Government Arrests REIT Official in Schorsch-related Cases
(Adds comment from Block’s lawyer in fourth paragraph.)
The Securities and Exchange Commission on Thursday brought fraud charges against the two financial executives whose alleged falsification of a real estate investment trust’s performance helped bring down the REIT and brokerage empire amassed by Nicholas Schorsch, and the Department of Justice arrested one of them.
Brian S. Block and Lisa P. McAlister, the former chief financial and chief accounting officers, respectively, of American Realty Capital Properties, purposely inflated a key metric used by analysts and investors to ensure that the REIT met analysts’ estimates for the first and second quarters of 2014, the SEC charged in its civil complaint in the U.S. District Court in Manhattan.
In a related criminal complaint, U.S. Attorney Preet Bharara and the Federal Bureau of Investigation unsealed an indictment charging Block, 44, with conspiracy and securities fraud and announcing his arrest at his home in Hatfield, Pennsylvania.
“These charges appear to be based on very fuzzy, poorly defined, non-generally accepted accounting principles, applicable only to the sophisticated world of real estate investment trusts,” Mike Miller a lawyer at Steptoe & Johnson LLP who represents Block said in a prepared statement on the securities fraud charges. “[T]here is little precedent for the notion that criminal charges are appropriate when accountants make decisions involving these sorts of accounting principles. However unusual these criminal charges are, one thing is certain—Mr. Block did not commit any crime in connection with his work at ARCP.”
McAlister, 52, pled guilty to four securities fraud and false filing counts on June 29, exposing her to a maximum of 50 years in prison, the government announced. (In 2015, she dropped a defamation lawsuit she had filed against ARCP accusing it of having made her a scapegoat for the scandal.)
ARCP, now known as Vereit, Inc., disclosed its inflation of financial results in October 2014, setting off a daisy chain of events. ARCP and other publicly and privately traded REITs and holding companies controlled by Schorsch lost billions of dollars in market capitalization and the Chapter 11 bankruptcy filing of Cetera Financial Group of ten independent broker-dealers that the executive cobbled together to help sell the high-commision products. (Cetera, whose CEO Larry Roth will be replaced on Sept. 12, emerged from bankruptcy in late May with plans to restructure and eliminate some of its brokerage units. It earlier shed cross-ownership and cross-management relationships with Schorsch and his other ventures.)
In its the government noted that Block had certified that ARCP’s earnings filing with the SEC contained no materially untrue statements or omissions. Schorsch similarly certified that the quarterly reports fairly presented the company’s financial condition and results and contained no untrue statements.
The SEC, which against Block and McAlister, said its investigation is continuing.
Schorsch could not be reached for comment.