Ex-American Realty Capital Properties, Inc. CFO Brian S. Block is guilty of real estate investment trust (REIT)-related securities fraud, according to a New York federal jury that handed down their verdict Friday afternoon. The fraud concerned sales of an ARCP REIT, part of chairman Nicholas Schorsch's REIT empire that continued to be sold throughout the securities industry, even after the problems at ARCP first became public.
For instance, while firms such as Cetera Financial Group suspended sales of ARCP and other REITs associated with Schorsch—including the RCS Capital Corp (RCAP) REIT—over 50 broker-dealers agreed to resume selling RCAP products after RCS Capital released a statement essentially saying it was not ARCP, even though the two entities shared a chairman in Schorsch, who also owned the Cole Real Estate Investments Inc. REIT, acquired by ARCP in 2014.
A WealthManagement analysis of RCAP's products concluded that of the 31 investment products RCAP distributed in November 2014, 14 of them were affiliated with ARCP. Still, 50 unnamed broker-dealers agreed to resume selling RCAP stock even after the accounting "error"-turned-fraud at ARCP became public.
Not surprisingly, both ARCP and RCAP's stock prices fell shortly after the disclosure (by September 2015, RCAP was down 91% since the ARCP accounting misstatement was announced), though RCAP reported gains on the day it announced the resumed sales, while also submitting an SEC filing declaring that RCAP CEO Edward Michael Weil purchased 20,550 shares (about $250,000) of the company's stock, with other firm executives also purchasing tens of thousands of shares of RCAP to the tune of 79,165 total shares purchased by the firm's senior executive staff at this time.
In March 2017, investors filed a lawsuit accusing Schorsch and his partners of siphoning RCAP revenue in order to enrich themselves, while leaving shareholders out to dry.
Named in the lawsuit were Schorsch, William Kahane, Peter Budko, Weil, and Block, who were accused of exploiting their control of RCAP to "enrich" a related nontraded REIT business known as AR Capital...
In September 2016, the SEC charged Block and AR Capital Properties' former Chief Accounting Officer, Lisa Pavelka McAlister, with devising a fraudulent scheme to manipulate and falsely report a key financial metric known as the Adjusted Funds From Operations (AFFO), which was seen as indicative of the ARCP's performance.
For instance, the SEC alleged that as a result of an incorrect accounting method, ARCP had overstated its 2014 first quarter AFFO by $12 million, out of $147 total.
Faced with the inflated figure, the complaint alleged, Block and McAlister devised and put into play a scheme to conceal the error by adding false amounts to several figures without any basis for doing so via an internal firm spreadsheet.
As such, the SEC concluded, Block and McAlister violated, and/or aided and abetted ARCP's violations and committed fraud in order to do so.
According to the Department of Justice, Block was convicted of conspiracy to commit securities fraud, securities fraud, false filings with the SEC, and submitting false certifications. McAlister previously entered a guilty plea to securities fraud and related charges.
In 2015, ARCP changed its name to VEREIT, from veritas, derived from the Latin word for "truth."
If you have invested in American Realty Capital Properties, RCS Capital, Cole Real Estate Investments, or a related Nicholas Schorsch REIT—especially in one sold after the accounting "error" was announced in early November 2014—and this unsuitable action has resulted in losses or has otherwise proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.