The arrest and indictment of a former senior executive at the one-time flagship REIT of Nicholas Schorsch's real estate empire could be the opening salvo in an attempt to prosecute Mr. Schorsch, according to securities attorneys.
In parallel investigations, the Department of Justice and the Securities Exchange Commission charged Brian S. Block, the former chief financial officer of American Realty Capital Properties Inc., a large traded REIT now known as Vereit Inc., with overstating the financial performance of the company by purposefully inflating a key metric used by analysts and investors to assess the company.
Mr. Block, 44, was arrested Thursday morning on conspiracy, securities fraud, and other charges at his home in Hatfield, Pa., according to a statement from the U.S. Attorney's Office for the Southern District of New York.
This was the first criminal indictment of an associate of Mr. Schorsch's various and far-flung real estate businesses. Mr. Block was one of the five founding partners at American Realty Capital, another of Mr. Schorsch's companies now known as AR Global. American Realty Capital took the brokerage world by storm after the financial crisis of 2008 and raised billions of dollars in equity in packaging a series of nontraded real estate investment trusts sold by brokers at independent broker-dealers.
Speaking without direct knowledge of the charges against Mr. Block, a CFO's indictment could mean bad news for a company's CEO, said John C. Coffee, law professor at Columbia Law School. Mr. Schorsch was the CEO and chairman of American Realty Capital Properties at the time of the alleged accounting fraud.
“This may be a stepping stone towards” the CEO, Mr. Coffee said. “The government tends to go up the food chain. This is not a new strategy. Flipping the CFO to get to the top would be a classic prosecutorial tactic. If I were counsel to CEO, I'd be nervous.”
Mercer Bullard, professor of law at the University of Mississippi Law School, said that he agreed with Mr. Coffee's assessment of prosecutor's tactics but declined to comment further.
(More: How Nick Schorsch lost his mojo)
Jesse Galloway, a spokesman for AR Global, did not return calls on Friday to comment.
“These charges against Brian Block are entirely unwarranted,” said Reid Weingarten, an attorney for Mr. Block and a partner at Steptoe & Johnson. “He is completely innocent and will be exonerated in court.”
A spokesman for Vereit said the company declined to comment. Mr. Schorsch is no longer associated with the company.
According to the SEC's complaint, Mr. Block and then chief accounting officer Lisa McAlister devised a scheme in 2014 to manipulate the calculation of the REIT's adjusted funds from operations, or AFFO, a non-GAAP measure used when the company provided earnings guidance.
Ms. McAlister, 52, pled guilty on June 29 to one count of conspiracy to commit securities fraud and other offenses, including 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.
After warnings from internal accounting staff that an incorrect method was used to calculate AFFO in ARCP's 2014 first quarter financial results, Mr. Block falsified the company's AFFO presentation in the final hours before filing the company's second quarter results, according to the SEC. With Ms. McAlister in his office, Mr. Block plugged in fake numbers that concealed the first quarter overstatement of AFFO and made it appear that the company had met second-quarter estimates when, in fact, it had fallen short, the SEC alleged.
“We allege that these senior executives conjured up numbers to purposely conceal ARCP's true performance, misleadingly suggesting that the company had met AFFO estimates for the first and second quarters of the year,” said Sanjay Wadhwa, senior associate director of the SEC's New York Regional Office.
The news of the accounting problems at ARCP were revealed in October 2014 after a whistleblower went to the company's audit committee. Both Mr. Block and Ms. McAlister immediately resigned from the company.
