ARCP CFO Brian Block Ordered to Report to Federal Prison

Brian Block, long-time partner of AR Global’s Nicholas Schorsch and former chief financial officer of American Realty Capital Properties, will begin serving his 18-month sentence on August 10, 2020, according to an order issued by District Judge J. Paul Oetken, as first reported by Investment News.

The Second Circuit Court of Appeals recently upheld Block’s 2017 conviction of securities fraud and related charges after he intentionally filed doctored financial statements with the Securities and Exchange Commission.

Block requested that he be ordered to surrender to the Bureau of Prisons in 90 days due to the current state of emergency as a result of the COVID-19 pandemic. The government consented to his request, and he will be housed at the minimum-security prison camp at the Federal Correctional Institution at Fairton in New Jersey.

Block must surrender on August 10, 2020 by 2:00 p.m., and his 18-month sentence will be followed by three years of supervised release.

While serving as CFO of ARCP, a publicly traded real estate investment trust founded by Schorsch, Block participated in a scheme to manipulate the reported financial results of the company in various SEC filings made in July 2014.

Block and former chief accounting officer Lisa McAlister were charged with fraudulently inflating the company’s adjusted funds from operations by approximately $13 million to cover up a methodological error in calculating AFFO in prior quarters and to make it appear as though the company had met certain financial targets when it had not. McAlister cooperated with the prosecution as its key witness against Block and sentenced to time served and one year of supervised release.

Following the highly publicized 2014 accounting scandal, ARCP’s market value dropped by more than $3 billion and Schorsch resigned as executive chairman. The company replaced its board members and senior management team and rebranded as Vereit (NYSE: VER) – a blend of veritas, the Latin word for truth, and REIT.

ARCP was founded by Nicholas Schorsch and his partners at AR Global (formerly AR Capital), including Block, William Kahane, Michael Weil, and Peter Budko.

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Appellate Court Upholds Securities Fraud Conviction of ARCP’s Brian Block

Last Thursday, the Second Circuit Court of Appeals upheld the conviction of Brian Block, long-time partner of AR Global’s Nicholas Schorsch and former chief financial officer of American Realty Capital Properties, who was convicted in November 2017 of securities fraud and related charges after he intentionally filed doctored financial statements with the Securities and Exchange Commission. Block was sentenced to 18 months in federal prison followed by three years of supervised release.

While serving as CFO of ARCP, a publicly traded real estate investment trust founded by Schorsch, Block participated in a scheme to manipulate the reported financial results of the company in various SEC filings made in July 2014.

Block and former chief accounting officer Lisa McAlister were charged with fraudulently inflating the company’s adjusted funds from operations by approximately $13 million to cover up a methodological error in calculating AFFO in prior quarters and to make it appear as though the company had met certain financial targets when it had not. McAlister cooperated with the prosecution as its key witness against Block and sentenced to time served and one year of supervised release.

In his argument to the appeals court, Block claimed that there was insufficient evidence for the jury to conclude that the manipulated numbers filed with the SEC were false. His attorneys argued that AFFO does not have an established industry definition, and there are no specific regulations or standards that relate to it, nor prescribe how it should be calculated.

The appellate court, however, determined that there was sufficient evidence introduced for a jury to find “beyond a reasonable doubt that Block’s AFFO reporting was false or misleading within the meaning of the securities laws.”

“We review challenges to the sufficiency of the evidence de novo, considering the totality of the evidence and drawing all permissible inferences in the government’s favor, and will affirm if any rational jury could have found the defendant guilty beyond a reasonable doubt,” the court’s ruling stated.

In addition to his conviction, Block also unsuccessfully appealed a March 19, 2019 opinion and order denying his motion for a new trial based on the government’s alleged failure to disclose impeachment information it became aware of during trial.

Following the highly publicized 2014 accounting scandal, ARCP’s market value dropped by more than $3 billion and Schorsch resigned as executive chairman. The company replaced its board members and senior management team and rebranded as Vereit (NYSE: VER) – a blend of veritas, the Latin word for truth, and REIT.

Late last year, Vereit agreed to pay an $8 million civil penalty to settle SEC charges stemming from the legacy company’s accounting fraud.

ARCP was founded by Nicholas Schorsch and his partners at AR Global (formerly AR Capital), including Block, William Kahane, Michael Weil, and Peter Budko.

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AR Capital and Schorsch to Settle SEC Charges for $60 Million

The Securities and Exchange Commission has charged AR Capital LLC, its founder Nicholas S. Schorsch, and its former CFO Brian Block with wrongfully obtaining millions of dollars in connection with two separate mergers between real estate investment trusts that were sponsored and externally managed by AR Capital, now known as AR Global.

The defendants agreed to settle the matter by paying a total of more than $60 million in disgorgement, prejudgment interest and civil penalties without admitting or denying the allegations in the complaint, which can be read here. The settlements are subject to court approval.

According to the SEC’s complaint, between late 2012 and early 2014, AR Capital arranged for American Realty Capital Properties Inc. (ARCP), a publicly-traded REIT, to merge with two publicly registered non-traded REITs: American Realty Capital Trust III Inc. and American Realty Capital Trust IV Inc.

Block was at the center of another ARCP accounting scandal back in October 2014 where he and a colleague were eventually found guilty of fraudulently inflating ARCP’s second quarter 2014 financial results to make it appear that the company had achieved certain financial metrics when it had not. He was sentenced to 18 months in prison and is currently attempting to appeal the verdict.

In the current complaint, the SEC alleges that AR Capital, Schorsch and Block inflated an incentive fee in both REIT mergers, and the fraudulent calculation allowed them to obtain approximately 2.92 million additional ARCP operating partnership units as part of their incentive-based compensation.

In addition, the complaint alleges that the defendants wrongfully obtained at least $7.27 million in unsupported charges from asset purchase and sale agreements that they entered into in connection with the mergers.

One such “charge” was supposedly for ARCP to purchase $5.8 million in furniture, fixtures, and equipment from AR Capital for post-merger operations, while the remainder was reimbursement to AR Capital of certain “unreimbursed expenses.”

“REIT managers and their professionals have an obligation to tell the truth when making disclosures to shareholders about their compensation,” said Marc P. Berger, director of the SEC’s New York regional office. “As we allege in our complaint, AR Capital and its partners Schorsch and Block failed to do so and benefitted themselves greatly at the expense of shareholders.”

The SEC’s complaint was filed in federal district court in Manhattan and charges AR Capital and Block with violating the antifraud provisions of various federal securities laws, and falsifying books and records of ARCP. The complaint charges Schorsch with antifraud violations, as well as books and records violations.

AR Capital, Schorsch, and Block have agreed to pay combined disgorgement and prejudgment interest on a joint-and-several basis of more than $39 million, which includes cash and the return of the wrongfully obtained ARCP operating partnership units; and imposes civil penalties of $14 million against AR Capital, $7 million against Schorsch, and $750,000 against Block.

This is not the first accounting misdeed involving Block, Schorsch, and their scandal-plagued empire. In October 2014, Block and Lisa McAlister, who served as ARCP’s chief accounting officer, manipulated 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.

McAlister cooperated with the prosecution and testified that then-CEO Schorsch directed Block to manipulate and conceal the falsified numbers.

Federal prosecutors 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.

In June 2017, Block was convicted of securities fraud, filing false reports to the SEC, filing false certifications and conspiracy, and was sentenced to 18 months in prison, followed by three years’ supervised release, and a $100,000 fine. Block was denied a new trial and is attempting to appeal the verdict in the Second Circuit Court of Appeals.

Block was a founding partner of American Realty Capital, AR Capital’s predecessor, along with Schorsch, Michael Weil, Peter Budko and William Kahane.

Following the various scandals that commenced with the ARCP accounting cover-up for which Block was charged, the company formed AR Global – where Block, Schorsch, Weil, Budko and Kahane are all presumed to continue in their roles as partners.

Schorsch had not been named in any federal indictments regarding the ARCP affair or other AR Global-related scandals.

After the accounting fraud was revealed, ARCP’s market value dropped by more than $3 billion and Schorsch eventually resigned as executive chairman. In 2015, ARCP replaced its board members and senior management team and rebranded as Vereit Inc. (NYSE: VER) – a blend of veritas, the Latin word meaning truth, and REIT.

Multiple securities class action complaints were filed against the company and its officers in the United States District Court for the Southern District of New York. Vereit has now settled claims to the tune of $254.4 million, brought by entities that hold approximately 35.3 percent of its stock.

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Brian Block Denied New Trial for ARCP Accounting Scandal

Brian Block, former chief financial officer of American Realty Capital Properties, was denied a new trial after being convicted of intentionally reporting false numbers in the company’s 2014 quarterly filings with the U.S. Securities and Exchange Commission.

Block’s June 2017 jury trial found him guilty on all counts, including one count of securities fraud, two counts of filing false reports to the SEC, two counts of filing false certifications and one count of conspiracy.

In November 2017, Judge J. Paul Oetken of the U.S. District Court for the Southern District of New York sentenced Block to 18 months in prison, followed by three years’ supervised release, and imposed a $100,000 fine and a $600 mandatory special assessment. Block is attempting to appeal the verdict in the Second Circuit Court of Appeals.

Block’s motion for a new trial centered on claims that the Justice Department failed to disclose certain impeachment information relating to one of their key witnesses Ryan Steel that it became aware of during the trial. Steel, the former director of financial reporting at ARCP, was granted immunity by federal prosecutors in exchange for his cooperation.

The undisclosed evidence pertained to a conversation Steel had in 2015 with ARCP executive, William Gribbin, who blew the whistle on ARCP to the SEC and also testified at Block’s trial.

During a deposition in a civil case in May 2018, nearly a year after Block’s trial, Steel was asked if Gribbin ever offered to share a portion of the financial award that he might receive for his SEC whistleblower program submission.

While “having a couple drinks at a bar,” Steel claims that Gribbin “referenced how bad he felt for me, that he couldn’t believe this happened to me, and that he would take care of me. He didn’t necessarily ever specify what that meant or bring it up again. So, there was maybe a discussion of that, but there has never been a true offer or follow-up.”

Block had not been made aware of this conversation between Steel and Gribbin previously, and the government represented that it had learned about the conversation from Steel on June 20, 2017―during the trial but after Steel had testified.

At a November 2018 evidentiary hearing, Gribbin testified that his offer to Steel was one of financial assistance; “I told him since he’s out of work, if I came into money I could help him out.” Steel declined the offer.

Block’s attorneys claim that the DOJ’s failure to disclose what it knew about the Steel-Gribbin conversation during the trial violated the prosecution’s duties and deprived Block of a fair trial. With that information, Block argues that his counsel could have impeached Steel with a potential financial incentive to incriminate him.

Judge Oetken concluded that although the information was impeachable, he claimed that “there is no reasonable probability that its disclosure would have made a difference in the verdict.”

Claiming that the impeachment effect of the testimony would have been relatively minor in the context of all the trial evidence, Judge Oetken said, “There are two overarching considerations that make it clear to the court that the verdict would have been the same if Steel had been impeached by evidence of his 2015 conversation with Gribbin. The first is that there was corroborating evidence of virtually every important element of Steel’s testimony. The second is that very little of that testimony was actually disputed by Block.”

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 was 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 is a publicly traded real estate investment trust now known as Vereit (NYSE: VER), which has no ties to the legacy company.

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Larry Roth Launches New Consulting Firm, Partners with Berkshire Global Advisors

Financial services industry veteran Larry Roth has launched RLR Strategic Partners, a growth consultancy focused on the retail wealth management and asset management spaces. In addition, RLR has partnered with investment bank Berkshire Global Advisors to provide mergers and acquisitions advisory solutions for its clients.

According to the company, RLR works in collaboration with the executive leadership teams, boards of directors, and advisory boards of wealth management businesses across the country in setting growth goals, and then developing and implementing strategies to reach those goals. As part of its strategy offerings, the company provides governance to publicly-traded and closely-held firms seeking to build out or enhance their boards of directors.

“The work that we are doing at RLR is ultimately all geared towards helping the wealth management space create significant new value by serving the crucial role it is meant to play in our society,” said Roth. “At its best, the wealth management industry connects Main Street and Wall Street, supports the achievement of long-term financial goals for people across the net worth spectrum, and drives better life outcomes for both the well-to-do, as well as those with more modest means.”

Prior to establishing RLR Strategic Partners, Roth served as CEO of AIG Advisor Group, as well as CEO of Cetera Financial Group, two of the largest independent financial advice firms in the industry.

Roth was at the helm during the pre-planned bankruptcy of Cetera’s former parent company, RCS Capital Corp in 2016. Cetera later reemerged as an independent, privately held organization with no ties to RCAP’s founder and former chairman Nicholas Schorsch.

A CPA and licensed attorney, Roth received his juris doctor from the University of Detroit’s School of Law and a bachelor’s degree from Michigan State University. He also graduated from the owner/president management program at Harvard University’s Graduate School of Business Administration. He holds FINRA Series 7, 24, 63 and 79 registrations.

Roth was recently appointed to the board of New York-based investment boutique Oppenheimer & Co. Inc.

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Cetera Acquired by Private Equity Firm Genstar Capital

After months of speculation, Cetera Financial Group, the second largest independent broker-dealer in the nation, has agreed to sell a majority stake of its business to private equity firm Genstar Capital, with Cetera’s leadership team maintaining “a meaningful ownership position,” the company said. The transaction is subject to regulatory approval and is expected to close in the late third quarter of 2018. Terms of the deal were not disclosed.

Cetera network of six independent broker-dealer firms is comprised of Cetera Advisors, First Allied Securities, Brokerage Services, Cetera Advisor Networks, Cetera Financial Institutions, and Cetera Financial Specialists.

Going forward, Cetera will continue to operate under a multi-affiliation structure, through two channels – traditional and specialty – that will serve independent advisor businesses and financial institutions.

“Working alongside Genstar, our entire organization will continue to serve our advisor community by advancing our Advice-Centric Experience, which envisions a profession driven by high-caliber, planning-based advice for clients,” said Robert “RJ” Moore, CEO of Cetera. “This is a unique time in our profession, when the need and desire for financial advice is at its greatest. We believe there continues to be significant opportunities for Cetera to be a compelling leader in the delivery of that advice.”

In addition to Moore, the new board will include Genstar managing partner Tony Salewski and vice president Sid Ramakrishnan, as well as Ben Brigeman, former executive vice president for Charles Schwab & Co., and Hal Strong, former vice chairman of Russell Investments.

Earlier this year, Bloomberg and other industry publications reported that Cetera was exploring a potential sale that could command up to $1.5 billion and had tapped investment banks to explore its options.

In February, Cetera disclosed a capital structure review and confirmed the retention of Goldman Sachs & Co. LLC to support the review process. At the time, the company said that the objective of the review was to optimize its capital structure, lower costs, and maximize continued investments.

Cetera became an independent, privately held organization following the pre-planned bankruptcy of its former parent company, RCS Capital Corp in 2016. Moore took over as chief executive officer in September 2016 after the departure of Larry Roth, who saw Cetera through the bankruptcy process.

RCS Capital was hit hard after it was revealed in October 2014 that American Realty Capital Properties, another company controlled by RCAP founder Nicholas Schorsch, intentionally left a $23 million accounting error uncorrected. The bankruptcy terms included a recapitalization by RCS Capital’s first and second lien lenders.

Genstar Capital is based in San Francisco and has approximately $10 billion in assets under management and targets investments focused on targeted segments of the financial services, industrial technology, healthcare and software industries.

Cetera is the nation’s second-largest independent financial advisor network with nearly 8,000 advisors, as well as a retail service provider to the investment programs of banks and credit unions.

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Feds Urge Appeals Court to Uphold Conviction of ARCP CFO Brian Block

Federal prosecutors filed their brief with the Second Circuit Court of Appeals on Wednesday urging the court to uphold the conviction of Brian Block, long-time partner of AR Global’s Nicholas Schorsch and former chief financial officer of American Realty Capital Properties, who was convicted of securities fraud and other charges following a three-week jury trial last summer.

While serving as CFO of ARCP, a publicly traded real estate investment trust founded by Schorsch, Block participated in a scheme to manipulate the reported financial results of the company in various SEC filings made in July 2014.

Block fraudulently inflated the company’s adjusted funds from operations by approximately $13 million to cover up a methodological error in calculating AFFO in prior quarters and to make it appear as though the company had met certain financial targets when it had not.

In his argument to the appeals court, Block claims that there was insufficient evidence for the jury to conclude that the manipulated numbers filed with the SEC were false. His attorneys argued that AFFO does not have an established industry definition, and there are no specific regulations or standards that relate to it, nor prescribe how it should be calculated. The arguments made in the Block appeal echo the arguments made in his defense during his jury trial last summer.

Block’s legal team argued that the government failed to prove that the AFFO reporting was false by not calling an expert accountant to testify, claiming that “undisputed evidence at trial clearly showed that the AFFO adjustments were supported by ARCP’s books and records and consistent with ARCP’s disclosures.”

“Specifically, the undisputed evidence showed that ARCP had elected to pay off hundreds of millions of dollars of debt that it had inherited from two recent acquisitions as part of its defeasement campaign—i.e., replacing the preexisting debt of two acquired companies with new debt carrying a much lower interest rate,” argued Block’s attorneys.

Block’s team also argued that evidence was introduced at trial that was “irrelevant and unduly prejudicial”, such as his exorbitant compensation package which was tied to AFFO performance, company stock holdings, his termination from ARCP, and that he engaged in an alleged cover-up. The feds claim that Block’s arguments are without merit.

During the trial, the government presented testimony from 10 witnesses, including two of Block’s co-conspirators, former ARCP chief accounting officer Lisa McAlister and former director of financial reporting Ryan Steel. Documentary evidence at the trial included SEC filings, e-mail correspondence, audit records, spreadsheets, and other business records.

In November 2017, Judge J. Paul Oetken sentenced Block to 18 months in prison, followed by three years’ supervised release, and imposed a $100,000 fine and a $600 mandatory special assessment.

Neither Schorsch nor any of Block’s other partners at AR Global have been charged with any crime in the ARCP or other ARC-related scandals.

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LPL and Advisor Group Parent Among Potential Cetera Buyers

LPL Financial and Advisor Group-owner Lightyear Capital are showing interest in buying Cetera Financial Group’s network of six independent broker-dealer firms, according to a report published yesterday by Investment News’ Bruce Kelly.

Citing anonymous sources close to the matter, Kelly reported that both firms signed confidential nondisclosure agreements to “access Cetera’s proprietary information in order to perform due diligence for a possible merger.”

Earlier this year, Bloomberg and other industry publications reported that Cetera was exploring a potential sale that could command up to $1.5 billion and had tapped investment banks to explore its options.

Shortly thereafter, Cetera disclosed a capital structure review and confirmed the retention of Goldman Sachs & Co. LLC to support the review process. At the time, the company said that the objective of the review was to optimize its capital structure, lower costs, and maximize continued investments.

Cetera’s broker-dealer network is comprised of Cetera Advisors, First Allied Securities, Brokerage Services, Cetera Advisor Networks, Cetera Financial Institutions, and Cetera Financial Specialists.

Cetera became an independent, privately held organization following the pre-planned bankruptcy of its former parent company, RCS Capital Corp in 2016. Robert Moore took over as chief executive officer in September 2016 after the departure of Larry Roth, who saw Cetera through the bankruptcy process.

RCS Capital was hit hard after it was revealed in October 2014 that American Realty Capital Properties, another company controlled by RCAP founder Nicholas Schorsch, intentionally left a $23 million accounting error uncorrected. The bankruptcy terms included a recapitalization by RCS Capital’s first and second lien lenders.

Cetera Financial Group is the second-largest independent financial advisor network in the nation by number of advisors, as well as a leading provider of retail services to the investment programs of banks and credit unions.

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Former ARCP Chief Accounting Officer Lisa McAlister Sentenced to Time Served

Lisa McAlister, the former chief accounting officer of American Realty Capital Properties Inc., was sentenced to time served and one year of supervised release for her role in the 2014 accounting scandal at American Realty Capital Properties, the publicly-traded REIT founded by New York real estate tycoon Nicholas Schorsch.

According to court documents, McAlister will not have to submit to drug testing due to her low risk for substance abuse, however, she must cooperate with DNA collection as directed by her probation officer and must participate in an outpatient mental health treatment program. She is permitted to travel throughout the country without prior approval from the court.

McAlister and former chief financial officer Brian Block were accused of overstating the financial performance of the company by fraudulently inflating ARCP’s second quarter 2014 adjusted funds from operations, or AFFO, by $13 million hours before filing the results with the SEC. More than $3 billion of the company’s market value was destroyed following the accounting fraud revelation.

Block was sentenced to 18 months in federal prison after a jury found him guilty of a number of charges, including conspiracy to commit securities fraud, securities fraud, and making false statements in SEC filings.

McAlister, who was the government’s key witness during Block’s trial, pled guilty in June 2016 to one count of conspiracy to commit securities fraud, one count of securities fraud, one count of making false filings with the SEC, and one count of making false statements in a matter within the jurisdiction of the executive branch of the United States Government.

As previously reported by The DI Wire, the last charge stems from a complaint McAlister filed in a New York state court against Schorsch, former CEO David Kay, and ARCP after the accounting scandal came to light.

McAlister claimed that she was defamed and terminated for reporting the accounting malfeasance and alleges that “an undisclosed change to the method for calculating AFFO – from ‘net’ to ‘gross’– was made suddenly and without any apparent justification or basis.”

McAlister indicated that Schorsch, Kay and Block “ordered” the change “to avoid public disclosure of [ARCP’s] faltering financial performance.” She later withdrew her suit without prejudice, meaning she could refile at a later date.

Block is attempting to have his conviction reversed in the Second Circuit Court of Appeals. In addition to 18-month imprisonment, Block was ordered to pay a $100,000 fine and will submit to three years of supervised release following his prison term.

American Realty Capital Properties is now known as Vereit (NYSE: VER) and has no ties to the legacy firm.

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Former ARCP CFO Brian Block Urges Court to Reverse Conviction

Brian Block, the former chief financial officer of American Realty Capital Properties and longtime partner of AR Global’s Nicholas Schorsch, is urging the Second Circuit Court of Appeals to reverse his recent conviction for intentionally reporting false numbers in quarterly filings with the U.S. Securities and Exchange Commission.

Block, who is facing 18 months in federal prison, was found guilty last summer on a number of charges, including conspiracy to commit securities fraud, securities fraud, and making false statements in SEC filings.

Block and former chief accounting officer Lisa McAlister were accused of fraudulently inflating ARCP’s second quarter 2014 adjusted funds from operations, or AFFO, by $13 million hours before filing the results with the SEC. More than $3 billion of the company’s market value was destroyed following the accounting fraud revelation.

In the brief filed with the court last week, Block’s attorneys noted that AFFO does not have an established industry definition, and there are no specific regulations or standards that relate to it, nor prescribe how it should be calculated.

As such, Block’s legal team believe that the government failed to prove that the AFFO reporting was false by not calling an expert accountant to testify, claiming that “undisputed evidence at trial clearly showed that the AFFO adjustments were supported by ARCP’s books and records and consistent with ARCP’s disclosures.”

“At trial, Block demonstrated that the $13 million addback was supported by ARCP’s books and records based on undisputed evidence regarding ARCP’s defeasement campaign,” argued Block’s attorneys.

“Specifically, the undisputed evidence showed that ARCP had elected to pay off hundreds of millions of dollars of debt that it had inherited from two recent acquisitions as part of its defeasement campaign—i.e., replacing the preexisting debt of two acquired companies with new debt carrying a much lower interest rate.”

Block’s team also argued that evidence was introduced at trial that prejudiced the former CFO, such as his exorbitant compensation package, his termination from ARCP, and that he engaged in an alleged cover-up.

In addition to 18-month imprisonment, Block was ordered to pay a $100,000 fine and will submit to three years of supervised release following his prison term.

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