Nicholas Schorsch 'highly focused' on cash-flow metric at center of alleged ARCP fraud: Feds

According to a recent court filing, the former nontraded REIT czar was keeping a close eye on adjusted funds from operation as the company was preparing to release second quarter earnings in 2014

May 18, 2017 @ 2:48 pm

By Bruce Kelly

Nicholas Schorsch, the former executive chairman of the giant REIT American Realty Capital Properties Inc., now called Vereit Inc., had a keen interest and was "highly focused" on a cash-flow metric that the federal government alleges was at the heart of a securities fraud at the company in the summer of 2014, according to a recent court filing by the U.S. attorney's office.

Mr. Schorsch, the lead partner of the privately held real estate investment trust manager AR Global, has not been charged by the Justice department in the alleged fraud.

However, in a court filing last Friday in the Justice Department's indictment against Brian Block, the former chief financial officer of ARCP, Mr. Schorsch was indirectly referenced throughout the filing as "the ARCP chair." Indeed, the ARCP chair was keeping a close eye on and in communication with Mr. Block regarding the cash-flow metric adjusted funds from operation (AFFO), as the company was preparing to release second quarter earnings in late July 2014, according to the court filing.

"As the government expects the evidence at trial to show, the ARCP chair was highly focused on AFFO per share and meeting company AFFO guidance," according to the court filing, a government response to a recent motion by Mr. Block that sought to limit certain evidence from being presented at his trial, which is scheduled to begin June 12 in New York. "The ARCP chair was aware of the first quarter AFFO issue and communicated with Block on the evening of July 28, 2014, about finding a way to 'solve' the problem in connection with the second quarter" earnings statement.

"The government also intends to admit evidence that Block derived substantial wealth from his significant financial and professional relationship with ARCP's chairperson, spanning several of the ARCP chair's many companies," according to the court filing. "This evidence is centrally relevant to showing that Block was financially motivated to keep the ARCP chair happy by making sure that ARCP hit its target AFFO numbers, a number that was particularly important to the ARCP chair."

The government alleges that Mr. Block was motivated in large part by millions of dollars in compensation tied to the company meeting certain AFFO targets. "The evidence of the lucrative nature of Block's relationship with the ARCP chair is powerful evidence of Block's motive to engage in fraud," according to the court filing.

The industry website The DI Wire first reported about Mr. Schorsch's alleged knowledge of the discrepancy in AFFO at ARCP three years ago.

A spokesman for Mr. Schorsch and AR Global, Jesse Galloway, did not return a call to comment. Michael Miller, an attorney for Mr. Block, also did not return a call to comment.

In October 2014, ARCP said its financial statements for the first half of the year were inaccurate, reducing its AFFO by about $12 million for the three months ended March 2014 and $10.9 million for the three months ended June 2014.

At the time, Mr. Block resigned, as did the company's former chief accounting officer, Lisa McAlister. Mr. Schorsch resigned weeks later that December as executive chairman of ARCP. He is no longer involved in the company, which changed its name to Vereit in 2015.

Ms. McAlister pled guilty last year to one count of conspiracy to commit securities fraud and other charges. Her sentencing is expected to take place this summer.

Last September, the Justice Department charged Mr. Block with conspiracy, securities fraud and other charges stemming from the accounting of AFFO at ARCP.

According to the government, after warnings from internal accounting staff that an incorrect method was used to calculate AFFO in ARCP's 2014 first-quarter financial results, Mr. Block allegedly falsified the company's AFFO presentation in the final hours before filing the company's second-quarter results. With Ms. McAlister in his office, Mr. Block allegedly inserted fake numbers in the company's second-quarter filings 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, the government alleges.

Mr. Block pled not guilty at the end of September.

The government also intends to call ARCP's former director of financial reporting to testify, who was present when Mr. Block inserted unsupported numbers into the calculation of ARCP's AFFO and AFFO per share figures, according to the filing.

Like Mr. Schorsch, the filing does not name the executive directly, but ARCP in July 2014 named Mike Sodo as senior vice president, director of financial reporting and treasury, starting that August. Mr. Sodo replaced Mr. Block as the company's chief financial officer in October 2014 and later left the company, and now works at another REIT. He did not return a call to comment.

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