United States District Judge J. Paul Oetken has denied a $35 million restitution request by Vereit Inc. (formerly American Realty Capital Properties) following the criminal case against its former chief financial officer Brian Block who was sentenced to 18 months in prison and fined $100,000 last November for plugging artificially inflated numbers into the company’s second quarter 2014 financial filing with the SEC. The judge said that Vereit is more accurately described as a “co-conspirator” than a “victim” of Block’s crimes.
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.
Judge Oetken noted that the government supports Vereit’s claim for restitution, but acknowledged that Block’s criminal actions were designed to benefit the company which was not criminally charged – although it “arguably could have been.”
“Although the government did not charge Vereit as a co-conspirator in this case, the corporate culture and the ‘tone at the top’ were major themes at trial,” said Oetken.
McAlister, who served as the government’s key witness during Block’s criminal trial, testified that she overheard chairman and CEO Nicholas Schorsch instruct Block to falsely manipulate the company’s financials to meet certain targets.
Also during the trial, the government argued that the company’s management team was “obsessed with AFFO,” and printed 2014 AFFO goals on the mousepads used by company employees.
Following the 2014 accounting scandal, American Realty Capital Properties replaced its board members and senior management team and rebranded the company as Vereit – a blend of veritas, the Latin word meaning truth, and REIT.
“Vereit presents a strong argument that the company should be rewarded, not penalized, for taking the action it took upon learning of the allegations of fraud and questionable accounting―hiring law firms to conduct an internal investigation and to cooperate with the government,” said Judge Oetken.
He added, “That is conduct that certainly deserves credit and ought to be encouraged. However, an even more important incentive is to prevent the circumstances that give rise to fraud and questionable accounting in the first place. That incentive is not advanced by allowing a company to play the victim card after the fact.”
In the summer of 2017, a jury convicted Block of 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.