In 2014, ARCP was set to file its financial statement for the second quarter, when an employee informed Block and Chief Accounting Officer Lisa McAlister that there was a methodological error in some of the firm’s calculations and that its average funds from operations (or AFFO, a key financial metric for real estate investment trusts) was overstated by roughly $0.03 per share. Despite this guidance, no corrective action was taken to address the issue of overstated AFFO. On October 29, 2014, ARCP shares plunged as much as 37% — effectively wiping out roughly $4 billion in market value — after the company publicly stated that certain of its employees had concealed accounting errors.
Following the $23 million accounting scandal, ARCP, a non-traded REIT sponsor, changed its name to VEREIT (from the Latin word “veritas” for truth).
Despite the promises of some industry professionals including financial advisors selling non-traded REITs as a safe, income-oriented investment vehicle, the facts do not align with the optimistic sales pitch. In actuality, non-traded REITs are very risky investments. One of the primary risks associated with non-traded REITs is their high cost, including significant up-front commissions (typically a 7% payout to the adviser and a 3% commission to the broker-dealer employing the financial advisor), as well as other due diligence and administrative costs. Another key risk associated with investing in non-traded REITs has to do with their illiquid nature. As a non-traded security, uninformed investors find out too late that they either cannot sell out of the investment (before a significant time horizon elapses), or if they do sell, it will be at a substantial loss through redemption to the issuer, or through an inefficient sale on a limited and fragmented secondary market.
The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in representing investors who have sustained losses on non-conventional investments, including non-traded REITs, private placements, and direct participation programs. Investors may contact a securities arbitration lawyer at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.