New York Securities Lawyer Blog
On September 8, 2016, the Securities and Exchange Commission (“SEC”) filed a Complaint and Jury Demand with the United States District Court for the Southern District of New York (“Complaint”) against Brian S. Block (“Block”) and Lisa Pavelka McAlister (“McAlister”) relating to an alleged 2014 fraud that inflated the value of the largest publicly traded net lease real estate investment trust (“REIT”), American Realty Capital Properties, Inc. (“American Realty Capital”) (NASDAQ ticker symbol “ARCP”) (n/k/a VEREIT, Inc.).
Block was the CFO of American Realty Capital until he resigned on October 28, 2014. He is a 44 year old certified public accountant (“CPA”) who is licensed and resides in Pennsylvania. McAlister was appointed Chief Accounting Officer of American Realty Capital in November 2013, and subsequently became Principal Accounting Officer in May 2014 until she resigned on October 28, 2014. McAlister is a 52 year old CPA who is licensed in New York and who resides in Massachusetts. According to the Complaint, American Realty Capital reported total assets of approximately $21 billion during the relevant time period.
Publicly traded issuers must follow generally accepted accounting principles (“GAAP”) as set forth by the Financial Accounting Standards Board, and as adopted by the SEC. One of the metrics captured is the net income and earnings per share (“EPS”). According to the Complaint, American Realty Capital reported a non-GAAP metric, Adjusted Funds from Operations (“AFFO”), which is a metric typically used by most REITs. According to the Complaint, and as defined by the National Association of Real Estate Investment Trusts, AFFO is an adjusted version of “a standardized metric of REIT operating performance.”
According to the Complaint, American Realty Capital filed its Form 10-Q for the first quarter of 2014 on May 8, 2014, despite internal concerns voiced to Block and McAlister by various employees that the AFFO metric might be overinflated due to calculation errors. These concerns were confirmed when internal communications revealed that the AFFO was indeed miscalculated and that American Realty Capital had overstated its AFFO by $12 million. Despite this confirmation, and on the eve of filing the Form 10-Q for the second quarter of 2014, it is alleged that Block and McAlister, with the aid of an accountant, met to discuss the means by which they could conceal the first quarter mistake and still achieve their goals for the second quarter AFFO metric. It is further alleged that they decided on a strategy of adding false numbers to internal spreadsheets that American Realty Capital used to calculate AFFO. On July 29, 2014, American Realty Capital filed its Form 10-Q for the second quarter of 2014, which included the fraudulent concealment.
The Complaint charges Block and McAlister with violating Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. According to the Complaint, and in violation of these rules, Block and McAlister “(a) employed devises, schemes or artifices to defraud; (b) made one or more untrue statements of material fact or one or more omissions of material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in one or more acts, practices or course of business which operated or would operate as a fraud or deceit upon any person.” The Complaint further charges both Block and McAlister with aiding and abetting each other and American Realty Capital in violating of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.
The Complaint also charges Block and McAlister with aiding and abetting American Realty Capital’s violations of Section 13(a) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-11 and 13a-13 thereunder. According to the Complaint, these rules require issuers of registered securities to file current quarterly reports that do not contain untrue statements of material fact or omit material information necessary to not make the statements misleading.
The Complaint charges Block alone with violating Rule 13a-14 of the Securities Exchange Act of 1934, which required him to include certain certifications on quarterly reports filed on Form 10-Q. According to the Complaint, these certifications indicate that the report doesn’t contain untrue statements of material fact or omit material facts necessary to avoid misleading investors, and that the report accurately represents “financial condition, results of operations and cash flows of the registrant.”
As for relief, the Complaint asks the Court to: 1) permanently enjoin Block and McAlister from further violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; (2) permanently enjoin Block and McAlister from further violating Section 13(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-11 and 13a-13 thereunder; (3) order Block and McAlister to disgorge any ill-gotten gains and to pay prejudgment interest thereon; (4) order Block and McAlister to pay civil money penalties pursuant to Section 21(d)(3) of the Securities Exchange Act of 1934; and (5) permanently bar Block and McAlister from acting as an officer or director of any issuer that has a class of securities registered under Section 12 of the Securities Exchange Act of 1934 or that is required to file reports pursuant to Section 15(d) of the Securities Exchange Act.
The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of investment and securities fraud. If you are a victim of fraud, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.