Brian Block, former chief financial officer of American Realty Capital Properties, maintained his innocence during testimony at his criminal trial in New York, telling the jury that he did not intend to defraud investors when he allegedly manipulated the company’s financials to make it appear that it had met certain targets when it had not.
Block and his former colleague Lisa McAlister, who served as ARCP’s chief accounting officer, are accused of manipulating the company’s second quarter 2014 financial results by inflating the company’s adjusted funds from operations, or AFFO, hours before filing the results with the Securities and Exchange Commission.
Instead of $0.26 per share, which was publicly reported by ARCP to its shareholders and the investing public, the correct AFFO was $0.23 per share. Block told jurors that there is no correct method to calculate AFFO and that he did not make up numbers to plug into the filing.
According to a document filed with the court, Block’s legal team argued that there are various methods used by REITs to calculate AFFO, and that ARCP’s AFFO was calculated and disclosed appropriately “given the ambiguous environment and discretionary nature of the process.” Federal prosecutors maintain that Block acted in bad faith.
McAlister, who pled guilty to fraud last year and is now a cooperating witness for the prosecution, testified earlier in the trial that CEO Nicholas Schorsch told Block that he could effectively manipulate the line item called “amortization of deferred financing costs” in order to hide the fudged numbers.
McAlister said that Block handed Ryan Steel, the director of financial reporting, a document with the revised deferred financing costs to be used in the AFFO calculation – which was overstated by approximately $0.03 per share.
Steel testified previously that Block used an improper methodology to calculate the company’s AFFO and that he had issued multiple warnings of the accounting mistake. Steel was granted immunity by federal prosecutors in exchange for his cooperation.
William Gribbin, Steel’s boss and the SEC’s whistleblower, testified that Steel confided in him that the numbers had been manipulated.
Federal prosecutors also argued that Block’s bonuses were partially tied to the company meeting AFFO targets and his extensive stock ownership was motivation to keep the share price “propped up.”
Block owned 1.4 million shares of ARCP and could have potentially received a cash and equity bonus of up to eight times his $500,000 annual salary had certain targets been met. The value of AFFO constituted a 20 percent portion of Block’s bonus.
Block was a founding partner of American Realty Capital, later known as AR Capital, along with chairman and CEO Nicholas Schorsch, Michael Weil, Peter Budko and William Kahane. Following the various scandals that commenced with the ARCP accounting cover-up for which Block is being charged, the company formed AR Global – where Block, Schorsch, Weil, Budko and Kahane are all presumed to continue in their roles as partners.
Schorsch has not been named in any federal indictments regarding the ARCP affair or other AR Global-related scandals. McAlister’s sentencing is expected later this summer.