U.S. prosecutors on Thursday announced criminal fraud charges against two former American Realty Capital Properties Inc executives stemming from a 2014 accounting scandal that wiped out roughly $4 billion of the real estate investment trust’s market value. This scandal has been a pivotal moment in the history of real estate investment trusts (REITs), illustrating the vulnerabilities in financial reporting practices and the importance of regulatory oversight in the financial markets. Investors are often drawn to REITs for the potential for high returns and passive income, but as this case shows, due diligence is crucial.
Understanding the Impact of American Realty on the REIT Market
Former Chief Financial Officer Brian Block, 44, was charged with six criminal counts, including securities fraud, conspiracy, and making false statements, according to U.S. Attorney Preet Bharara in Manhattan. These charges highlight the severe consequences of corporate malfeasance, as individuals in trusted positions can significantly impact the financial landscape. The trust of investors was shattered, leading to a reevaluation of how companies disclose financial information.
Lisa McAlister, 52, a former chief accounting officer, pleaded guilty on June 29 to four counts, including securities fraud and conspiracy, and is cooperating, Bharara said. Her cooperation with authorities may provide crucial insights into the internal workings of American Realty Capital, potentially revealing how such fraudulent activities were able to persist unnoticed for an extended period.
The U.S. Securities and Exchange Commission filed related civil charges against both defendants, seeking fines and officer and director bans. These civil charges complement the criminal charges and indicate a broader effort to hold individuals accountable for their actions in the financial sector. The SEC’s involvement underscores the importance of stringent regulatory frameworks to protect investors and maintain market integrity.
Block was arrested on Thursday at his home in Hatfield, Pennsylvania. He was released on a $1 million bond after appearing in federal court in Philadelphia, prosecutors said. This arrest marks a critical point in the ongoing efforts to crack down on white-collar crime and restore faith in financial reporting practices.
The REIT, which has since changed its name to Vereit Inc. and is under new management, declined to comment. Vereit has said in past regulatory filings that it has been cooperating with investigators. The rebranding effort highlights the lengths companies will go to distance themselves from past controversies and rebuild trust with investors. It remains to be seen how effective these efforts will be in restoring confidence in the market.
The accounting scandal that rocked American Realty Capital in 2014 represented a significant black eye for the nontraded real-estate investment trust business, which flourished during the years following the 2008 financial crash. Nontraded REITs, which purchased non-flashy commercial property, were popular with small investors because of the relatively high dividends they offered. However, the scandal raised questions about the sustainability of such returns, especially when transparency and governance practices are lax.
But they came under fire from regulators and others because of their high fees and weak disclosure. New regulations have gone into effect in recent years, but the industry’s fundraising efforts have been hurt by the negative publicity. The American Realty scandal served as a wake-up call for many in the industry, prompting calls for more stringent regulations and a renewed focus on ethical governance. As the landscape evolves, industry players are tasked with rebuilding trust and ensuring the protection of investor interests.
This case study of American Realty highlights the critical importance of transparency in investment practices. Investors should remain vigilant and informed, especially in sectors that have experienced rapid growth or where financial oversight has been historically weak. With the lessons learned from American Realty, the investment community can work towards a more responsible and sustainable financial market.
What Is FINRA Arbitration?
FINRA arbitration is a dispute resolution process used to settle conflicts between investors, brokerage firms, and financial advisors outside of traditional court litigation. The process is administered by the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization responsible for overseeing broker-dealers and maintaining fairness in the U.S. securities industry. Because most brokerage agreements require customers to resolve disputes through arbitration rather than the court system, FINRA arbitration has become the primary method for resolving investor disputes in the United States.
At its core, FINRA arbitration is designed to be faster and less formal than a lawsuit. When an investor believes they have suffered financial losses due to misconduct—such as unsuitable investment recommendations, misrepresentation, excessive trading, or failure to supervise—they can file a claim with FINRA’s dispute resolution forum. Brokerage firms and registered representatives who are members of FINRA are generally required to participate in this process if a customer initiates arbitration.
The FINRA Process
The arbitration process begins when a claimant files a Statement of Claim with FINRA. This document outlines the facts of the dispute, the alleged misconduct, and the damages being requested. After the claim is filed, the respondent—typically the brokerage firm or broker—submits an Answer responding to the allegations. FINRA then appoints a panel of one or three arbitrators depending on the size of the claim. Arbitrators are neutral decision-makers selected from FINRA’s roster and may include individuals with industry experience as well as public arbitrators who have no ties to the securities industry.
Once the arbitration panel is selected, the case proceeds through several stages similar to litigation, including document exchange and pre-hearing conferences. However, arbitration is typically more streamlined than court proceedings. There are fewer procedural hurdles, discovery is more limited, and the process is generally designed to move more quickly than traditional litigation. Eventually, the case proceeds to an evidentiary hearing where both sides present testimony, documents, and arguments to the arbitrators.
At the conclusion of the hearing, the arbitration panel issues a written decision known as an award. This award determines whether the claimant is entitled to damages and, if so, how much compensation should be paid. Arbitration awards are generally final and binding, meaning they cannot easily be appealed. Courts may only overturn an arbitration award under very limited circumstances, such as evidence of fraud or arbitrator misconduct.
The Role of FINRA Arbitration in Dispute Resolution
FINRA arbitration plays a crucial role in the securities industry because it provides investors with a forum to pursue recovery for investment losses caused by broker misconduct. At the same time, brokerage firms benefit from a dispute resolution process that is often faster and less expensive than court litigation. While critics argue that mandatory arbitration clauses limit investors’ ability to pursue claims in court, supporters maintain that arbitration provides an efficient and accessible system for resolving financial disputes.
Ultimately, FINRA arbitration serves as the central mechanism for resolving conflicts between investors and the brokerage industry. By offering a structured yet streamlined process overseen by FINRA, arbitration aims to provide fair outcomes while maintaining confidence in the U.S. financial markets. Contact the investment fraud lawyers at Bakhtiari & Harrison.