A key witness in the trial of Brian Block, the former chief financial officer of a giant real estate investment trust once controlled by Nicholas Schorsch, suggested Monday that Mr. Schorsch had a hand in cooking the company's books by directing Mr. Block on how to fudge the numbers.
The witness, Lisa McAlister, the former chief accounting officer at the Schorsch-controlled REIT, American Realty Capital Properties Inc., was testifying against Mr. Block, her former boss. Mr. Block pleaded not guilty to charges including conspiracy and securities fraud stemming from the accounting of an important financial metric for REITs.
Ms. McAlister, testifying in U.S. district court in Manhattan, described a call between Mr. Schorsch and Mr. Block that occurred the evening of July 28, 2014, as ARCP executives were preparing to release the company's second-quarter financial statements.
Ms. McAlister, who was in the room during the conference call, said Mr. Schorsch, then ARCP's chairman and CEO, told Mr. Block where to hide the fraudulent accounting for the "adjusted funds from operation" metric, known as AFFO.
"It's in your deferred financing costs. There it is. You know what you need to do," Ms. McAlister quoted Mr. Schorsch as saying to Mr. Block.
Specifically, according to Ms. McAlister, Mr. Schorsch was telling Mr. Block to make up for a $0.03 shortfall in the REIT's targeted AFFO per share by tinkering with a particular line item called "amortization of deferred financing costs."
Mr. Schorsch has not been charged with any wrongdoing. Ms. McAlister pleaded guilty last year to four fraud charges, and her sentencing is expected to occur this summer.
"I recall [Brian] … shrugging his shoulders and looking very uncomfortable with what he was doing," Ms. McAlister later said of Mr. Block's behavior after the call with Mr. Schorsch.
Mr. Block shortly thereafter "slid" a document with the "unsupported" adjustment to amortization of deferred financing costs to Ryan Steel, the former director of financial reporting at ARCP, to use in the AFFO calculation, according to Ms. McAlister.
Ultimately, in October 2014, ARCP said its financial statements for the first half of the year were inaccurate, reducing its AFFO by roughly $12 million for the three months ended March 2014 and $10.9 million for the three months ended June 2014.
Ms. McAlister described the relationship between Mr. Block and Mr. Schorsch as that of "two very close colleagues, both in business and personal as well."
She also said Mr. Schorsch was "very demanding" in his management style. "He's a bully … just an overall bully," she said.
She also painted a picture of Mr. Schorsch as a man to whom achieving the firm's financial goals was all-important. "Every hundredth of a penny was important here," Ms. McAlister said.
While Ms. McAlister and the prosecution framed her role in the fraud as one of a reluctant party who'd repeatedly flagged accounting issues to senior management, including Mr. Block, in the months leading up to July 2014, Ms. McAlister didn't try to hide the fact that she ultimately went along with the fraud despite her reservations.
"I'm sorry," Ms. McAlister said, choking back tears. "I couldn't rat on him," she continued, speaking of Mr. Block.
"We did commit fraud," she said, speaking of herself, Mr. Block and Mr. Steel. (Mr. Steel has cut a deal with federal prosecutors not to be charged in the ARCP accounting matter.)
Ms. McAlister's testimony is set to continue Tuesday morning.