Did Brian Block, former chief financial officer of a giant real estate investment trust once controlled by Nicholas Schorsch, cook the books in 2014 as he faced pressure to hit financial goals for the company? Or, rather, did Mr. Block act in good faith when, as CFO of American Realty Capital Properties Inc., he signed off on company financial statements in the summer of 2014 that later were revised to show a decline in an all-important cash flow metric for REITs, AFFO, or adjusted funds from operation?
That was the gist of two opening arguments posed by opposing attorneys on Tuesday morning in New York during the first day of Mr. Block's trial at U.S. district court in Manhattan. Last September, the Justice Department charged Mr. Block with conspiracy, securities fraud and other charges stemming from the accounting of AFFO at the REIT, known by its former ticker symbol ARCP. At the time, Mr. Block pleaded not guilty.
Mr. Block faced discrepancies over the REIT's AFFO accounting in July 2014 as he was preparing ARCP's second quarter financial statements, according to Daniel Tehrani, assistant U.S. attorney. "He could make up numbers to make problems disappear," Mr. Tehrani said. "He chose to lie. He chose to deceive the marketplace."
"Boy, do we disagree," countered Mr. Block's attorney, Reid Weingarten, a partner at Steptoe & Johnson, who asked the jury to focus on the idea of good faith when considering Mr. Block's work at ARCP. "I'm asking you to look for good faith in every nook and cranny in this trial," Mr. Weingarten said. "There was never a moment in time he didn't act in good faith."
Wearing a dark blue suit, pale blue shirt and purple neck tie, Mr. Block, 44, appeared calm throughout the day's proceedings. Mr. Schorsch, whose name came up throughout the proceeding, has not been charged with any wrongdoing. Launched in 2011, ARCP quickly became a behemoth, acquiring $21 billion in commercial real estate assets in just three years.
It was later revealed there were problems with the REIT's accounting of AFFO.
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 Inc. in 2015.
Ms. McAlister pleaded guilty last year to one count of conspiracy to commit securities fraud and other charges. Her sentencing is expected to take place this summer. She will likely testify for the government at Mr. Block's trial later this week.
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 in July the company's AFFO presentation in the final hours before filing the company's second-quarter results. With Ms. McAlister and another company executive, Ryan Steel, the former director of financial reporting at ARCP, 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.
The culture of ARCP was intensely focused on hitting the company's AFFO projections, according to Mr. Tehrani. "Nothing was more important than AFFO per share" at the company, Mr. Tehrani said. In fact, the company gave employees computer mouse pads with 2014 AFFO guidance on them. "AFFO per share greater than $1.16," the computer mousepad declared. "First believe it, then achieve it."
ARCP was facing a stiff problem on July 28, 2014, Mr. Tehrani said. It wasn't doing as well as people thought. Three people — Mr. Block, Ms. McAlister, and Mr. Steel — huddled in Mr. Block's ARCP office off Park Avenue deciding what to do when Mr. Block allegedly plugged in numbers to smooth out the company's AFFO and issued the allegedly false second quarter report the next day, Mr. Tehrani said.
Mr. Block "fudged numbers just enough," Mr. Tehrani said.
Mr. Weingarten said Mr. Block was a solid, decent quiet and hardworking man, who Mr. Schorsch first hired in 2002 at another real estate company. AFFO can be a tricky financial metric to measure, and ARCP in its filings cautioned against relying on the metric. Indeed, there was no obfuscation of AFFO at the company, said Mr. Weingarten, who occasionally thumped the podium for emphasis during his remarks to the jury.
Any reader of the company's financial statements could see that ARCP used a specific method to calculate AFFO, he said. Financial statements were viewed by executives, lawyers and others, and not one said [Mr. Block] was doing it wrong.
"There's no credible evidence that anyone at ARCP thought [Mr. Block] was doing anything wrong," Mr. Weingarten said.