Shares of Nicholas Schorsch’s American Realty Capital Properties (NASDAQ: ARCP) fell 36 percent Wednesday morning (as of 11:36 a.m. eastern time) on news the company released inaccurate financial statements overstating its funds from operations and understated its net loss.
In a notice filed with securities regulators Wednesday, ARCP said the accounting errors occurred in the first and second quarters of 2014. The AFFO errors were “identified but intentionally not corrected and other AFFO and financial statement errors were intentionally made,” the company said. Upon learning of the discrepancies, Chief Financial Officer Brian Block and Chief Accounting Officer Lisa McAlister resigned from their positions, effective immediately.
Specifically, the non-traded REIT sponsor incorrectly calculated its adjusted funds from operations by $12 million for the first quarter of 2014 and by nearly $11 million for the second quarter.
While no errors were found in its consolidated financial statements for the 2013 fiscal year and its 2013 Form 10-K, the firm said these statements cannot be relied upon until the inquiry is complete because Block and McAlister were involved in their preparation.
"The accounting issues are unacceptable and we are taking the personnel and other actions necessary to ensure that this does not happen again," said David S. Kay, CEO of ARCP, in a statement.
The company’s audit committee, with assistance from outside counsel and forensic experts, initiated an investigation after first learning of the concerns on Sept. 7. Michael Sodo will replace Block as chief financial officer, and Gavin Brandon will now serve as chief accounting officer.
In light of these issues, ARCP is re-evaluating its financial reporting controls and procedures, vowing to make changes if necessary. The company said it does not expect the matter to impact any previously announced transactions, including the sale of Cole Capital to RCS Capital Corp.
“As disappointed as I am, I do not believe that this impairs, in any meaningful way, what is important about our company – the high quality and diversification of our real estate assets, the depth and strength of our management team, the strong and predictable cash flows from our leases, the strength of our balance sheet and the size of our market opportunity,” Kay said.
On the heels of the news, law firms Johnson & Weaver and Ademi & O'Reilly announced they were launching investigations into possible securities fraud claims against ARCP. “Our investigation focuses on the extent to which ARCP issued false and misleading statements regarding its business practices, financial statements, past and future business performance and prospects,” Ademi & O'Reilly said in a statement Wednesday.