Executives Charged With Inflating Performance of Real Estate Investment Trust

The Securities and Exchange Commission today charged two former accounting executives with overstating the financial performance of a large publicly-traded real estate investment trust (REIT) then known as American Realty Capital Properties (ARCP) by purposely inflating a key metric used by analysts and investors to assess the company.

According to the SEC’s complaint, then-chief financial officer Brian S. Block and then-chief accounting officer Lisa P. McAlister devised a scheme to manipulate the calculation of ARCP’s adjusted funds from operations (AFFO), a non-GAAP measure used when the company provided earnings guidance.  After warnings from internal accounting staff that an incorrect method was used to calculate AFFO in ARCP’s 2014 first quarter financial results, Block falsified the company’s AFFO presentation in the final hours before filing the company’s second quarter results.  With McAlister in his office, Block plugged in fake numbers that concealed the first quarter overstatement of AFFO and made it appear that the company had met second-quarter estimates when, in fact, it had fallen short.

“We allege that these senior executives conjured up numbers to purposely conceal ARCP’s true performance, misleadingly suggesting that the company had met AFFO estimates for the first and second quarters of the year,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.

AFFO was a key non-GAAP financial metric by which analysts and investors assessed the company’s performance, and AFFO per share was the primary measure for which the company provided earnings guidance.  SEC rules generally permit companies to present non-GAAP financial measures to convey supplemental information about how company management views the company’s results of operations in ways that GAAP results alone may not convey.  But companies cannot present non-GAAP measures in a way that is misleading.

ARCP is now known as VEREIT Inc.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Block and McAlister.

The SEC’s complaint charges Block and McAlister with violating or aiding and abetting violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as aiding and abetting violations of Exchange Act Section 13(a) and Rules 12b-20, 13a-11, and 13a-13.  Block also is charged with violating Rule 13a-14 of the Exchange Act.  The complaint seeks permanent injunctions, disgorgement plus interest and penalties, and officer-and-director bars.

The SEC’s continuing investigation is being conducted by Wendy B. Tepperman, Karen E. Willenken, Victor Suthammanont, and Nancy A. Brown with assistance from Scott B. York.  The litigation will be led by Ms. Brown, Mr. Suthammanont, and Ms. Willenken.  The case is being supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Public Company Accounting Oversight Board.