements, but to no avail.

Days before Vereit filed its complaint against the four defendants, Schorsch filed and has since dismissed a claim in the Delaware Chancery Court against Vereit for refusing “to honor its clear obligations” to advance defense expenses relating to his “civil litigations and government investigations.”

“Vereit has become increasingly brazen in its disregard of its contractual obligations, continuing both with untimely payments, and making increasingly large and retroactive deductions during the past several months,” according to Schorsch’s complaint against Vereit. “Not once has [Vereit OP] paid a single invoice within 10 days as required by the indemnification agreement.”

The same day Schorsch voluntarily dismissed his claim, he, Weil, Budko, and Kahane filed a complaint in the Delaware Chancery Court against Vereit and its operating partnership alleging breach of indemnification agreements. Vereit is attempting to have the claim dismissed or stayed so that litigation can take place in New York rather than Delaware, as the New York court is familiar with the issues surrounding the company and its 2014 scandal.

Vereit is seeking an entry of judgment from the court and a declaration that it is complying with its obligations under the indemnification agreements.

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Article by: The DI Wire

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