Federal Judge Denies Schorsch Partner’s Trial Dismissal Request
U.S. District Judge Paul Oetke has refused to dismiss the indictment against Brian Block, former chief financial officer of American Realty Capital Properties, for his alleged role in the October 2014 accounting scandal that led to the loss of billions of dollars of investor equity and the retreat from the direct investment industry by American Realty Capital, formerly the industry’s largest participant. Block is being accused of falsely inflating financial data at the publicly-traded REIT that was once the crown jewel in Nicholas Schorsch’s empire.
Block was a founding partner of American Realty Capital, later known as AR Capital, along with 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 arrested, the company formed AR Global – where Block, Schorsch, Weil, Budko and Kahane are all presumed to continue in their roles as partners.
Along with chief accounting officer Lisa McAlister, Block was accused of manipulating the calculation of the company’s adjusted funds from operations, or AFFO, a non-GAAP financial performance measurement.
Block allegedly falsified the company’s financials with McAlister in his office before filing the company’s second quarter 2014 financial results with the SEC. The indictment alleges that he falsely inflated AFFO in order to conceal errors made in the first quarter of 2014 and to make it appear that the company had met second-quarter estimates when, in fact, it had fallen short.
Block’s attorney pushed to have the indictment dismissed because he says it violates due process. He argued that this is the first criminal case based solely on non-GAAP financial metrics, no uniform standards for calculating AFFO exist, and that Block’s alleged misstatement was not material.
“As for Block’s argument that the absence of standards or guidance for calculating AFFO renders the indictment a violation of his due process rights, this argument is beside the point,” said Judge Oetken. “The indictment makes clear that the government is not challenging the method Block used to calculate AFFO, but rather the inputs he used in that calculation—the government claims that the inputs on their own fraudulently inflated the ultimate output.”
Block was arrested last September and pled not guilty in the U.S. District Court for the Southern District of New York to charges of conspiracy to commit securities fraud, securities fraud, making false statements in filings with the SEC, and filing a false certification with the SEC.
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.
McAlister, who pled guilty in June 2016, is cooperating with the prosecution and is expected to testify at the June trial.
American Realty Capital Properties is now known as VEREIT (NYSE: VER) and has severed all ties to AR Global.
