213. Specifically, the table represented that AFFO was $163,915,000 for the 

year ended December 31, 2013, compared to $48,082,000 for the year ended December 

31, 2012. 

214. Note 3 to the 2013 Form 10-K, which was entitled “Summary of 

Significant Accounting Policies,” represented that ARCP’s financial statements were 

“prepared on the accrual basis of accounting in accordance with U.S. GAAP.” 

215. Defendants also stated the following with respect to the Company’s internal 

controls and procedures:

In accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, 

management, with the participation of our Chief Executive Officer and 

Chief Financial Officer, has evaluated the effectiveness of our disclosure 

controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the 

Exchange Act) as of the end of the period covered by this Annual Report on 

Form 10-K. Based on such evaluation, our Chief Executive Officer and 

Chief Financial Officer have concluded, as of the end of such period, that 

our disclosure controls and procedures are effective in recording, 

processing, summarizing and reporting, on a timely basis, information 

required to be disclosed by us in our reports that we file or submit under the 

Exchange Act.

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Management’s Annual Report on Internal Control over Financial 

Reporting

Our management is responsible for establishing and maintaining adequate 

internal control over financial reporting, as defined in Rules 13a-15(f) and 

15d-15(f) under the Securities Exchange Act of 1934, as amended. Our 

internal control over financial reporting is designed to provide reasonable 

assurance regarding the reliability of financial reporting and the preparation 

of financial statements in accordance with generally accepted accounting 

principles.

Our management assessed the effectiveness of our internal control over 

financial reporting as of December 31, 2013. In making this assessment, 

our management used the criteria set forth by the Committee of Sponsoring 

Organizations of the Treadway Commission (“COSO”) in the 1992 Internal 

Control-Integrated Framework.

Based on our assessment, our management believes that, as of December 

31, 2013, our internal control over financial reporting is effective. 

216. The 2013 Form 10-K also contained the same internal disclosure control 

Certifications and SOX Certifications that were included with ARCP’s Forms 10-Q filed 

during the Relevant Period. See ¶¶ 95, 135-136, 156, 172, above. Again, Defendants 

Schorsch and Block signed the Certifications, which represented, among other things, 

that Defendants Schorsch and Block had reviewed the 2013 Form 10-K and that it 

contained no materially untrue statements or omissions; fairly represented in all material 

respects the financial condition of ARCP; was accurate in all material respects; and 

disclosed any material changes to the Company’s internal control over financial 

reporting. 

217. After the market closed on February 27, 2014, Defendants held a 

conference call to discuss the Company’s fourth quarter of 2013 results. During the 

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conference call, Defendant Schorsch confirmed that “[o]ur earnings guidance is solid,”

and even had “room for upside[.]” Defendant Block stated:

We are very pleased to be sharing such impressive results for 2013 and the 

beginning of 2014 . . . . Our AFFO improved more than 240% to 

approximately $164 million, producing a 70% increase of AFFO per share 

on a fully diluted basis to $0.86. The strength of our AFFO is directly 

related to our investing $3.4 billion in 676 new real estate properties and 

the closing and successful integration of the $2.3 billion acquisition of 

ARCT Trust III the $2.2 billion acquisition of CapLease and the $774 

million acquisition of the GE [Trust REIT] portfolio. . . . [W]e comfortably 

affirm our 2014 AFFO guidance of $1.13 to $1.19 per share . . . .

Based on the strength of our acquisitions, success in our private capital 

management business, strategic execution of our balance sheet initiatives

and the continued savings in G&A costs, we comfortably affirm our 2014 

AFFO guidance of $1.13 to $1.19 per share.

We currently have today 812.5 million shares and share equivalents 

outstanding on a fully diluted basis. The end result of all these numbers, I 

just mentioned is a run rate of around $1.11 to $1.13 per share AFFO. 

Again, this number is a run rate through what we know today.

If we didn’t do anything else as of April 1st, we would achieve this roughly 

$1.12 per share for the prospective 12 months. We of course will continue 

to acquire more than the $1 billion we’ve discussed over the next nine 

months and therefore achieve higher results.

These results demonstrate tremendous success and are a result of the 

equally tremendous hard work. 

218. In addition, the following exchange regarding the transaction took place 

between analyst Chris Lucas of Capital One Securities and Defendant Block about the 

Company’s full-year 2014 AFFO estimates:

Analyst Lucas: [A]nd then, again related to guidance. Brian, just in terms 

of getting to the low end of the numbers, we should just assume that, that

$1.13 at the low end is reflective of just essentially what you’ve talked 

about before which is what’s done and nothing more, is that effectively 

how we should be thinking about the low end?

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Defendant Block: That’s correct. So to repeat Chris, if we didn’t do 

anything past March 31st, we’d be at the low end of the range and that’s

fact that we have a lot more acquisition potential for the duration of the 

year. 

219. Also during the call, Defendant Beeson touted ARCP’s “acquisition 

machine” in the following exchange with analyst Josh Patinkin of BMO Capital Markets:

Analyst Patinkin: Okay and is that you think what enabled you such an 

attractive initial yield going into smaller deal size?

Defendant Beeson: Absolutely, that is how we distinguish our[selves], no 

other company has the acquisition machine that we have built here that 

enables us to cost effectively do smaller one-off transactions and that’s how 

we’re able to get the pricing differential. We can buy three assets at a 

7.75[%] or an 8[%] cap that another competitor buys in a portfolio at a 6, 

7[%] cap, that’s a significant spread differential and we do that because 

we’re able to and will do granular level acquisitions. 

220. The statements referenced in ¶¶ 205-219 each were materially false and 

misleading and omitted material facts when made. The facts were that:

(a) ARCP’s reported AFFO for the fourth quarter of 2013 was 

overstated by nearly 90%, and its reported AFFO for the full year of 

2013 was overstated by 23%, as detailed in ¶¶ 13, 88;

(b) Contrary to the statements referenced in ¶¶ 205-219, ARCP’s 

financial statements were materially false and misleading as they did 

not accurately portray the Company’s financial performance, and 

were not prepared in accordance with GAAP. Specifically, ARCP

reported that its AFFO for the year ending December 31, 2013, was 

$163,915,000. Defendants have admitted, however, that the reported 

AFFO figure was materially inflated, including because ARCP

improperly added back expenses associated with 100% of the equity 

interests in the Operating Partnership. As a result, ARCP was forced 

to restate and amend its 2013 Form 10-K, including the following 

adjustments: (i) AFFO and AFFO per share were reduced by $43.9 

million (23%) and $0.20 per share (23%), respectively; and (ii) net 

loss attributable to stockholders and net loss per share were 

increased by $16.8 million (3.5%) and $0.08 per share (3.5%), 

respectively;

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(c) Contrary to the statements referenced in ¶¶ 205-219, ARCP’s 2014 

AFFO estimates were not accurate, attainable, honestly believed, or 

founded on a reasonable basis. As Defendants knew but omitted to 

disclose to investors. ARCP’s claimed AFFO growth could only be 

achieved through Defendants’ continued falsification of ARCP’s 

financial statements;

(d) Contrary to the statements referenced in ¶ 216, and as the Company 

admitted in connection with its Restatement, ARCP’s disclosure 

controls and procedures suffered from “material weaknesses” and 

were not properly designed or implemented to ensure that (i) AFFO 

per share was correctly calculated; (ii) AFFO guidance, and the 

Company’s ability to meet that guidance, were accurate; (iii) the 

information in its SEC filings correctly reflected its internal 

accounting records; and (iv) its SEC filings were reviewed on a 

timely basis by senior management and that significant changes in 

previously reviewed documents were brought to the attention of the 

Audit Committee for approval before filing;

(e) Contrary to the statements referenced in ¶ 216, and as the Company 

admitted in connection with its Restatement, ARCP’s internal 

controls over financial reporting suffered from “material 

weaknesses,” which resulted in the Company failing to (i) maintain 

adequate controls to assess, authorize and monitor related-party 

transactions, validate the appropriateness of such transactions or 

manage the risks arising from contractual relationships with 

affiliates; (ii) maintain adequate controls over various grants of 

equity-based compensation; (iii) implement consistent policies and 

procedures relating to purchase accounting; (iv) establish clear 

reporting, lines and job responsibilities or promote accountability 

over business process control activities; and (v) develop 

standardized policies and procedures for critical accounting

estimates and non-routine transactions, including management 

review and approval of the accounting treatment of all critical and 

significant estimates;

(f) Contrary to the statements referenced in ¶ 216, the Company’s rapid 

pace of mergers and acquisitions during the Relevant Period “had a 

severe impact on the Company’s control environment” and 

exacerbated the deficiencies in ARCP’s internal controls and 

financial reporting processes;

(g) Contrary to the statements referenced in ¶¶ 205-219, ARCP’s 

“growth by acquisition” strategy was not beneficial for its 

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shareholders, but instead was designed to generate transaction fees 

for Schorsch-controlled companies and to result in large 

compensation payments to executives in Schorsch-controlled 

companies without regard to the underlying fairness of the 

transaction; and

(h) Contrary to the statements referenced in ¶ 206, Defendants’

statement that the Company was “undervalued” was based on 

inflated AFFO numbers that were only possible through 

manipulation and falsification of ARCP’s actual performance.

W. First Quarter 2014 Financial Results

221. On May 8, 2014, ARCP issued a press release announcing “Record First 

Quarter 2014 Operating Results” (“First Quarter 2014 Press Release”). That same day, 

the Company filed with the SEC a Form 8-K, which Defendant Schorsch signed, and

included the press release as an exhibit. The press release announced AFFO available to 

common stockholders of $147.4 million, or $0.26 per diluted share, representing a yearover-year increase of 334.6%. ARCP reaffirmed its full-year 2014 AFFO estimates of 

$1.13 to $1.19 per diluted share. 

222. The First Quarter 2014 Press Release contained the following statements 

from Defendant Schorsch regarding the Company’s financial results:

We had a record quarter with earnings coming exactly in line with our 

expectations of $0.26 AFFO per share, consistent with our previously stated 

guidance for the year. Additionally, our year-to-date acquisitions, combined 

with properties currently under contract puts us well-ahead of schedule to 

achieve our total 2014 annual acquisition targets by midyear. With our 

strengthened balance sheet, and the Company ready to capitalize on a 

number of large-scale sale- leaseback transactions, we are in position to 

deliver strong shareholder return this year . . . .

223. Likewise, Defendant Kay represented:

With our acquisitions team firing on all cylinders, every aspect of our 

business is exceeding our expectations . . . With strong earnings, our 

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acquisition volume is outpacing our guidance, our cap rates surpass all 

industry peers, Cole Capital launched two new products, and we 

successfully integrated our management and systems, all of which is 

allowing us to execute with a disciplined intensity. The $1.7 billion of 

acquisitions we have closed or placed under contract were at a 7.92% cash 

cap rate or 8.26% GAAP cap rate. These 150 self-originated transactions 

are indicative of the scale and expertise of our platform, providing a 

significant competitive advantage. 

224. Defendant Beeson further noted that the Company’s “improved operational 

and financial efficiencies” had positioned ARCP “well to drive meaningful growth.” 

225. The First Quarter 2014 Press Release also contained statements similar to 

that included in other press releases during the Relevant Period with respect to the 

importance of AFFO. See, e.g., ¶¶ 131, 152, 168, 209, above. 

226. Also on May 8, 2014, ARCP filed with the SEC its Form 10-Q for the 

quarter ended March 31, 2014 (“First Quarter 2014 Form 10-Q”). The First Quarter 2014 

Form 10-Q was signed by Defendants Schorsch and Block, contained the same financial 

results and reported AFFO from the First Quarter 2014 Press Release, and represented 

that those financial results were accurate and presented in accordance with GAAP. The 

First Quarter 2014 Form 10-Q also contained substantially similar statements about 

AFFO as compared to the Company’s other documents filed with the SEC during the 

Relevant Period. See, e.g., ¶¶ 131-132, 153, 169, 210, above. Notably, although she 

signed the 2013 Form 10-K and the Second Quarter 2014 Form 10-Q, Defendant 

McAlister did not sign the First Quarter 2014 Form 10-Q. 

227. In addition, the Company provided the following table that quantified “the 

items deducted or added to net loss in our calculation of FFO and AFFO for the three 

months ended March 31, 2014 and 2013 (in thousands)” and assured investors that the 

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amounts listed were “presented net of any non-controlling interest effect where 

applicable”: 

228. Specifically, the table represented that AFFO was $147,389,000 for the 

three-month period ended March 31, 2014, compared to $33,922,000 for the three-month 

period ended March 31, 2013. 

229. Note 3 to the Third Quarter 2013 Form 10-Q, which was entitled 

“Summary of Significant Accounting Policies,” represented that ARCP’s financial 

statements “were prepared in conformity with U.S. GAAP” and that they included “all 

adjustments and accruals of a normal recurring nature, which, in the opinion of 

management, are necessary for a fair presentation of results for the interim periods.” 

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230. The First Quarter 2014 Form 10-Q also contained the same internal 

disclosure control Certifications and SOX Certifications that were included with ARCP’s 

other Forms 10-Q filed during the Relevant Period. See, e.g., ¶¶ 95, 135-136, 156, 172, 

above. Again, Defendants Schorsch and Block signed the Certifications. 

231. Later on May 8, 2014, ARCP held a conference call to discuss the 

Company’s first quarter 2014 financial results. During the call, Defendant Schorsch 

stated: “Our first quarter earnings came in exactly where we expected, at $0.26 per share 

of AFFO,” and reiterated that “[w]e are confident with our guidance for the full year of 

2014 of $0.13 to $0.19 per share and a forward quarterly run rate of $0.29 to $0.30 per 

share.” Likewise, Defendant Block noted that the first quarter 2014 AFFO was $0.26 per 

share, fully diluted, and that the Company’s “current run rate based on AFFO per share 

fully diluted is between $0.29 and $0.30.” Following his prepared remarks, Defendant 

Schorsch stated that investors should buy ARCP stock as “we are way undervalued.”

Defendant Schorsch further emphasized that “our stock is cheap.” 

232. During the call, Defendant Beeson discussed aspects of the Company’s 

operations and net lease portfolio, stated that it had “successfully integrated over 300 

individuals from the multiple entities into one cohesive enterprise,” and confirmed that 

the respective accounting systems had likewise been “fully integrated as well.” 

233. The statements referenced in ¶¶ 221-232 each were false and misleading 

and omitted material facts when made. The facts were that:

(a) ARCP’s reported first quarter 2014 AFFO of $147 million, or $0.26 

per share, was overstated by 35%, as detailed above in ¶¶ 13, 88;

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(b) ARCP had not achieved “record” results, was not experiencing 

“improved operational efficiencies,” and was not positioned for 

meaningful growth, as the Company lacked reliable financial 

controls and, as a result, was issuing false financial reports,

including materially inflated AFFO and unreliable AFFO guidance;

(c) ARCP’s financial statements referenced in ¶¶ 221-232 were 

materially false and misleading, as they did not accurately portray 

the Company’s financial performance, and were not prepared in 

conformity with GAAP. Specifically, ARCP reported that its AFFO 

available to common stockholders was $147.4 million. As 

confirmed by Defendants’ admissions, however, that figure was 

inflated, including because ARCP improperly added back expenses 

associated with 100% of the equity interests in the Operating 

Partnership. As a result, ARCP was forced to restate and amend the 

First Quarter 2014 Form 10-Q, including the following adjustments: 

(i) AFFO and AFFO per share were reduced by $38.5 million (26.1 

%) and $0.07 per share (26.9%), respectively; and (ii) net loss 

attributable to the Company and net loss per share were reduced by 

$17.2 million (5.58%) and $0.03 per share (5.5 8%), respectively;

(d) Contrary to the statements referenced in ¶¶ 221-232, ARCP’s 2014 

AFFO estimates and related statements about its projected earnings 

growth were not accurate, attainable, honestly believed, or founded 

on a reasonable basis. To the contrary, ARCP’s claimed AFFO 

growth could be achieved only through Defendants’ continued 

falsification of ARCP’s financial statements;

(e) Contrary to the statements referenced in ¶ 230, and as the Company 

admitted in connection with its Restatement, ARCP’s disclosure 

controls and procedures suffered from “material weaknesses” and 

were not properly designed or implemented to ensure that (i) AFFO 

per share was correctly calculated; (ii) AFFO guidance, and the 

Company’s ability to meet that guidance, were accurate; (iii) the 

information in its SEC filings correctly reflected its internal 

accounting records; and (iv) its SEC filings were reviewed on a 

timely basis by senior management and that significant changes in 

previously reviewed documents were brought to the attention of the 

Audit Committee for approval before filing;

(f) Contrary to the statements referenced in ¶ 230, and as the Company 

admitted in connection with its Restatement, ARCP’s internal 

controls over financial reporting suffered from “material 

weaknesses,” which resulted in the Company failing to maintain 

adequate controls to assess, authorize and monitor related-party 

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transactions, validate the appropriateness of such transactions or 

manage the risks arising from contractual relationships with 

affiliates; (ii) maintain adequate controls over various grants of 

equity-based compensation; (iii) implement consistent policies and 

procedures relating to purchase accounting; (iv) establish clear 

reporting, lines and job responsibilities or promote accountability 

over business process control activities; and (v) develop 

standardized policies and procedures for critical accounting 

estimates and non-routine transactions, including management 

review and approval of the accounting treatment of all critical and 

significant estimates;

(g) Contrary to the statements referenced in ¶ 230, the Company’s rapid 

pace of mergers and acquisitions during the Relevant Period, 

including the Cole Merger, “had a severe impact on the Company’s 

control environment” and exacerbated the deficiencies in ARCP’s 

internal controls and financial reporting processes;

(h) Contrary to the statements referenced in ¶¶ 221-232, ARCP’s 

“growth by acquisition” strategy was not beneficial for its 

shareholders, but instead was designed to generate transaction fees 

for Schorsch-controlled companies and to result in large 

compensation payments to executives in Schorsch-controlled 

companies without regard to the underlying fairness of the 

transaction;

(i) Defendants’ statement in ¶ 232 that the Company had successfully 

integrated its financial systems and operations “into one cohesive 

enterprise” was false because the Company lacked even the most 

basic accounting functions, including a standardized internal 

accounting, close and cash reconciliation process; and

(j) Defendants’ statements in ¶ 231 that the Company was “way 

undervalued” were based on inflated AFFO numbers that were only 

possible through manipulation and falsification of ARCP’s actual 

performance.

X. May 21, 2014, Stock Offering

234. On March 14, 2013, ARCP committed to offer up to 138 million of newly 

issued shares of common stock at $12.00 per share (“May 2014 Stock Offering”), which 

ultimately raised $1.65 billion.

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235. In connection with the May 2014 Stock Offering, ARCP filed a Form S3ASR (“Shelf Registration Statement”) with the SEC. According to the Shelf 

Registration Statement, certain documents filed with the SEC were incorporated by 

reference:

[A]ny reports filed by [ARCP] with the SEC after the date of this 

[statement] and before the date that the offering of securities by means of 

this prospectus is terminated will automatically update and, where 

applicable, supersede any information contained in this [statement] or 

incorporated by reference into this [statement].

All documents that [ARCP] file[s] (but not those that we furnish) pursuant 

to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of

1934, as amended, or the Exchange Act, after the date of the initial 

registration statement of which this prospectus is a part and prior to the 

effectiveness of the registration statement . . . .

* * *

All documents that [ARCP] file[s] (but not those that we furnish) pursuant 

to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the 

date of this prospectus and prior to the termination of the offering of any of 

the securities covered under this prospectus . . . . 

236. The documents filed with the SEC that were incorporated by reference in 

the Shelf Registration Statement included ARCP’s 2013 Form 10-K and First Quarter 

2014 Form 10-Q, as well as a preliminary Prospectus Supplement filed May 21, 2014, a 

Prospectus Supplement filed May 23, 2014, and other offering materials identified 

therein. The Shelf Registration Statement was signed by Defendants Schorsch and Block. 

237. On May 21, 2014, ARCP issued the May 2014 Stock Offering Press 

Release, which announced the issuance of 100 million shares of newly issued ARCP

stock. That same day, the Company filed with the SEC a Form 8-K, which Defendant 

Schorsch signed, and included the press release as an exhibit. 

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238. The statements referenced in ¶¶ 235-237 each were materially false and 

misleading and omitted material facts when made. The facts were that:

(a) ARCP’s financial statements referenced in ¶¶ 235-237 were 

materially false and misleading as they did not accurately portray the 

Company’s financial performance, and were not prepared in 

accordance with GAAP. Specifically, the AFFO that ARCP

reported in its 2013 Form 10-K and its First Quarter 2014 Form 10-

Q were inflated because ARCP improperly added back expenses 

associated with 100% of the equity interests in the Operating 

Partnership. As a result, ARCP was forced to restate and amend its 

2013 Form 10-K, including the following adjustments: (i) AFFO and 

AFFO per share were reduced by $43.9 million (23%) and $0.20 per 

share (23%), respectively; and (ii) net loss attributable to 

stockholders and net loss per share were increased by $16.8 million

(3.5%) and $0.08 per share (3.5%), respectively. In addition, ARCP

restated and amended its First Quarter 2014 Form 10-Q, including 

the following adjustments: (i) AFFO and AFFO per share were 

reduced by $38.5 million (26.1%) and $0.07 per share (26.9%), 

respectively; and (ii) net loss attributable to the Company and net 

loss per share were reduced by $17.2 million (5.58%) and $0.03 per 

share (5.58%), respectively;

(b) Contrary to the statements referenced in ¶¶ 235-237, ARCP’s 2014 

AFFO estimates were not accurate, attainable, honestly believed, or 

founded on a reasonable basis. As Defendants knew but omitted to 

disclose to investors, ARCP’s claimed AFFO growth could only be 

achieved through Defendants’ continued falsification of ARCP’s 

financial statements;

(c) Contrary to the statements referenced in ¶¶ 235-237, and as the 

Company admitted in connection with its Restatement, ARCP’s 

disclosure controls and procedures suffered from “material 

weaknesses” and were not properly designed or implemented to 

ensure that (i) AFFO per share was correctly calculated; (ii) AFFO 

guidance, and the Company’s ability to meet that guidance, were 

accurate; (iii) the information in its SEC filings correctly reflected its 

internal accounting records; and (iv) its SEC filings were reviewed 

on a timely basis by senior management and that significant changes 

in previously reviewed documents were brought to the attention of 

the Audit Committee for approval before filing;

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(d) Contrary to the statements referenced in ¶¶ 235-237, and as the 

Company admitted in connection with its Restatement, ARCP’s 

internal controls over financial reporting suffered from “material 

weaknesses,” which resulted in the Company failing to (i) maintain 

adequate controls to assess, authorize and monitor related-party 

transactions, validate the appropriateness of such transactions or 

manage the risks arising from contractual relationships with 

affiliates; (ii) maintain adequate controls over various grants of 

equity-based compensation; (iii) implement consistent policies and 

procedures relating to purchase accounting; (iv) establish clear 

reporting lines and job responsibilities or promote accountability 

over business process control activities; and (v) develop 

standardized policies and procedures for critical accounting 

estimates and non-routine transactions, including management 

review and approval of the accounting treatment of all critical and 

significant estimates;

(e) Contrary to the statements referenced in ¶¶ 235-237, the Company’s 

rapid pace of mergers and acquisitions during the Relevant Period 

“had a severe impact on the Company’s control environment” and 

exacerbated the deficiencies in ARCP’s internal controls and 

financial reporting processes;

(f) Contrary to the statements referenced in ¶¶ 235-237, ARCP’s 

“growth by acquisition” strategy was not beneficial for its 

shareholders, but instead was designed to generate transaction fees 

for Schorsch-controlled companies and to result in large 

compensation payments to executives in Schorsch-controlled 

companies without regard to the underlying fairness of the 

transaction; and

(g) Contrary to the statements referenced in ¶¶ 235-237, the Company 

lacked appropriate controls to ensure, among other things, that its 

Code of Conduct was adhered to and that employees would not be 

subject to pressure to make inappropriate decisions concerning the 

formulation of ARCP’s financial statements or calculation of AFFO.

Y. REIT Week Investor Forum

239. On June 3, 2014, Schorsch spoke on behalf of the Company at the National 

Association of Real Estate Investment Trusts REITWeek Investor Forum in New York 

City. Schorsch emphasized to the institutional investors, securities analysts, and 

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investment-banking and financial-service professionals in attendance the Company’s 

increased acquisition guidance for 2014, stating that:

We’ve also raised our acquisition guidance – our core acquisition guidance. 

This is critically important for people to understand about what we do. This 

is a very, very large enterprise. It’s about $30 billion between our nontraded REITs that are the Cole brand and our traded American Realty 

balance sheet.

* * *

. . . But the reason we’ve raised our acquisition target is because we met the 

entire year’s core acquisition target by June. It makes no sense to not have 

acquisitions in the last half of the year. Now granted, we do not expect 

anywhere near the acquisition speed in the last half of the year . . . but we 

did raise our target from $3 billion to $4.5 billion and we’re currently 

already locked and loaded on $3.3 billion to close this year through the end 

of June. 

Z. June 20, 2014, Stockholder Memorandum

240. On June 20, 2014, ARCP issued a stockholder memorandum (“June 2014 

Stockholder Memorandum”). That same day, the Company filed with the SEC a Form 8-

K, which Defendant Schorsch signed, and included the stockholder memorandum as an 

exhibit. The stockholder memorandum also included a chart emphasizing that ARCP

was “a compelling value proposition” because, among other things, it traded at the 

“lowest 2014 AFFO multiple” relative to its peers.

AA. Second Quarter 2014 Financial Results

241. On July 29, 2014, ARCP issued a press release for the second quarter of 

2014 (“Second Quarter 2014 Press Release”). That same day, the Company filed with 

the SEC a Form 8-K, which Defendant Schorsch signed, and included the press release as 

an exhibit. The release announced AFFO of $205.3 million, representing a year-over-

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year increase of 429.0%, and AFFO per diluted share of $0.24, representing a year-overyear increase of 26%. The Company also reported a net loss of $63.4 million, or $0.08 

per share. The Company also reported a “[p]ro forma normalized estimated AFFO run 

rate as of year-end 2014 of $1.18 to $1.20 per share including 2014 completed and 

announced transactions.” 

242. The Second Quarter 2014 Press Release contained the following statement 

from Defendant Schorsch regarding the Company’s financial results:

I have continued to focus my attention on improving corporate governance . 

. . . With the support of our Board of Directors, we are improving our 

practices by eliminating related party transactions, enhancing disclosures, 

evaluating executive compensation, opting out of the MUTA to assure our 

stockholders’ right to elect the entire Board at each annual meeting, and 

implementing other policies designed to improve our reporting and 

transparency, further align interest with our stockholders, and eliminate 

potential conflicts of interest. Our goal is to constantly improve our 

corporate governance, which we expect will ultimately be reflected in our 

corporate governance scores. All of these efforts are taken with a view 

toward creating long-term value for stockholders. 

243. Likewise, Defendant Kay stated that ARCP was purportedly wellpositioned to continue to provide value to its shareholders:

Our second quarter results and accomplishments are indicative of our focus 

on driving long-term value by delivering on our commitments . . . . In six 

months, we have fully integrated the organization, achieved $38.0 million 

of the $77.0 million of cost synergies to come in the first year, reduced 

leverage, de-risked the balance sheet, lengthened debt maturities, created 

$11.8 billion of unencumbered assets and significantly extended and 

upsized our credit facility. With these actions undertaken and the formative 

stage of the company behind us, we are focused on the day-to-day 

operations of the company. Through all of these undertakings, we are 

positioned for long-term success.

Our balance sheet acquisitions in the quarter, owned and under contract, of 

1,217 properties in over 210 separate transactions demonstrates the 

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continuing systematic execution of our core acquisition strategy and 

testifies to the repeatability of our investment process.

* * *

The daily execution of these collective actions allows us to maintain our 

2014 AFFO per share guidance of $1.13-$1.19, while significantly delevering the balance sheet and maximizing value for our stockholders. 

244. The Second Quarter 2014 Press Release also contained statements similar 

to that included in other press releases during the Relevant Period with respect to the 

importance of AFFO. See, e.g., ¶¶ 131, 152, 168, 209, 225, above. 

245. Also on July 29, 2014, ARCP filed with the SEC its Form 10-Q for the 

quarter ended June 30, 2014 (“Second Quarter 2014 Form 10-Q”). The Second Quarter 

2014 Form 10-Q was signed by Defendants Schorsch, Block and McAlister, contained 

the same financial results and AFFO figures from the Second Quarter 2014 Press 

Release, and represented that those financial results were accurate and presented in 

accordance with GAAP. The Second Quarter 2014 Form 10-Q also contained statements 

about AFFO substantially similar to those contained in the Company’s other documents 

filed with the SEC during the Relevant Period. See, e.g., ¶¶ 131-132, 153, 169, 210, 226, 

above. 

246. In addition, the Company provided the following table that quantified “the 

items deducted or added to net loss in our calculation of FFO and AFFO for the three 

months ended June 30, 2014 and 2013 (in thousands)”: 

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247. Specifically, the table represented that AFFO was $205,278,000 and 

$353,058,000 for the three- and six-month periods ended June 30, 2014, respectively, 

compared to $38,802,000 and $72,279,000 for the three- and six-month periods ended 

June 30, 2013, respectively. ARCP disclosed to investors for the first time that it was 

calculating AFFO on a gross rather than a net basis. 

248. Note 3 to the Second Quarter 2014 Form 10-Q, which was entitled 

“Summary of Significant Accounting Policies,” represented that ARCP’s financial 

statements “were prepared in conformity with U.S. GAAP” and that they included “all 

adjustments and accruals of a normal recurring nature, which, in the opinion of 

management, are necessary for a fair presentation of results for the interim periods.” 

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249. The Second Quarter 2014 Form 10-Q also contained the same internal 

disclosure controls Certifications and SOX Certifications that were included with 

ARCP’s other Forms 10-Q filed during the Relevant Period. See, e.g., ¶¶ 95, 135-136, 

156, 172, 230, above. Again, Defendants Schorsch and Block signed the Certifications. 

250. Later on July 29, 2014, ARCP held a conference call to discuss the 

Company’s second quarter 2014 financial results. During the call, Defendant Kay stated:

I could not be more excited about my senior management team and the 

future prospects of this Company. From afar, it may appear at times our 

rapid growth is hard to understand I can assure you, however, that 

everything we do is directed towards a singular objective: to create value 

for our shareholders.

So why am I excited? I can tell you that it has a lot to do with our people, 

our culture, the opportunities we see in the marketplace, and our 

competitive advantages. Today we have roughly $30 billion of assets 

managed by more than 425 talented people located strategically throughout 

the country. We have built this Company with the future in mind and we 

are well positioned to take advantage of market opportunities as they arise.

* * *

For example, I am often asked, how can a company of our size consistently 

invest in properties at cap rates meaningfully better than our competitors.

There is no alchemy here, I assure you. In part, our ability to invest at 

prices better than our peer group’s results from our origination team being 

the largest in the industry.

* * *

I would like to talk about the equity offering we completed this quarter. I 

am pleased that we raised the money and deleveraged the balance sheet. 

With plenty of uncertainty in the global economy, heading into the summer 

reducing our leverage was the right choice, although not the most popular 

choice.

* * *

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American Realty is positioned for success. It is now not about creating this 

foundation, but building upon it. I could not be more excited about the 

prospects for this Company and I look forward to our future together. 

251. Defendant Block commented on ARCP’s second quarter 2014 financial 

performance and AFFO guidance, stating, in relevant part:

Our second-quarter results are in line with our expectations. . . . AFFO was $198.6

million, or $0.24 per fully diluted share, which represents a 26% increase from this 

period last year. We are confident with our [AFFO] guidance range for the full 

year of 2014 of $1.13 to $1.19 per share . . . .

Additionally, our internal operations continue[] to strengthen. The synergy created 

by the integration of the Cole team and the adoption of new technology has 

allowed us to be more timely and efficient in our financial reporting. In fact, this 

enhanced scale allowed us to move up the timing of our 10-Q filing and earnings 

call as a result of these improvements by roughly a week.

Let me turn to our earnings guidance numbers . . . . The second-half estimated 

AFFO projected run rate of $533 million . . . includes second quarter as well as 

G&A for the second half of the year of approximately $80 million, which is 

inclusive of commissions and cost synergies. This is consistent with our full-year 

estimate of total G&A, including noncash compensation of approximately $176 

million. The run rate AFFO also includes an estimate for Cole Capital based on 

our projected $3.1 billion of capital raise and $4.9 billion of acquisitions into the 

managed funds. The projection results in AFFO for Cole Capital for the full year 

of approximately $120 million. 

252. On the call, the following exchange related to AFFO and AFFO guidance 

took place between analyst Dan Donlan of Ladenburg Thalmann and Defendant Kay:

Analyst Dolan: David, just wanted to go to the guidance of a quick just so 

I understand it. The pro forma AFFO run rate at year-end 2014, you have 

$1.18 to $1.20, that implies a quarterly run rate of $0.295 to $0.30. That’s 

not a run rate for the fourth quarter, is it? Is that what it would be, call it, at 

the very end of the quarter for the first quarter assuming – for the first 

quarter of 2015 assuming nothing new to 2015. Is that right?

Defendant Kay: That is correct. Other than for Cole Capital that would 

assume the same estimates for 2015 as we have estimated for 2014. So yes, 

that would be a year-end run rate but would assume the same $4.9 billion of 

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assets acquired during 2015 as well as the same $3.1 billion of equity raised 

in the Cole Capital managed funds.

* * *

Analyst Dolan: If I am looking at the other guidance range that you 

reiterated, the one for the full-year 2014 of $1.13 to $1.19 I think, the 

midpoint of that is $1.16. So you have done $0.49 year to date. That 

would imply about $0.335 in the third quarter and fourth quarter to get to 

that midpoint – is that right as well?

Defendant Kay: That is roughly, yes, the math. And the reason there 

being is again, most of the Cole Capital EBITDA will occur with the 

acquisitions in the capital (inaudible) in Cole Capital versus where we were 

the first two quarters of the year. It is a very steep ramp up, as you know.

Analyst Dolan: Yes, yes. And so you probably have some benefit from 

[ARCenters] not getting full potentially until the first part of the fourth 

quarter as well.

Defendant Kay: That is exactly right. Because as articulated in that and 

part of the reason why we really wanted to lay that out is because you will 

have Red Lobster and ARCenters being owned for the three-month period, 

roughly, both at the same time. And that is why we tried to be transparent 

and give both numbers – give the AFFO run rate so that you will see the 

difference of actually Centers coming out as well as the year with both 

Centers and Lobster in at the same period of time.

Just to note, one other thing also in the estimates there is no promote or

one-time disposition fees in any of the Cole numbers either in the AFFO 

run rate that we gave of $1.18 to $1.20 or in the $1.13 to $1.19 range where 

we reconciled to $1.14. 

253. The statements referenced in ¶¶ 239-252 each were materially false and 

misleading and omitted material facts when made. The facts were that:

(a) As detailed in ¶¶ 13, 88, ARCP’s reported AFFO of $0.24 per share 

was overstated by more than 10%;

(b) ARCP’s financial statements referenced in ¶¶ 239-252 were 

materially false and misleading because they did not accurately 

portray the Company’s financial performance, and were not prepared 

in accordance with GAAP. Specifically, as to the second quarter of 

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2014, ARCP reported that AFFO was $205,278,000 and 

$353,058,000 for the three- and six-month periods ended June 30, 

2014, respectively. Defendants have since admitted, however, that 

those figures are inflated because, among other things, ARCP

improperly added back expenses associated with 100% of the equity 

interests in the Operating Partnership. This, in turn, caused ARCP’s 

net loss to be understated for the three- and six-month periods ended 

June 30, 2014. Indeed, ARCP was forced to restate and amend the 

Second Quarter 2014 Form 10-Q, including the following 

adjustments: (i) AFFO and AFFO per share were reduced by $19.3 

million (9.4%) and $0.03 per share (12.5%), respectively; and (ii) 

net loss attributable to the Company and net loss per share were 

increased by $14.4 million (35.7%) and $0.02 per share (35.7%), 

respectively;

(c) Contrary to the statements referenced in ¶¶ 239-252, ARCP’s 2014 

AFFO estimates were not accurate, attainable, honestly believed, or 

founded on a reasonable basis. As Defendants knew but omitted to 

disclose to investors, ARCP’s claimed AFFO growth could only be 

achieved through Defendants’ continued falsification of ARCP’s 

financial statements;

(d) Contrary to the statements referenced in ¶ 249, and as the Company 

admitted in connection with its restatement, ARCP’s disclosure 

controls and procedures suffered from “material weaknesses” and 

were not properly designed or implemented to ensure that (i) AFFO 

per share was correctly calculated; (ii) AFFO guidance, and the 

Company’s ability to meet that guidance, were accurate; (iii) the 

information in its SEC filings correctly reflected its internal 

accounting records; and (iv) its SEC filings were reviewed on a 

timely basis by senior management and that significant changes in 

previously reviewed documents were brought to the attention of the 

Audit Committee for approval before filing;

(e) Contrary to the statements referenced in ¶ 249, and as the Company 

admitted in connection with its restatement, ARCP’s internal 

controls over financial reporting suffered from “material 

weaknesses,” which resulted in the Company failing to (i) maintain 

adequate controls to assess, authorize and monitor related-party 

transactions, validate the appropriateness of such transactions or 

manage the risks arising from contractual relationships with 

affiliates; (ii) maintain adequate controls over various grants of 

equity-based compensation; (iii) implement consistent policies and 

procedures relating to purchase accounting; (iv) establish clear 

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reporting lines and job responsibilities or promote accountability 

over business process control activities; and (v) develop 

standardized policies and procedures for critical accounting 

estimates and non-routine transactions, including management 

review and approval of the accounting treatment of all critical and 

significant estimates;

(f) The Company lacked appropriate controls to ensure, among other 

things, that its Code of Conduct was adhered to and that employees 

would not be subject to pressure to make inappropriate decisions 

concerning the formulation of ARCP’s financial statements or 

calculation of AFFO;

(g) The Company was not improving its governance practices, reporting 

practices, transparency or practices concerning related-party 

transactions. During the same quarter that Defendants Schorsch, 

Kay and Block were making these representations, they deliberately 

had falsified ARCP’s reported AFFO by tens of millions of dollars 

and its AFFO per share by more than 14%;

(h) Contrary to the statements referenced in ¶ 251, ARCP’s operations 

did not “continue[] to strengthen” during the Relevant Period. 

Rather, the Company’s rapid pace of mergers and acquisitions 

during the Relevant Period, including, the Cole Merger, “had a 

severe impact on the Company’s control environment” and 

exacerbated the deficiencies in ARCP’s internal controls and 

financial reporting processes;

(i) Contrary to the statements referenced in ¶¶ 239-252 ARCP’s 

“growth by acquisition” strategy was not beneficial for ARCP

shareholders, but instead was designed to generate transaction fees 

for Schorsch-controlled companies and to result in large 

compensation payments to executives in Schorsch-controlled 

companies without regard to the underlying fairness of the 

transaction;

(j) Contrary to the statements referenced in ¶ 251, the Company’s 

financial reporting was neither “timely” nor “efficient,” but instead 

was grossly inadequate, replete with inadequacies, and the product 

of fraudulent accounting artifices; and

(k) Contrary to the statements referenced in ¶ 243, ARCP’s results for 

the second quarter of 2014 did not position the Company for “longterm success,” and were not the product of Defendants’ focus on 

driving long-term value for ARCP shareholders, but rather were the 

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result of deliberate, pervasive, and systematic manipulation by 

Defendants Schorsch, Block, Kay and McAlister of ARCP’s 

financial results, including its AFFO.

VI. ADDITIONAL ALLEGATIONS OF SCIENTER

254. Defendants acted with scienter with respect to the materially false and 

misleading statements and omissions discussed herein.

255. ARCP has admitted that Defendants acted with scienter in connection with 

the false and misleading financials. As discussed above at ¶¶ 7, 76-79, the Company’s 

October 29, 2014, press release stated that its executives had “identified” misstatements 

in the Company’s financials, but nevertheless “intentionally” did not correct them. The 

Company further has admitted that the misstatements in its financials during the second 

quarter of 2014 were “intentionally made” and deliberately concealed from investors. In 

addition, the Company has recognized that its internal controls over financial reporting 

were materially deficient – a fact which the Company and its top officers knew or were 

severely reckless in not knowing. Indeed as discussed above at ¶¶ 60-68, 76-80, the 

Company already had identified multiple errors in its financials, and Schorsch and his 

entities improperly had been using his network of related entities to complete various 

self-dealing transactions. 

256. Defendant Schorsch was ARCP’s founder, CEO, and Chairman and, as 

such, was intimately familiar with, and exercised substantial control over, every aspect of 

ARCP’s business, including its calculation and reporting of AFFO and the effectiveness 

of the Company’s internal controls over financial reporting. As discussed herein, 

Defendant Schorsch directed ARCP’s CFO, Defendant Block, improperly to report the 

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Company’s AFFO. Defendant Schorsch also directed Defendant Block and others to 

conceal the Company’s improper accounting by fraudulently deferring the accrual of 

second quarter expenses. Knowing those facts, Defendant Schorsch nevertheless 

certified the accuracy of ARCP’s financial results and the adequacy of its internal 

controls in ARCP’s financial filings throughout the Relevant Period. Defendant 

Schorsch’s scienter is further demonstrated by the decision of ARCP’s independent 

directors on or about December 15, 2014, to sever all ties between ARCP and Defendant 

Schorsch and ask him to “step down.”

257. Defendant Block was ARCP’s CFO, and, as such, had ultimate 

responsibility for ARCP’s finances. In addition, Defendant Block was intimately familiar 

with, and exercised substantial control over, ARCP’s business, including its calculation 

and reporting of AFFO and the effectiveness of its internal controls over financial 

reporting. As discussed herein, Defendant Block became aware by no later than February 

2014 that ARCP’s financial statements contained errors related to the calculation of 

AFFO, yet he did nothing to correct those errors. In fact, Defendant Block continued to 

certify the accuracy of ARCP’s financial statements, as well as the adequacy of ARCP’s 

internal controls throughout the Relevant Period, despite knowing that the Company’s 

financial statements did not accurately reflect the Company’s true financial condition. In 

addition, as discussed above at ¶ 11, Defendant Block attempted to conceal the 

Company’s improper accounting by converting to the “gross” method of reporting AFFO 

and fraudulently deferring the accrual of second quarter expenses. As the Audit 

Committee explained in its October 29, 2014, disclosure, Defendant Block had a “key 

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role[] in the preparation” of the fraudulent reports, which led to his immediate 

termination and necessitated a review of prior financial statements that he had approved. 

258. Defendant McAlister, ARCP’s CAO, was a member of ARCP’s senior 

management and was in charge of ARCP’s accounting. As Defendant McAlister 

admitted in her verified complaint, by no later than February 2014, she knew that

ARCP’s financial statements contained errors related to the calculation of AFFO, yet she 

failed to correct those errors. Defendant McAlister also was fully aware that Defendant

Schorsch directed Defendant Block to conceal the improper accounting by converting to 

the “gross” method of reporting AFFO and fraudulently deferring the accrual of second 

quarter expenses. Defendant McAlister nevertheless signed the Second Quarter 2014 

Form 10-Q despite knowing of the fraudulent accounting contained in the Company’s 

financials. As the Audit Committee explained in its October 29, 2014, disclosure, 

Defendant McAlister had a “key role[] in the preparation” of the fraudulent reports, 

which led to her immediate termination and necessitated a review of prior financial 

statements that she had approved. 

259. As ARCP’s President and CEO, Defendant Kay was a member of ARCP’s 

senior management, was responsible for the Company’s day-to-day operations, and was 

familiar with ARCP’s internal controls. Defendants Block and McAlister brought the 

improper AFFO accounting to Defendant Kay’s attention by no later than February 2014.

In response, however, “Mr. Kay told Ms. McAlister and Mr. Block not to change or 

correct the fraudulent reports, in an apparent effort to avoid public disclosure of the 

Company’s faltering financial performance.” As the result of his day-to-day control over 

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ARCP, Defendant Kay also knew, or was reckless in not knowing, that Defendant 

Schorsch directed Defendants Block and McAlister to conceal the improper accounting 

by converting to the “gross” method of reporting AFFO and fraudulently deferring the 

accrual of second quarter expenses. Defendant Kay’s scienter is further demonstrated by 

the fact that he was asked to step down from his position at ARCP on or about December 

15, 2014. 

260. As ARCP’s President and COO, Defendant Beeson was a member of 

ARCP’s senior management, was responsible for the Company’s day-to-day operations, 

and was familiar with ARCP’s internal controls. Defendant McAlister brought the 

improper AFFO accounting to Defendant Beeson’s attention by no later than February 

2014, informing Beeson that in the 2013 Annual Report ARCP had misrepresented 

AFFO. As the result of her day-to-day control over ARCP, Defendant Beeson also knew, 

or was reckless in not knowing, that Defendant Schorsch directed Defendants Block and 

McAlister to conceal the improper accounting by converting to the “gross” method of 

reporting AFFO and fraudulently deferring the accrual of second quarter expenses. 

Defendant Beeson’s scienter is further demonstrated by the fact that she was asked to step 

down from her position at ARCP on or about December 15, 2014.

261. Other facts alleged above support a strong inference of scienter for each of 

the Defendants. ARCP and its executives repeatedly told investors that the Company had 

achieved “record” AFFO, emphasizing that this financial metric was a particularly 

important measure to evaluate the Company’s stock. At each reporting period during the 

Relevant Period, those Defendants singled out the Company’s purportedly strong AFFO. 

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Those Defendants were aware of the fact that the market was relying on these statements, 

as analysts published numerous reports that underscored the Company’s “record” AFFO. 

Given that those Defendants repeatedly stressed to investors that AFFO was a critical 

measure of the Company’s financial health, any failure to confirm that their repeated 

statements about the Company’s AFFO were materially accurate supports an inference of 

recklessness, at a minimum.

262. The nature, duration, and scope of Defendants’ misconduct further supports 

a strong inference of scienter. As admitted in the Restatement, the Company falsified its 

reported operating performance and financial statements for each and every reporting 

period since the Company went public in 2011. The Company further has acknowledged 

that its financial statements were riddled with accounting errors and/or financial 

manipulations, resulting in understatements of net losses attributable to stockholders by 

as much as 18%. Likewise, the Company has admitted that it overstated its AFFO per 

share each and every year during the Relevant Period, with the overstatements in 

individual quarters reaching as high 95%. 

263. Moreover, the Company has admitted that management was aware of 

certain errors that were “intentionally not corrected” and that other “errors were 

intentionally made.” Finally, the accounting scheme allowed management to pursue and 

execute a rapid-fire, growth-by-acquisition strategy that generated over one billion 

dollars in fees, commissions, and incentive compensation for related parties controlled by 

Defendant Schorsch. 

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264. The Restatement is an admission that (i) the Company’s financial 

statements and the Executive Defendants’ public statements regarding those results were 

materially false and misleading; and (ii) the financial statements reported during the 

Relevant Period were incorrect based on information available to the Defendants at the 

time the results were originally reported. ARCP’s Restatement contains at least the 

following indicators of Defendants’ scienter:

(a) The type of restatement – The restated items at issue were not due to any 

mathematical error, or honest misapplication of a complex accounting standard. Rather, 

the Restatement resulted from a host of deliberate accounting errors and 

misrepresentations in ARCP’s financial statements that concern the most important 

financial metrics for investors – including the single most critical metric for investors in 

REITs – and encompass serious and repeated misapplications of GAAP accounting, 

which caused net loss to be materially understated for 2013 and contributed to the 

material overstatement of AFFO in 2013 and 2014.

(b) The duration over which the improper accounting was perpetrated –

The Restatement does not hinge on an honest mistake or oversight during a single quarter 

or even a single year that was later corrected on a good-faith basis. Here, ARCP was 

forced to restate its financial statements covering the last seven consecutive reporting 

periods: (1) the year ended December 31, 2012; (2) the year ended December 31, 2013; 

as well as the quarters ended (3) March 31, 2013; (4) June 30, 2013; (5) September 30, 

2013; (6) March 31. 2014; and (7) June 30, 2014 – to correct its accounting improprieties 

that could no longer be concealed. In addition, ARCP was forced to admit that it had 

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falsified its reported operating performance and/or financial statements for every 

reporting period since it went public in 2011.

(c) The types of accounting gimmicks employed – The improper accounting 

corrected by this Restatement did not occur as a result of good-faith differences in 

accounting judgments, or interpretations of complicated, vague or arcane accounting 

rules, and the Company does not claim otherwise. Rather, as ARCP has acknowledged, 

the Company’s Relevant Period financial statements were replete with accounting errors 

and/or financial manipulations that violated clear and well-established expense 

recognition standards, including:

• The recording of numerous expenses in the incorrect accounting period, 

effectively delaying expense recognition and understating reported 

expenses.

• The misclassification of ordinary business expenses as “merger-related,”

which inflated AFFO and gave investors the false impression that such 

expenses were not recurring in nature.

• The misclassification of management fees to affiliates as being merger and 

other non-routine transaction-related, which masked related-party 

transactions, inflated AFFO, and gave investors the false impression that 

such expenses were not recurring in nature.

• The recording of deferred financing costs as merger and other transactionrelated expenses.

• The recording of payments to Schorsch-controlled entities as being for the 

acquisition of furniture, fixtures and equipment, and including those 

purported assets on its books, notwithstanding that there was “no evidence 

of the receipt” to substantiate the existence of any such assets.

Among the myriad accounting gimmicks employed by the Company, the manner 

in which the Company understated net losses by understating expenses is a clear example 

of how the Company violated basic and fundamental rules of accounting. In violation of 

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the basic tenet of accrual accounting that expenses be recorded in the same period in 

which the corresponding benefit is realized,

2 ARCP systematically engaged in a scheme 

of improper timing of expense recognition, understating its expenses in a current period 

or improperly delaying expense recognition for as long as possible.

(d) The income statement effect of the misstatements – Most or all of the 

Company’s purported accounting “errors” had the effect of improving, not worsening, 

operating results, including but not limited to (i) ARCP’s operating loss; (ii) loss from 

continuing operations; (iii) net loss; (iv) net loss per share; (v) AFFO; and (vi) AFFO per 

share.

(e) The false SOX certifications – In addition to the Executive Defendants’

knowledge of the Company’s violations of basic accounting principles, Defendants 

Schorsch and Block’s SOX Certifications attached to ARCP’s Forms 10-Q, Forms 10-K, 

and Registration Statements also evidence scienter. As set forth above, Defendants

Schorsch and Block certified that they had personally reviewed ARCP’s financial 

statements, designed and evaluated ARCP’s disclosure controls, and evaluated ARCP’s 

internal controls over financial reporting. Such reviews and evaluations, if performed as 

represented, would have alerted the Executive Defendants to ARCP’s glaring accounting 

misstatements and material weaknesses in internal and disclosure controls that were 

subsequently admitted. The Executive Defendants either knew of the material 

misstatements in the financial statements, the ineffectiveness of the disclosure controls, 

2 See FASB Statement of Financial Accounting Concepts No. 5, Recognition and Measurement in 

Financial Statements of Business Enterprises, ¶¶ 85-86; ASC Topic 450-20, Loss Contingencies.

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and the material weaknesses in internal controls, or knowingly failed to perform the 

required review of the financial statements, evaluation of internal controls and evaluation 

of disclosure controls and falsely represented that they had. In either case, the Executive 

Defendants knew or recklessly disregarded that the SOX Certifications Defendants 

Schorsch and Block signed were false and misleading.

(f) The Audit Committee Investigation found that financial misstatements 

were intentional – The Company admitted in the Restatement that senior management 

participated in the intentional, material misstatement of ARCP’s operating performance 

measures, including the material misstatement of various GAAP income and cash flowrelated measures. The 2013 Amended Form 10-K included, in pertinent part, the 

following admissions with respect to the Company’s previously disclosed AFFO:

The investigation found that Adjusted Funds From Operations (“AFFO”), a 

nonGAAP measure presented in the Company’s SEC filings and other 

financial communications, was overstated for fiscal year 2011, fiscal year 

2012, fiscal year 2013 (including each fiscal quarter of 2013) and, as 

previously disclosed in the October 29 8-K, the first two fiscal quarters of 

2014. Senior management considered AFFO to be an important metric used 

by analysts and investors in evaluating the Company’s performance and, 

for the first two quarters of 2014, sought to maintain reported AFFO within 

the 2014 guidance range of $1.13 to $1.19 per share announced at the end 

of 2013. The overstatements of AFFO were due in part to errors in 

reflecting amounts attributable to the limited partnership interests in the 

Company’s operating partnership, ARC Properties Operating Partnership, 

L.P., held by holders other than the Company (known as non-controlling 

interests or “NCI”). Prior to the filing of the Quarterly Report on Form 10-

Q for the first quarter of 2014, some members of senior management were 

aware of NCI errors but allowed the report to be filed without completing 

an analysis of the errors. In the Company’s Quarterly Report on Form 10-Q 

for the second quarter of 2014, as previously reported in the October 29 8-

K, the NCI errors in the first quarter were intentionally not corrected, and 

other AFFO and financial statement errors were intentionally made, 

resulting in an overstatement of AFFO and an understatement of the 

Company’s net loss for the three and six months ended June 30, 2014.

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The Company’s admissions that “some members of senior management” were 

“aware” of the errors is corroborated by McAlister’s verified complaint, which identified 

those members of senior management to include Defendants Schorsch, Kay, Block, and 

McAlister. 

(g) The Executive Defendants profited as a result of the 

misrepresentations – Defendants Schorsch, Block and other senior executives profited 

from ARCP’s fraud because it enabled them to tax the Company with hundreds of 

millions of dollars in improper fees and services through Defendant Schorsch’s web of 

interrelated entities. The Company’s executives also profited because the OPP tied 

executive compensation to the Company’s size and reported AFFO. When the 

Company’s stock price rose as it acquired more companies and recorded higher AFFO, 

the Company’s executives profited.

(h) ARCP terminated its top executives responsible for the 

misrepresentations – Finally, at least five of the Company’s top executives –

Defendants Block, McAlister, Schorsch, Kay, and Beeson – including those directly 

responsible for its accounting, were all fired or “stepped down” within weeks of the 

revelation of the accounting fraud, and the Commonwealth of Massachusetts, SEC, and 

Department of Justice are conducting on-going investigations into matters associated with 

the Company’s false financial reporting.

VII. PLAINTIFFS’ RELIANCE 

265. During the Relevant Period, Plaintiffs relied on the materially false and 

misleading statements alleged herein when purchasing ARCP common stock.

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266. There is a presumption of reliance established by the fraud-on-the-market 

doctrine in this case because, among other things:

(a) The Defendants made public misrepresentations or failed to disclose 

material facts during the Relevant Period;

(b) The misrepresentations and omissions were material;

(c) The Company’s common stock traded in efficient markets;

(d) The misrepresentations and omissions alleged would induce a 

reasonable investor to misjudge the value of the Company’s 

common stock; and

(e) Plaintiffs purchased ARCP common stock between the time 

Defendants misrepresented or failed to disclose material facts, and 

the time the true facts were disclosed, without knowledge of the 

misrepresented or omitted facts.

267. At all relevant times, the markets for ARCP common stock were efficient 

for reasons including that (a) ARCP’s common stock was listed, and actively traded, on 

the NASDAQ, a highly efficient and automated market; (b) ARCP filed periodic reports 

with the SEC; (c) ARCP regularly communicated with investors via established market 

communication mechanisms, including through regular disseminations of press releases 

on the major news wire services, and through other wide-ranging public disclosures, such 

as communications with the financial press, securities analysts and other similar reporting 

services; and (d) ARCP was followed by numerous analysts who wrote reports that were 

published, distributed and entered the public market. As a result of the foregoing, the 

market for ARCP’s publicly traded common stock promptly digested current information 

with respect to the Company and reflected such information in the price of ARCP’s 

common stock. Plaintiffs relied on the price of ARCP’s common stock, which reflected 

all the information in the market, including the misstatements by Defendants.

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VIII. LOSS CAUSATION 

268. Defendants’ wrongful conduct directly and proximately caused Plaintiffs’

economic loss. As Defendants’ false and misleading statements and omissions became 

apparent to the market, beginning on October 29, 2014, the price of ARCP stock declined 

as the artificial inflation was removed, causing damage to the Plaintiffs.

269. Before the market opened on October 29, 2014, ARCP made a series of 

startling admissions regarding the effectiveness of its internal controls and the accuracy 

of its financial information. In direct response to these disclosures, ARCP common stock 

declined on October 29, 2014, closing at $10.00 per share – a decline of nearly 20% – on 

heavy trading volume of over 231 million shares traded, which was nearly 50 times 

greater than the average daily trading volume during the Relevant Period. On the next 

three consecutive trading days, the price of ARCP’s stock price continued to decline by, 

respectively, 5.8%, 5.8% and 11.5%. By November 3, 2014, the Company’s stock price 

closed at $7.85, a 36.6% drop from the pre-disclosure price. These declines in ARCP

stock were the direct and proximate result of the nature and extent of Defendants’ prior 

materially false and misleading statements and omissions being revealed to the market. 

The timing and magnitude of the price declines negate any inference that Plaintiffs’

losses were caused by changed market conditions, macroeconomic or industry factors or 

Company-specific factors unrelated to Defendants’ wrongful conduct.

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IX. CLAIMS FOR RELIEF 

COUNT 1

FOR VIOLATION OF THE ARIZONA CONSUMER FRAUD ACT

(By all Plaintiffs against all Defendants)

270. Plaintiffs reallege the allegations above.

271. This claim is brought by Plaintiffs against Defendants for violation of the 

Arizona Consumer Fraud Act (“ACFA”), Ariz. Rev. Stat. Ann. § 44-1522.

272. Defendants violated ACFA in that they engaged in deception, deceptive or 

unfair acts or practices, fraud, false pretense, false promise, misrepresentation, and/or 

concealment, suppression or omission of material facts with intent that others rely on 

such concealment, suppression or omission, in connection with the sale and/or 

advertisement of ARCP common stock to Plaintiffs.

273. Defendants’ violations of ACFA were wanton, reckless and/or showed spite 

or ill will, and/or Defendants acted with a reckless indifference to the interests of others.

274. Plaintiffs have suffered consequence and proximate injury in that, in 

reliance on the integrity of the market, Plaintiffs paid artificially inflated prices for ARCP

common stock. But for Defendants’ repeated material misrepresentations, Plaintiffs

would not have made purchases of ARCP shares at the quantities, or at the prices, at 

which they in fact did. 

275. As a direct and proximate effect of Defendants’ wrongful conduct, 

Plaintiffs suffered damages in connection with their purchases and acquisitions of ARCP

common stock during the Relevant Period.

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276. An award of punitive damages is warranted because the Defendants’ 

conduct was wanton, reckless, and/or showed spite or ill will, and/or because the 

Defendants acted with reckless indifference to the interests of others.

COUNT 2

FOR AIDING AND ABETTING VIOLATIONS OF

THE ARIZONA CONSUMER FRAUD ACT

(By all Plaintiffs against the Operating Partnership,

the Schorsch-Controlled Defendants and the Executive Defendants)

277. Plaintiffs reallege the allegations above.

278. This claim is brought by Plaintiffs against the Operating Partnership, the 

Schorsch-Controlled Defendants and the Executive Defendants for aiding and abetting 

violations of the ACFA, Ariz. Rev. Stat. Ann. § 44-1522.

279. Defendants violated the ACFA in that they engaged in deception, deceptive 

or unfair acts or practices, fraud, false pretense, false promise, misrepresentation, and/or 

concealment, suppression or omission of material facts with intent that others rely on 

such concealment, suppression or omission, in connection with the sale and/or 

advertisement of ARCP common stock to Plaintiffs.

280. The Operating Partnership, the Schorsch-Controlled Defendants and the 

Executive Defendants knew that Defendants engaged in deception, deceptive or unfair 

acts or practices, fraud, false pretense, false promise, misrepresentation, and/or 

concealment, suppression or omission of material facts with intent that others rely on 

such concealment, suppression or omission, in connection with the sale and/or 

advertisement of ARCP common stock to Plaintiffs. 

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281. The Operating Partnership, the Schorsch-Controlled Defendants and the 

Executive Defendants substantially assisted or encouraged Defendants in committing the 

violation of the ACFA described above. 

282. By assisting, supporting, and supplementing, instigating, advising and 

encouraging the efforts of Defendants to violate the ACFA, the Operating Partnership, 

the Schorsch-Controlled Defendants and the Executive Defendants are each responsible 

for the underlying damages available to the Plaintiffs for the ACFA violations of each 

Defendant as if each Defendant had performed the illegal acts itself.

COUNT 3

FOR VIOLATION OF SECTION 10(B) OF THE EXCHANGE ACT

AND SEC RULE 10B-5 PROMULGATED THEREUNDER

(By all Plaintiffs against ARCP, the Operating Partnership, and the Executive 

Defendants)

283. Plaintiffs reallege the allegations above.

284. This claim is brought by Plaintiffs against Defendants for violation of 

Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated 

thereunder.

285. During the Relevant Period, Defendants disseminated or approved the 

materially false and misleading statements specified above, which they knew or 

recklessly disregarded were misleading in that they misrepresented or omitted material 

facts necessary in order to make the statements made, in light of the circumstances under 

which they were made, not misleading.

286. Defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 in 

that they (a) employed devices, schemes and artifices to defraud; (b) made untrue 

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statements of material facts or omitted to state material facts necessary in order to make 

the statements made, in light of the circumstances under which they were made, not 

misleading; or (c) engaged in acts, practices and a course of business that operated as a 

fraud or deceit upon Plaintiffs related to the purchase and/or acquisition of ARCP

common stock.

287. Plaintiffs have suffered consequence and proximate injury in that, in 

reliance on the integrity of the market, Plaintiffs paid artificially inflated prices for ARCP

common stock. But for Defendants’ repeated material misrepresentations, Plaintiffs

would not have made purchases of ARCP shares at the quantities, or at the prices, at 

which they in fact did.

288. As a direct and proximate effect of Defendants’ wrongful conduct, 

Plaintiffs suffered damages in connection with their purchases and acquisitions of ARCP

common stock during the Relevant Period.

COUNT 4

VIOLATION OF SECTION 14(A) OF THE EXCHANGE ACT

AND SEC RULE 14A-9 PROMULGATED THEREUNDER

(By the Cole Exchange Plaintiffs against ARCP,

the Operating Partnership, Schorsch, and Block)

289. Plaintiffs reallege the allegations above.

290. Plaintiffs, who held shares of Cole as of the dates of the proxy votes 

regarding ARCP’s merger with Cole, allege that Defendants ARCP, the Operating 

Partnership, Schorsch, and Block prepared, reviewed and/or disseminated false and 

misleading proxy statements, which proxy statements misrepresented and/or omitted 

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material facts necessary to make the statements made, in light of the circumstances under 

which they were made, not misleading.

291. Defendants prepared, reviewed and disseminated the false and misleading 

Cole Merger Proxy. This document contained untrue statements of material fact and 

omitted to state facts necessary to make the statements made therein not misleading in 

violation of Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and SEC Rule 14a-9 

promulgated thereunder. This document was an essential link to the consummation of the 

Cole Merger.

292. As a direct result of the Defendants’ preparation, review and dissemination 

of the false and misleading Cole Merger Proxy, Plaintiffs were deprived of their right to a 

fully informed shareholder vote in connection with the Cole Merger.

293. Plaintiffs suffered further injury as a consequence of exchanging their 

shares in Cole for shares in ARCP, which subsequently plummeted in value.

294. Thus, as a direct and proximate result of the dissemination of the materially 

false and misleading merger proxies, Plaintiffs suffered damage and actual economic 

losses.

295. At all times relevant to the dissemination of these materially false and 

misleading merger proxies, Defendants were aware of and had access to the true facts, 

and were at a minimum negligent in making the misrepresentations contained in the 

proxies.

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COUNT 5

VIOLATION OF SECTION 20(A) OF THE EXCHANGE ACT

(By all Plaintiffs against the Operating Partnership,

the Schorsch-Controlled Defendants, and the Executive Defendants)

296. Plaintiffs reallege the allegations above.

297. Plaintiffs bring this claim against the Operating Partnership, the SchorschControlled Defendants, and the Executive Defendants for violation of Section 20(a) of 

the Exchange Act, 15 U.S.C. § 78t(a).

298. The Operating Partnership, the Schorsch-Controlled Defendants, and 

Executive Defendants acted as controlling persons of ARCP within the meaning of 

Section 20(a) of the Exchange Act. By reason of their positions as officers or directors 

of, or their ownership interests in, ARCP and the Operating Partnership, the Operating 

Partnership, the Schorsch-Controlled Defendants, and the Executive Defendants had the 

power and authority to cause these entities to engage in the wrongful conduct complained 

of herein.

COUNT 6

VIOLATION OF SECTION 11 OF THE SECURITIES ACT

(By the Cole Exchange Plaintiffs against ARCP, Schorsch, Kay, Block, and Beeson)

299. Plaintiffs reallege the allegations above. For purposes of this claim, 

Plaintiffs expressly disclaim any allegation that could be construed as alleging fraud or 

intentional or reckless misconduct, as this claim is based solely on claims of strict 

liability and/or negligence.

300. This claim is brought by Plaintiffs for violation of Section 11 of the 

Securities Act, 15 U.S.C. § 77k, against the following Defendants:

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Event Date Entity Individuals

Cole Merger 2/2014 ARCP Schorsch, Kay, 

Block, and Beeson

301. The Registration Statements and Prospectus issued in connection with the 

offering identified above were false and misleading and omitted to state material facts 

required to be stated therein, contained untrue statements of material facts, and omitted to 

state facts necessary to make the statements made therein not misleading.

302. ARCP is the registrant for the Cole Registration Statement. ARCP is 

strictly liable to Plaintiffs for the misstatements and omissions in the applicable 

Registration Statement and Prospectus.

303. The individuals and entities identified above were responsible for the 

contents and dissemination of the Registration Statement and Prospectus. Each of these 

Individual Defendants signed or authorized the signing of the Registration Statement and 

Prospectus, and participated in the preparation and dissemination of the Registration 

Statement and Prospectus. As a signatory to one or more of the Registration Statement

and Prospectus, each is liable to Plaintiffs for the misstatements and omissions contained 

within the Registration Statement and Prospectus pursuant to Section 11 of the Securities 

Act.

304. The Defendants named herein did not conduct a reasonable investigation of 

the statements contained in and incorporated by reference in the Registration Statement

and Prospectus used in connection with the Cole Merger did not possess reasonable 

grounds for believing that the statements made therein were not false and/or misleading.

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305. Plaintiffs purchased or acquired the stock described above pursuant or 

traceable to the Registration Statement used in the Cole Merger. As a direct and 

proximate result of the misrepresentations and omissions contained in that Registration 

Statement, Plaintiffs suffered damages.

306. At the time of their acquisition of ARCP’s common stock, Plaintiffs were 

not aware of the untrue statements and/or omissions alleged herein and could not have 

reasonably discovered such untruths or omissions.

307. As to this Count, Plaintiffs expressly disclaim any allegation of fraud or 

intentional misconduct except that any challenged statements of opinion or belief are 

alleged to have been materially misstated statements of opinion or belief when made. 

Such opinion statements also included embedded misstatements of material fact and 

omitted to state facts necessary to make the opinion statements not misleading.

COUNT 7

VIOLATION OF SECTION 12(A)(2) OF THE SECURITIES ACT

(By the Cole Exchange Plaintiffs against ARCP,

the Operating Partnership, Schorsch, Kay, Block and Beeson)

308. Plaintiffs reallege the allegations above. For purposes of this claim, 

Plaintiffs expressly disclaim any allegation that could be construed as alleging fraud or 

intentional or reckless misconduct, as this claim is based solely on claims of strict 

liability and/or negligence.

309. This claim is brought by Plaintiffs for violation of Section 12(a)(2) of the 

Securities Act, 15 U.S.C. § 77l(a)(2), by the following Defendants:

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Event Date Entities Individuals

Cole Merger 2/2014 ARCP, the 

Operating 

Partnership

Schorsch, Kay, 

Block, and Beeson

310. The Registration Statement and Prospectus issued in connection with the 

offering identified above were false and misleading and omitted to state material facts 

required to be stated therein, contained untrue statements of material facts, and omitted to 

state facts necessary to make the statements made therein not misleading.

311. ARCP is the registrant for the Cole Merger. ARCP is strictly liable to 

Plaintiffs for the misstatements and omissions in the applicable Registration Statements 

and Prospectuses.

312. Defendants identified above were statutory sellers who sold and assisted in 

the sale of securities to Plaintiffs by means of the defective Prospectus and did so for 

personal gain.

313. Plaintiffs did not know, nor in the exercise of reasonable diligence could 

have known, of the untruths contained and/or omissions from the Prospectus at the time 

Plaintiffs acquired ARCP common stock.

314. As a direct and proximate result of Defendants’ violation of Section 

12(a)(2) of the Securities Act, Plaintiffs sustained damages in connection with their 

purchases of the common stock pursuant to the Registration Statement and Prospectus.

315. Plaintiffs have the right to rescind and recover the consideration paid for 

their securities, upon tender of their securities to the Defendants named in this Count, or 

to damages.

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316. At the time of their purchases and acquisitions of ARCP’s common stock, 

Plaintiffs were not aware of the untrue statements and/or omissions alleged herein and 

could not have reasonably discovered such untruths or omissions.

317. As to this Count, Plaintiffs expressly disclaim any allegation of fraud or 

intentional misconduct except that any challenged statements of opinion or belief are 

alleged to have been materially misstated statements of opinion or belief when made. 

Such opinion statements also included embedded misstatements of material fact and 

omitted to state facts necessary to make the opinion statements not misleading.

COUNT 8

VIOLATION OF SECTION 15 OF THE SECURITIES ACT 

(By the Cole Exchange Plaintiffs against the Operating Partnership,

the Schorsch-Controlled Defendants, and the Executive Defendants)

318. Plaintiffs reallege the allegations above. For purposes of this claim, 

Plaintiffs expressly disclaim any allegation that could be construed as alleging fraud or 

intentional or reckless misconduct, as this claim is based solely on claims of strict 

liability and/or negligence.

319. This claim is brought by Plaintiffs for violation of Section 15 of the 

Securities Act, 15 U.S.C. § 77o, against the Operating Partnership, the SchorschControlled Defendants, and Executive Defendants.

320. The Operating Partnership, the Schorsch-Controlled Defendants, and the 

Executive Defendants each had the power to influence and control, and did influence and 

control, directly or indirectly, the decision-making of ARCP, including the contents of 

the Registration Statements and Prospectuses for the Cole Merger.

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321. As to this Count, Plaintiffs expressly disclaim any allegation of fraud or 

intentional misconduct except that any challenged statements of opinion or belief are 

alleged to have been materially misstated statements of opinion or belief when made. 

Such opinion statements also included embedded misstatements of material fact and 

omitted to state facts necessary to make the opinion statements not misleading.

X. PRAYER FOR RELIEF 

WHEREFORE, Plaintiffs pray for relief and judgment as follows:

(a) Awarding Plaintiffs compensatory damages in an amount to be proven at 

trial for all injuries sustained as a result of Defendants’ wrongdoing, 

including all interest thereon;

(b) Awarding Plaintiffs punitive damages;

(c) Awarding Plaintiffs injunctive and other equitable relief, including 

rescission, as appropriate, in addition to any other relief that is just and 

proper under the circumstances;

(d) Awarding Plaintiffs their reasonable costs and expenses incurred in this 

action, including counsel fees and expert fees; and

(e) Awarding such other relief as this Court may deem just and proper.

XI. JURY TRIAL DEMAND

Plaintiffs hereby demand a trial by jury in this action for all issues so triable. 

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Case 2:15-cv-02157-ROS Document 1-2 Filed 10/27/15 Page 46 of 47
Respectfully submitted this 26th day of October, 2015.

COPPERSMITH BROCKELMAN PLC

By: s/ Keith Beauchamp

Keith Beauchamp

Shelley Tolman

Jonathan Sherman

(application for admission pro hac vice being 

submitted)

BOIES, SCHILLER & FLEXNER LLP

5301 Wisconsin Avenue, N.W.

Washington, DC 20015

T: 202.237.2727 

F: 202.237.6131 

jsherman@bsfllp.com

Edward Normand

Nathan Holcomb

(applications for admission pro hac vice being 

submitted)

BOIES, SCHILLER & FLEXNER LLP

333 Main Street

Armonk, NY 10504

T: 914.749.8200 

F: 914.749.8300 

enormand@bsfllp.com

nholcomb@bsfllp.com

Beko Reblitz-Richardson

(application for admission pro hac vice being 

submitted)

BOIES, SCHILLER & FLEXNER LLP

1999 Harrison Street, Suite 900

Oakland, CA 94612

T: 510.874.1000

F: 510.874.1460

brichardson@bsfllp.com

Attorneys for Plaintiffs

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