Given the general frustration over the dearth of cases against individuals involved in the financial crisis, it’s heartening to see official action taken against financial fraudsters. Such was the case late last week, when Manhattan prosecutors arrested Brian S. Block, the former CFO of American Realty Capital Properties, on charges he made false filings and committed securities fraud in relation to his real-estate investment company. Block faces up to 20 years in prison on each of the multiple charges levied against him. Block’s former colleague, accounting head Lisa P. McAlister, pled guilty to one count of conspiracy to commit securities fraud, and is cooperating with authorities.
Block and McAlister ran American Realty Capital Properties, a real estate investment trust (REIT), that, like other REITs, owned or financed income-producing real estate and paid out all taxable income to shareholders. REITS, like mutual funds, provide investors regular income streams, diversification, and long-term capital appreciation. At least that’s the case where REIT investors aren’t lied to about material information.
American Realty investors weren’t so lucky. Rather than providing investors with required information, Block allegedly used a metric that didn’t comply with Generally Accepted Accounting Principles (GAAP), and in so doing knowingly inflated the company’s results and criminally misled investors. Although publically traded companies are permitted to use some non-GAAP metrics to report results, SEC guidelines issued last June require that GAAP and non-GAAP metrics be given equal prominence, and investors must be provided an explanation regarding reconciliation of the two.
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