Feds: Schorsch Knew About ARCP AFFO Discrepancy
In the latest development in the criminal case against Brian Block, the former chief financial officer of American Realty Capital Properties (NYSE: ARCP), federal prosecutors have filed documents with the court that provide new details into the scandal that decimated the company’s stock price and sent shockwaves through the financial industry. The trial will be heard by Judge Paul Oetke in the U.S. District Court for the Southern District of New York next month.
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.
Block, along with chief accounting officer Lisa McAlister, was accused of manipulating the calculation of ARCP’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.
According to court filings, ARCP’s former director of financial reporting – who was also allegedly present when Block plugged numbers into the company’s AFFO calculation – will testify at the trial.
According to the federal prosecutors filing, Schorsch knew about the first quarter AFFO issue and that “Block was financially motivated to keep [Schorsch] happy by making sure that ARCP hit its target AFFO numbers.”
“[Schorsch] was aware of the first quarter AFFO issue and communicated with Block on the evening of July 28, 2014 [the day before ARCP filed its second quarter financial statement with the SEC] about finding a way to ‘solve’ the problem in connection with the [SEC filing],” according to court documents.
The government also intends to admit evidence that Block derived substantial wealth from his “significant financial and professional relationship” with Schorsch, who they noted was highly focused on AFFO per share and meeting company AFFO guidance.
“Block had a long-standing business and personal relationship with [Schorsch], through which Block was made partner of AR Capital…and made millions of dollars in compensation through ARCP and AR Capital and other affiliated entities, including in 2014, in which the charged conspiracy took place,” the court documents said.
“This relationship, which was highly lucrative to Block, including $1.2 million in compensation, solely from ARCP and just in 2014, provided a strong incentive for Block to remain in [Schorsch’s] good graces.”
Federal prosecutors are opposing Block’s moves to prevent certain evidence and testimony from being presented to the jury in the trial, including Block’s compensation, testimony from the government’s expert witness, evidence of ARCP’s stock price drop following the accounting fraud revelation, opinion testimony from auditors, and oddly – the term “plug” when used in reference to Block’s intentional overstatement of the company’s financials.
Schorsch has not been named in any federal indictments regarding the ARCP affair or other AR Global-related scandals. American Realty Capital Properties was renamed Vereit (NYSE: VER) in 2015 and has no connections to the legacy firm.