Fighting to prove his innocence from federal securities fraud charges, Brian Block, the former CFO of a giant REIT formerly controlled by Nicholas Schorsch, took the stand in federal court in Manhattan on Monday and testified he did not fudge numbers for an important cash flow metric.
Mr. Block is the former chief financial officer of American Realty Capital Properties Inc., a net lease real estate investment trust, accused of securities fraud, conspiracy and making false filings with the Securities and Exchange Commission, stemming from $23 million in inaccurate accounting entries at the company in 2014.
When asked by his defense attorney if he had put "made up numbers" into a second quarter 2014 filing for the company, American Realty Capital Properties Inc., Mr. Block responded, "I did not."
The attorney, Michael C. Miller, then asked Mr. Block if he believed he had a basis for every number he put into the quarterly filing. "Yes I did," he said.
He also said it was "absolutely not" his intention to deceive or defraud anyone. When asked about filing company reports to the SEC, Mr. Block said, "I believe then and I believe now that everything I signed was appropriate and correct."
He later denied cutting corners to boost the disputed metric, adjusted funds from operation, or AFFO, which was closely watched by Mr. Schorsch and other key executives at the REIT, but said he had "tremendous discretion" regarding the calculation of the cash flow metric. The metric is important because REIT investors rely on it as part of their assessment of the financial well-being of a company.
Questions around AFFO accounting at ARCP first surfaced when Ryan Steel, the REIT's former director of financial reporting, raised concerns about the methods used to calculate the number, Mr. Steel testified earlier in the trial. Mr. Steel said that in emails and meetings through the spring and summer of 2014 he repeatedly raised the warning of an accounting mistake in the calculation of AFFO.
At the time, AFFO at the company 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.
On the night of July 28, 2014, Mr. Block, Mr. Steel and Lisa McAlister, the REIT's former chief accounting officer, met in Mr. Block's office, according to Mr. Steel's and Ms. McAlister's testimony. Allegedly under pressure from Mr. Schorsch, Mr. Block changed the AFFO for the second quarter to boost the number by 3 cents per share, the federal government claims.
Mr. Block and Ms. McAlister were forced to resign from ARCP that October when it was revealed there had been a $23 million accounting error over the first half of the year that was intentionally not corrected at the company. Mr. Steel was fired that December. Mr. Block is a minority partner with a 3% stake in AR Global, the privately held nontraded REIT manager where Mr. Schorsch is the controlling partner.
Mr. Block on Monday testified that the SEC, ARCP's auditor, Grant Thornton, the company's external and internal lawyers and analysts never saw anything amiss with its AFFO calculation. "We were under the microscope and scrutinized quite closely by the analysts," he said. "We were a unique business," that for a period of two to three years routinely had large acquisitions of billions of dollars of commercial real estate per quarter.
"It was very clear and transparent what we were doing," he said.