Risk & Compliance

Ex-American Realty CFO Gets 18 Months in Jail

Brian Block "participated in a scheme to inflate the value" of the REIT by "brazenly" making up numbers for a key metric, a judge says.
Matthew HellerNovember 9, 2017

Former American Realty Capital Properties CFO Brian Block has been sentenced to 18 months in prison for his role in an accounting fraud that overstated a key metric used to evaluate the REIT’s financial performance.

U.S. District Court Judge J. Paul Oetken said Block “participated in a scheme to inflate the value of the company” by “brazenly” making up numbers to ensure American Realty’s AFFO (or, adjusted fund from operation) per share for the second quarter of 2014 was consistent with its publicly announced guidance and to conceal accounting errors in a previous report.

The fraud resulted in overstating AFFO for fiscal 2014 by about $13 million and inflated AFFO per share by about 5%.

“It’s a serious set of crimes,” Oetken said at Block’s sentencing hearing on Wednesday.

“I’m not exactly sure why he did it,” he added. “What is clear is he knew better … and should have known better.”

Prosecutors had sought a sentence of at least seven years but Oetken cited mitigating factors, including Block’s lack of a prior criminal history and “personal history” as a good father and friend.

“It is unbelievable to me today that I am here,” Block told the judge. The conviction is “so at odds [with my character],” he added.

American Realty, one of the nation’s largest real-estate empires, disclosed the fraud in October 2014, saying it had asked Block and Chief Accounting Officer Lisa Pavelka McAlister to resign after determining that it overstated AFFO in the first quarter of 2014.

Block had been CFO of American Realty since its inception in December 2010. According to the government, Block, McAlister and others learned in early 2014 that the method of calculating AFFO contained an error but continued to use the incorrect calculation in reporting second-quarter earnings.

The prosecution estimated that about $300 million in stock loss was attributable to the fraud but the defense argued it was impossible to know how much of the drop in American Realty’s stock price was directly attributable to the falsified AFFO number.

McAlister, who pleaded guilty to related charges, has yet to be sentenced.