Brian S. Block has resigned as CFO of American Realty Capital Properties, one of the nation’s largest real-estate empires, after an internal investigation found the company had made an accounting mistake and executives chose not to correct it, according to a regulatory filing.
American Realty said it asked Block and Chief Accounting Officer Lisa Pavelka McAlister to resign after determining that it had overstated a measure of income known as “adjusted funds from operations” in the first quarter.
The error “was identified but intentionally not corrected, and other AFFO and financial statement errors were intentionally made, resulting in an overstatement of AFFO and an understatement of the company’s net loss for the three and six months ended June 30, 2014,” American Realty said in the filing Wednesday.
Block, 42, had been CFO of American Realty, the primary holding of property mogul Nicholas Schorsch, since its inception in December 2010. Bloomberg reports that his resignation will cost him a pay package worth $35 million, including a $10 million stock retention award, $22 million in long-term pay and annual cash and stock bonuses of $1.25 million and $1.75 million, respectively.
In the filing, American Realty also disclosed that its board of directors had appointed Michael Sodo to serve as chief financial officer and Gavin Brandon to serve as the company’s chief accounting officer. Sodo, age 36, joined American Realty as senior vice president, director of financial reporting and treasury, in August 2014.
The U.S. Securities and Exchange Commission has launched an inquiry into the accounting irregularities, the Wall Street Journal reports. American Realty Capital manages nearly $30 billion in real estate and, according to the WSJ, the company’s disclosure has “sent shock waves through the real-estate industry, where Schorsch has raised tens of billions of dollars in recent years, much of it from individual investors.”
American Realty stock fell 24% through Thursday on news of the accounting errors. On Friday, it declined 6% to $8.86.
As a result of discovering the errors, the company adjusted first-quarter AFFO to $135.8 million from $147.8 million and second-quarter AFFO to $194.4 million from $205.3 million. CEO David Kay said in a conference call that an employee alerted the company’s audit committee about the irregularities in early September, after which the committee launched an investigation.
There was no intent to overstate AFFO for the first quarter, he said, explaining, “We don’t have bad people, we had some bad judgment there.”