WASHINGTON (CN) – Federal prosecutors announced the conviction late Friday of a former chief financial officer who misled investors about the profitability of American Realty Capital Partners.
Along with a potential five-year sentence for conspiracy, 44-year-old Brian Block faces up to 20 years in prison for securities fraud and each of other four counts against him.
The verdict against the Hatfield, Pennsylvania, man came after a three-week trial in Manhattan — nearly a year to the day that American Realty Capital’s former chief accounting officer, Lisa McAlister, pleaded guilty to securities fraud and related charges on June 29, 2016. McAlister ultimately testified against Block at trial.
Before changing its name to Vereit in July 2015, the Phoenix-based real estate investment trust American Realty was one the largest U.S. owners of single-tenant buildings such as drugstores, banks and restaurants.
With more than 4,100 properties under its belt in the U.S., Puerto Rico and Canada, the company lost approximately $4 billion in market value after disclosing in 2014 that it had been relying for seven consecutive reporting periods on intentionally misrepresented calculations.
“This trial revealed that when it looked like ARCP would not meet investors’ expectations, Block made up numbers and fudged the books,” said Joon Kim, the acting U.S. attorney for the Southern District of New York. “The integrity of our markets rests on the truth of the financial information provided to investors. And those like Block who lie and manipulate the markets must be identified and held to account.”
The metric that Block was convicted of manipulating is known as AFFO, short for adjusted funds from operations, which aim to more accurately reflect a company’s cash flow and financial performance by presenting income before consideration of non-cash depreciation and amortization expense, and by excluding certain one-time charges and expenses.
Prosecutors say that Block, McAlister and others knew that there was an overstatement of 3 cents in the AFFO per share calculation that ARCP submitted to the Securities Exchange Commission in the Form 10-Q for the first quarter of 2014.
This 3-cent exaggeration had a profound impact, however, resulting in a 5 percent overstatement of AFFO per share and an overstatement of AFFO by approximately $13 million.
“Despite his knowledge of a material error in ARCP’s previous filings with the SEC, Brian 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,” a statement from the Justice Department says.
Block, McAlister and an unnamed co-conspirator “then knowingly facilitated the use of the same materially misleading calculations in ARCP’s Second Quarter 10-Q,” the statement continues.
When Block met with McAlister and the co-conspirator on July 28, 2014, to finalize the financial figures that were to be included in ARCP’s Second Quarter 10-Q, the government says they inserted figures into a spreadsheet that fraudulently inflated the AFFO and AFFO per share calculations that were to be included in the Second Quarter 10-Q and the related ARCP press release.
These numbers “had no basis in fact, were without documentary support, and did not tie to ARCP’s general ledger accounting system, as Block knew and understood at the time,” a statement from the government states.
“By reporting AFFO per share of $0.24 in the second quarter, after having reported AFFO per share of $0.26 in the first quarter, Brian Block and his co-conspirators misled ARCP’s shareholders and the investing public by falsely representing that ARCP’s AFFO per share for the first six months of 2014 was consistent with analysts’ expectations and on track to meet ARCP’s guidance for AFFO per share for calendar year 2014, when in fact, they were not,” the statement continues.
U.S. District Judge J. Paul Oetken presided over Block’s trial.