The Department of Justice and the Federal Bureau of Investigation recently announced the unsealing of an indictment in federal court charging Brian Block, former chief financial officer of American Realty Capital Partners (ARCP), with fraudulently inflating a key metric used to evaluate ARCP’s financial performance.
As Compliance Week previously reported, ARCP in 2014 announced sweeping changes to its management and corporate governance follwoing the resignations of Block and Chief Accounting Officer Lisa McAlister in November 2014. At that time the company disclosed errors in the financial statements for first-quarter 2014 and fiscal 2013 that Block and McAlister allegedly covered up rather than disclosed and corrected.
Block was arrested on conspiracy, securities fraud, and other charges on Sept. 8. The case has been assigned to U.S. District Judge J. Paul Oetken in Manhattan federal court.
According to the indictment, ARCP, like many REITs, measured its financial performance through metrics besides, or in addition to, traditional measurements of company performance calculated using Generally Accepted Accounting Principles (GAAP). ARCP calculated and reported to the investing public a non-GAAP measure called adjusted funds from operations (AFFO), which was designed to more accurately reflect ARCP’s cash flow and financial performance by presenting ARCP’s income before consideration of non-cash depreciation and amortization expense and by excluding certain one-time charges and expenses.
Publicly traded real estate investment trusts (REITs), such as ARCP, commonly reported their AFFO figures, including AFFO per share, to the investing public and in filings with the Securities and Exchange Commission. ARCP also provided forward-looking guidance to the investing public regarding their anticipated AFFO performance in upcoming time periods.
Prior to the filing of ARCP’s Form 10-Q setting forth ARCP’s financial statements for the second quarter of 2014, Block, along with McAlister and others, came to understand that the method used by ARCP to calculate AFFO in the first quarter of 2014 and in certain previous quarters was erroneously inflated. Another ARCP employee brought this error to the attention of Block, McAlister, and others shortly before the filing of ARCP’s first quarter 2014 10-Q.
Despite his knowledge of a material error in ARCP’s previous filings with the SEC, Block took no steps to advise the audit committee of ARCP’s board of directors, or ARCP’s outside auditors, of the error in the first quarter 10-Q. Moreover, Block, McAlister, and the employee who brought this error to the attention of Block then knowingly facilitated the use of the same materially misleading calculations in ARCP’s second quarter 10-Q. As a result of their manipulative efforts, ARCP’s SEC filings included AFFO and AFFO per share figures for the second quarter of 2014 and for the first six months of 2014 that were fraudulently inflated.
Block, among other individuals, signed the second quarter 10-Q. Additionally, on a certification accompanying the 10-Q, BLOCK falsely certified, among other things, that the second quarter 10-Q did not contain any materially untrue statements or material omissions. He further falsely certified that he had disclosed to ARCP’s auditors and the audit committee of its board of directors: “Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.”
In a second certification accompanying the 10-Q, Block falsely certified that: “The quarterly report on Form 10-Q of the Company, which accompanies this Certificate, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and all information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the company.”
Block was charged in the indictment with one count of conspiracy to commit securities fraud and other offenses, one count of securities fraud, two counts of making false filings with the SEC, and two counts of submitting false certifications along with required filings with the SEC.
The securities fraud, false filings charges, and false certification charges each carry a maximum prison term of 20 years. The charge of conspiracy carries a maximum prison term of five years.
McAlister pled guilty on June 29, 2016, before U.S. District Judge Alvin Hellerstein to one count of conspiracy to commit securities fraud and other offenses, 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 U.S government.
The securities fraud and false filings charges each carry a maximum prison term of 20 years. The conspiracy and false statements charges each carry a maximum prison term of five years.