By Jonathan Stempel
NEW YORK (Reuters) - A federal judge on Friday refused to dismiss an indictment accusing a former chief financial officer of American Realty Capital Properties Inc of fraudulently inflating financial data for the big real estate investment trust.
U.S. District Judge Paul Oetken in Manhattan said prosecutors could pursue charges that Brian Block knowingly misled investors by plugging fake numbers into a spreadsheet later incorporated into American Realty's reported results, making them appear better than they actually were.
American Realty shares plunged as much as 37 percent on Oct. 29, 2014, wiping out roughly $4 billion of market value, after the REIT said employees "intentionally" concealed accounting errors. It also said Block and its chief accounting officer, Lisa McAlister, had resigned the previous day.
Authorities accused Block of concealing a calculation error in American Realty's adjusted funds from operations (AFFO), a key metric not defined by generally accepted accounting principles (GAAP), and with McAlister in his office inserting false data into the spreadsheet.
"The indictment makes clear that the government is not challenging the method Block used to calculate AFFO, but rather the inputs he used in that calculation," Oetken wrote.
"While it is true, as Block notes, that no criminal case - or at least no case the parties have identified - has been based solely on non-GAAP financial metrics and no case has been based on AFFO specifically, these distinctions are insufficient to justify dismissal," he added.
Michael Miller, a lawyer for Block, in an email said Block's calculation of AFFO was neither false nor misleading.
"To the extent that this case now boils down to whether a handful of AFFO calculations at the end of Q2 2014 were materially false, we welcome a trial on those issues," he wrote.
Now based in Phoenix and known as Vereit Inc (N:VER), American Realty was part of a commercial real estate empire built by investor Nicholas Schorsch.
Neither Schorsch nor Vereit was accused of wrongdoing.
McAlister pleaded guilty last June to fraud and began cooperating with prosecutors. The U.S. Securities and Exchange Commission filed related civil charges against her and Block, who was arrested in September.
The case is U.S. v. Block, U.S. District Court, Southern District of New York, No. 16-cr-00595.