On Advice

Nick Schorsch's presence at Brian Block's trial unseen, but keenly felt

Testimony at Block trial places REIT czar at center of alleged conspiracy

Jun 25, 2017 @ 6:00 am

By Bruce Kelly

Nicholas Schorsch has been physically absent from the courtroom of the U.S. District Court for the Southern District of New York for the securities fraud trial of his longtime business associate Brian Block, which started June 12.

But for the past two weeks, his presence has loomed over the proceedings like the faceless villain in a James Bond thriller. Even if the audience can't see him, they sense him somewhere just offstage, sitting next to a gold phone, stroking a cat and pulling the strings on the mayhem that is about to unfold.

From the testimony of two key government witnesses, it sounds like Mr. Schorsch was yanking plenty of strings at American Realty Capital Properties Inc., the giant net lease real estate investment trust he launched in 2011 and built through a furious pace of acquisitions. Three years later, when the fraud allegedly occurred, the real estate investment trust had $21 billion in assets.

Even though Mr. Schorsch has not been charged by the Justice Department with any wrongdoing, witnesses have said he was at the center of the alleged conspiracy to inflate a key cash-flow metric used by REITs: adjusted funds from operation, known as AFFO. The purpose of the alteration was to reflect better company performance, according to the witnesses and former ARCP employees Lisa McAlister, the company's one-time chief accounting officer; and Ryan Steel, its former director of financial reporting.

The question hanging above Mr. Block's trial now is, if he is eventually convicted, what will the government do about Mr. Schorsch? Will the government use a conviction to indict Mr. Schorsch?

Jesse Galloway, a spokesman for AR Global, a privately held real estate company where Mr. Schorsch is the lead partner, did not return a call to comment.

Mr. Block, the former chief financial officer of ARCP, was forced to resign from the company in October 2014 after the revelation of a $23 million accounting error that was intentionally not corrected at the company.

Also pushed out at that time was Ms. McAlister, who last Monday 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.

Last September, the justice department charged Mr. Block with six counts related to the accounting mishap at ARCP in the first half of 2014: two counts each for securities fraud, conspiracy and making false statements to the Securities and Exchange Commission. At the time, he pleaded not guilty.

According to the government, the alleged fraud culminated on the evening of July 28 as Mr. Block, Ms. McAlister and Mr. Steel huddled in Mr. Block's office and prepared the company's financial reports for the second quarter of 2014, which were released the next day.

(More: Brian Block's lawyer portrays prosecution witness as a liar)

The AFFO per share was falling three cents short under revised accounting methods, causing the quandary, according to Ms. McAlister and Mr. Steel.

Ms. McAlister said Mr. Schorsch, then ARCP's chairman and CEO, on a conference call told Mr. Block where to hide the fraudulent accounting for the "adjusted funds from operation."

"'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.

Ms. McAlister is hardly blameless for the problems at ARCP; she pleaded guilty a year ago to four fraud charges and is expected to be sentenced this summer. ARCP changed its name after Mr. Schorsch resigned at the end of 2014 to Vereit Inc. in 2015.

Similarly, Mr. Steel on June 14 described Mr. Schorsch's focus on AFFO and the ARCP earnings release one night in late July as the three were working together in Mr. Block's Park Avenue office. Under oath, he testified that ARCP's focus on AFFO was "severe," and that management's questions typically focused on AFFO.

Late that evening, Mr. Schorsch called Mr. Block, and Mr. Steel testified that he overheard a discussion of the "current issue at hand." Mr. Block allegedly said he was working on it.

Minutes later, Mr. Block quickly populated a blank spreadsheet for AFFO, using an incorrect accounting method, Mr. Steel said. He then turned his computer screen to show Mr. Steel and Ms. McAlister the results. "There you go," Mr. Block allegedly said. "What do you think?"

"I was shocked. My jaw dropped," Mr. Steel said. "I thought we were starting the conversation [about AFFO accounting], not ending it."

Both Ms. McAlister and Mr. Steel have cut deals with the government.

There is no doubt that Mr. Schorsch has been at times relentless in both the nontraded REIT and retail brokerage industries. Ms. McAlister said Mr. Schorsch was "very demanding" in his management style. "He's a bully ... just an overall bully," she said.

(More: How Nick Schorsch lost his mojo)

While some of Mr. Schorsch's REIT deals, especially those REITs that merged with other companies, have paid handsome returns to investors, his foray into retail brokerage was a disaster. His brokerage firm, RCS Capital Corp., slid into bankruptcy last year. Equity investors, including many financial advisers who owned RCAP stock, were wiped out.

Mr. Block's trial could be over by the end of the week. What repercussion, if any, will it have for Mr. Schorsch?

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