American Realty Capital Sued by Shareholders

MANHATTAN (CN) - American Realty Capital Properties raised nearly $1.6 billion in a secondary offering of common stock based on material misrepresentations, a federal class action alleges.

The City of Tampa General Employees Retirement Fund filed the complaint Monday against ARCP, which it describes as a Maryland-based real estate investment trust with offices in New York.

Founded in 2010, the trust had 3,809 properties as of March 31, 2014, consisting of 101.8 million square feet of leasable space, according to the complaint.

The class takes aim at the "untrue statements" that the trust allegedly included in the registration statement prepared in connection with its sale of 138 million shares of common stock for its May 21, 2014, secondary offering, at $12 a share.

In addition to a $12 million overstatement of its noncontrolling interests in the calculation of adjusted funds from operations (AFFO), the trust overstated AFFO by $10.9 million for the fiscal period ended June 30, the class alleges.

AFFO measures a trust's net income, according to the complaint.

The class says the trust also failed to disclose inadequate internal controls.

Five months after the offering brought in net proceeds of $1.59 billion, the trust announced on Oct. 29 that the forms it previously filed with the Securities and Exchange Commission should not be relied upon.

Because the trust "admitted that its registration statement and its disclosures and filings incorporated ... were materially false and misleading," the trust announced that it would be restating its audited consolidated financial results.

Shares fell 36 percent in intraday trading to as low as $7.85 on Oct. 29, according to the complaint.

Among the trust's revelations on Oct. 29 was "that its audit committee determined that the financial statement misrepresentations were 'intentionally made' and 'intentionally not corrected' and that the company's chief financial officer and chief accounting officer who 'had key roles in the preparation of those financial statements' had resigned and were no longer with the company," according to the complaint.

Soon thereafter, "news spread quickly that investigations were being launched" by the SEC, the FBI and the U.S. Attorney's Office for the Southern District of New York, the class says.

Among the late 2014 executive departures at American Realty Capital Properties were Nick Schorsch, who stepped down as executive chairman and from board of directors; and David Kay, who stepped down as CEO and from the board.

Both are named as defendants, among various other officers and the companies that handled the trust's underwriting.

The underwriters are Merrill Lynch Pierce Fenner & Smith Inc.; Citigroup Global Markets Inc.; Barclays Capital Inc.; JP Morgan Securities LLC; Capital One Securities Inc.; Credit Suisse Securities (USA) LLC; Deutsche Bank Securities Inc.; Wells Fargo Securities LLC; Robert W. Baird & Co. Inc.; Ledenburg Thalmann & Co. Inc.; BMO Capital Markets Corp.; JMP Securities LLC; Janney Montgomery Scott LLC; Mizuho Securities USA Inc.; PNC Capital Markets LLC; Piper Jaffray & Co.; and RBS Securities Inc.

Peter Safirstein with Morgan & Morgan represents the class, which seeks compensatory damages and rescission for violations of federal securities law.

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