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U.S. Attorney Brings Fraud Charges Against Former REIT Executives

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  • Posted on: Sep 22 2016

How can I protect my business from conduct risk?

The U.S. Attorney in Manhattan recently announced a number of charges against two former executives of American Realty Capital Properties, Inc. (“American Realty”), a real estate investment trust (“REIT”), for their role in a 2014 accounting scandal. Brian Block, the former chief financial officer (“CFO”), is facing six criminal counts for securities fraud, conspiracy and the making of false statements.  Lisa McAlister, the REIT’s former chief accounting officer, previously pleaded guilty to four counts, including securities fraud and conspiracy, and has been cooperating with authorities, according to U.S Attorney Preet Bharara.

“Market investors are entitled to be told the truth from publicly traded companies,” Bharara said in a statement. “When investors are lied to about material information, as is alleged to have happened here, the perpetrators need to be investigated and prosecuted.”

In addition, the Securities and Exchange Commission has filed civil charges against the two former executives, seeking fines as well as officer and director bans. The attorney representing the fallen CFO said that the charges were “unwarranted” and that his client would prevail at trial.

The American Realty Scandal

The September 2014 accounting scandal wiped out almost $4 billion of the REIT’s market value. The U.S. Attorney alleges that the defendants manipulated American Realty’s adjusted funds from operations (“AFFO”), a key metric used by analysts to measure the performance of a REIT. Authorities contend that Block concealed an error in the calculation of AFFO — one that he had been warned about internally — and, with McAlister in his office, input fictitious numbers into a spreadsheet that was later incorporated into the financial results American Realty reported to the public and the SEC. According to the government, the fictitious data made it appear that American Realty met Wall Street forecasts, when, in fact, it had not.

On October 29, 2014, the REIT acknowledged that the executives “intentionally” concealed the accounting errors, which caused American Realty to overstate its AFFO. On that day, the REIT’s shares plunged by 37 percent. American Realty eventually restated 3-1/2 years of its reported financial results.

American Realty, which went public in 2011 and was part of Nicholas Schorsch’s commercial real estate empire, is now the Phoenix-based VEREIT, Inc. Although Schorsch has not been charged in the case, another of his businesses filed for bankruptcy seven months ago, giving lenders control of an affiliated investment advisory unit. At this juncture, it is unclear whether the U.S. Attorney is investigating these matters further.

The Takeaway

This case illustrates how essential it is for investment firms and other financial service providers to have policies and procedures in place to mitigate conduct risk. The illegal actions of senior executives, officers and directors can have a significant adverse affect on a business, resulting in serious market losses that ultimately harm investors. If your firm is being investigated or is embroiled in an investor lawsuit, you should engage the services of an experienced business litigation attorney.

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