The defense for Brian Block, the former chief financial officer for American Realty Capital Properties Inc. who is on trial for securities fraud, continued to work to undercut a key government witness who worked alongside Mr. Block in creating the company's financial statements in the spring and summer of 2014.
Defense attorney Michael Miller on Thursday repeatedly raised the question as to why Ryan Steel, the former director of financial reporting at ARCP, never wrote emails to the firm's auditor, Grant Thornton, or outside law firm reflecting his concerns about accounting for a cash flow metric known as adjusted funds for operations, or AFFO. Mr. Miller also questioned Mr. Steel about sending drafts of second-quarter financial statements to the firm's audit committee as well as Grant Thornton that had used incorrect AFFO calculations.
In turn, Mr. Steel said he had spoken about his concerns regarding the AFFO reporting at the REIT in May, June and July of 2014 with several of ARCP executives, including Mr. Block and Lisa McAlister, ARCP's former chief accounting officer.
Last September, the Justice Department charged Mr. Block with conspiracy, securities fraud and other charges stemming from the accounting of AFFO at the REIT. At the time, Mr. Block pleaded not guilty.
Mr. McAlister pleaded guilty last summer to one count to commit securities fraud and other charges. She will likely testify for the government at Mr. Block's trial.
When pressed by Mr. Miller, Mr. Steel at one point responded, "The calculation itself troubled me. Regardless of disclosure, the intent of the reconciliation seemed to be double dipping."
Mr. Steel said he first identified problems with ARCP's AFFO calculation in the spring or 2014. At the time, AFFO was calculated by taking funds from operation, or FFO — which adds back depreciation to net operating income — and then adding back other financial figures, such as mergers and acquisitions costs.
Mr. Steel testified that the problem with ARCP's accounting was that while shareholders accounted for roughly 96% of the company's operating partnership units, the add-backs were computed on 100% percent of the units, causing the AFFO to be inflated. Making appropriate adjustments to ARCP's accounting for AFFO would result in a per share decrease in the metric. Mr. Steel testified on Wednesday that focus on AFFO at the company was "severe."
The company said in its quarterly filings that the AFFO was net of any noncontrolling interests, which Mr. Steel said accounted for about 4% of the company.
In his testimony, Mr. Steel repeatedly referred to such a calculation of AFFO as double dipping and called it a "hybrid" method of calculating AFFO.
Mr. Miller peppered Mr. Steel with questions about the hybrid accounting method, asking if it was illegal or against any known REIT rules or standards. Mr. Steel replied that there were no such formal or legal restrictions on the accounting, but qualified his answers by saying he had many conversations with management, including Mr. Block, and they agreed that his question over accounting was appropriate. "Everyone had agreed the question I raised was right."
Launched in 2011 by Nicholas Schorsch, ARCP quickly grew to a behemoth, acquiring $21 billion in real estate assets in just three years. The wheels came off the company in October 2014, when ARCP said its financial statements for the first half of the year were inaccurate, reducing its AFFO by about $23 million for the first half of 2014. At the time, Mr. Block and Mr. McAlister resigned. Mr. Schorsch resigned weeks later in December as executive chairman of ARCP. He is no longer involved in the company, which changed its name to Vereit Inc. in 2015.