Block Seeking to Prevent Testimony of “Cover Story” in ARCP Fraud Trial
Federal prosecutors have filed new documents in the criminal case against Brian Block, the former chief financial officer of American Realty Capital Properties (NYSE: ARCP) and partner in Nicholas Schorsch’s AR Global, who is now seeking to block certain testimony from ARCP’s former director of financial reporting and former chief accounting officer Lisa McAlister. The trial is expected to begin this month and will be heard by Judge Paul Oetke in the U.S. District Court for the Southern District of New York.
Block was accused, along with McAlister, of manipulating the calculation of the company’s adjusted funds from operations before filing second quarter 2014 financial results with the SEC. The indictment alleges that he falsely inflated AFFO to conceal errors made in the first quarter and to make it appear that the company had met second-quarter estimates.
Block is attempting to prevent ARCP’s former director of financial reporting from testifying about a conversation he had with Block relating to a “cover story” he wanted to tell the audit committee during their investigation.
Block allegedly told the audit committee’s investigators that an analysis had been done to support the changes in AFFO, but that he would need to review his notes on the issue. The former director of financial reporting is expected to testify that Block asked him to find support for the plugged numbers and then fabricated a false explanation to tell the investigators. Block also allegedly asked another ARCP employee via email to back up his false cover story.
“The fact that Block was searching for a plausible justification for the calculations and crafting a cover story to present to the audit committee is highly probative of Block’s knowledge of the falsity of the AFFO figures included in ARCP’s second quarter 2014 SEC filings and of Block’s intent to deceive,” said federal prosecutors in the filing.
Block is also attempting to prevent McAlister’s testimony that the pair were terminated following the investigation. According to the court documents, both McAlister and the former director of financial reporting are expected to testify that they participated in criminal conduct with Block and were asked to resign. McAlister is also expected to testify that Block told her that he was being asked to “take one for the team,” and to forcibly resign.
After leaving ARCP, McAlister – who is cooperating with the government – filed a defamation lawsuit against the company and certain officers, as well as a wrongful termination complaint with the Occupational Health and Safety Administration. She acknowledged the AFFO fraud in her OSHA complaint, but positioned herself as a whistleblower, rather than a co-conspirator. She has since pled guilty to making a material false statement in her OSHA filing.
Prosecutors argue that the context McAlister’s termination and subsequent fraudulent legal filings is “critical,” and that without testimony about Block’s employment status, the jury might speculate that Block was somehow “cleared” by the investigation.
“McAlister’s false statements were not made after she was terminated for unrelated conduct, but instead were made after she was fired for engaging in the very conduct that she then falsely denied in her legal documents,” said federal prosecutors. “Without this context, the jury will be left to speculate as to the basis for McAlister’s termination and her guilty plea, and could also speculate that there was some other misconduct that resulted in her termination and subsequently false OSHA complaint.”
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. American Realty Capital Properties was renamed Vereit (NYSE: VER) in 2015 and has no connections to the legacy firm.
