Singapore Resident Pleads Guilty In Manhattan Federal Court To Soliciting Millions Of Dollars In Pre-IPO Stock Scheme
Joon H. Kim, the Acting United States Attorney for the Southern District of New York, announced that BRIAN BLOCK, the former chief financial officer of the publicly traded real estate investment trust (“REIT”) formerly known as American Realty Capital Partners (“ARCP”), was sentenced to 18 months in prison for inflating a key metric used to evaluate the financial performance of publicly traded REITS in ARCP’s filings with the U.S. Securities and Exchange Commission (the “SEC”). BLOCK was convicted by a jury in June, following a three-week trial before U.S. District Judge J. Paul Oetken, who imposed today’s sentence.
Acting Manhattan U.S. Joon H. Kim said: “Block, the CFO of a major REIT, deliberately cooked the books to mislead investors and the SEC. Investors in our securities markets must be able to trust that corporate officers will not lie about the financial health of a publicly traded company. And corporate officers who do lie face time in a federal prison, as Brian Block has learned.”
According to allegations contained in the Indictment, and evidence presented during the trial in Manhattan federal court:
In 2014, ARCP was a publicly traded REIT headquartered in Manhattan, New York. ARCP’s securities traded under the symbol “ARCP” on the National Association of Securities Dealers Automated Quotations (“NASDAQ”) exchange.
ARCP, like many REITs, measured its financial performance through metrics besides, or in addition to, traditional measurements of company performance calculated using Generally Accepted Accounting Principles (“GAAP”). ARCP calculated and reported to the investing public a non-GAAP measure called adjusted funds from operations, or AFFO, which was designed to more accurately reflect ARCP’s cash flow and financial performance by presenting ARCP’s income before consideration of non-cash depreciation and amortization expense and by excluding certain one-time charges and expenses. REITs such as ARCP commonly reported their AFFO figures, including AFFO per share, to the investing public and in filings with the SEC. ARCP also provided forward-looking guidance to the investing public regarding their anticipated AFFO performance in upcoming time periods.
Prior to the filing of ARCP’s Form 10-Q setting forth ARCP’s financial statements for the second quarter of 2014 (the “Second Quarter 10-Q”), BRIAN BLOCK, along with Lisa McAlister and others, came to understand that the method used by ARCP to calculate AFFO in the first quarter of 2014 and in certain previous quarters was erroneously inflated. Another employee of ARCP (“CC-1”) had brought this methodological error to the attention of BLOCK, McAlister, and others shortly before the filing of ARCP’s first quarter 2014 10-Q (the “First Quarter 10-Q”), but no corrective change was made to the First Quarter 10-Q while the issue was under review. Following the filing of the First Quarter 10-Q, CC-1 concluded, and advised BLOCK, McAlister, and others, that the reported AFFO per share calculation for the first quarter of 2014 was overstated by approximately $0.03 per share. Instead of $0.26 per share, which was publicly reported by ARCP to its shareholders and the investing public, and which placed ARCP on track to meet its full-year AFFO per-share guidance, the correct AFFO for the first quarter of 2014 was $0.23 per share.
Despite his knowledge of a material error in ARCP’s previous filings with the SEC, 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. Moreover, BLOCK, McAlister, and CC-1 then knowingly facilitated the use of the same materially misleading calculations in ARCP’s Second Quarter 10-Q. For example, on July 24, 2014, a draft of ARCP’s Second Quarter 10-Q was circulated to members of ARCP’s Audit Committee. The draft included an AFFO calculation for the six-month period ending June 30, 2014, that incorporated AFFO figures from the first quarter of 2014 that BLOCK, McAlister, and CC-1 knew to be erroneously inflated.
On July 28, 2014, BLOCK met with McAlister and CC-1 in his office in Manhattan for the purpose of finalizing the financial figures that were to be included in ARCP’s Second Quarter 10-Q. Utilization of a proper method to calculate ARCP’s second quarter 2014 AFFO would have exposed that the reported AFFO and AFFO per share figures from the first quarter were inflated. Accordingly, during the meeting, BLOCK, McAlister, and CC-1 inserted into a spreadsheet BLOCK was using to calculate AFFO and AFFO per share for the first and second quarters of 2014 and for the first six months of 2014 (“YTD 2014”) figures 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. The fraudulent numbers BLOCK, McAlister, and CC-1 used to inflate the AFFO and AFFO per share figures 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. The fraudulent numbers included in the spreadsheet prepared by BLOCK were then incorporated into ARCP’s Second Quarter 10-Q, which was filed with the SEC the following day. As a result of the manipulative efforts of BLOCK, McAlister, and CC-1, ARCP’s SEC filings included AFFO and AFFO per share figures for the second quarter of 2014 and for the first six months of 2014 that were fraudulently inflated.
The Second Quarter 10-Q was signed by, among others, BLOCK. Additionally, on a certification accompanying the 10-Q, BLOCK falsely certified, among other things, that the Second Quarter 10-Q did not contain any materially untrue statements or material omissions. He further falsely certified that he had disclosed to ARCP’s auditors and the audit committee of its board of directors: “Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.” In a second certification accompanying the 10-Q, BLOCK falsely certified that: “The quarterly report on Form 10-Q of the Company, which accompanies this Certificate, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and all information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company.”
With regard to YTD 2014 specifically, the fraud resulted in an intended overstatement of AFFO by approximately $13 million and an intended overstatement of AFFO per share by approximately $0.03, or approximately 5 percent of total AFFO per share. 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, 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.
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In addition to the prison term, BLOCK, 45, of Hatfield, Pennsylvania, was sentenced to three years of supervised release, and a $100,000 fine. Restitution will be determined at a future date.
Mr. Kim praised the investigative work of the Federal Bureau of Investigation and also thanked the SEC.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Brian Blais, Edward Imperatore, and Daniel Tehrani are in charge of the prosecution.
 BLOCK’s co-defendant, ARCP’s former chief accounting officer Lisa McAlister, pled guilty to securities fraud and related charges on June 29, 2016, and has yet to be sentenced.