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Block Trial: Junior Auditor Approved Fraudulent ARCP Filing

In the criminal trial against former American Realty Capital Properties CFO Brian Block, the jury heard testimony that a junior employee at Grant Thornton auditing firm approved the fraudulently revised financial filing that Block and then chief accounting officer Lisa McAlister submitted to the Securities and Exchange Commission.

McAlister and Block were accused of manipulating the company’s second quarter 2014 financial results by inflating the company’s adjusted funds from operations, or AFFO, by $13 million hours before filing the results with the SEC.

McAlister, the prosecution’s key witness in the case, testified earlier in the week that CEO Nicholas Schorsch instructed Block to manipulate a line item called “amortization of deferred financing costs” to hide the inflated calculation and meet certain financial targets set by the firm.

According to testimony given by Grant Thornton partner Richard LaFleur, he approved the original second quarter financial filing before going to bed, but later that evening, ARCP re-submitted the quarter filing with the inflated numbers. A junior staffer at the auditing firm, believing the $13 million adjustment was immaterial, approved the revised filing that evening without discussing with his boss or ARCP first.

Also at the trial this week, McAlister admitted that she lied to the Occupational Safety and Health Administration in a wrongful termination complaint claiming that she was a whistleblower rather than a co-conspirator after being fired by ARCP. She made similar claims in a $50 million defamation lawsuit against the company and certain officers, and has since pled guilty to making a material false statement in her OSHA filing.

Block’s legal team painted McAlister as a liar, but she insisted that she is now telling the truth about the fraudulent SEC filing.

“Yes, there were lies,” she said. “I’m taken my hit for that and I’m sitting here telling the truth.

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, who pled guilty to fraud and other charges last year, is expected to be sentenced later this summer.

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