‘Accounting Tricks’

Their scheme had been “breathtaking in both its breadth and magnitude” -- “a collage of accounting tricks” designed to inflate cash flow and “line senior insiders’ pocketbooks,” investors said.

Recurring expenses were classified as one-time costs, while executives delayed reporting many expenses, used so-called goodwill from acquisitions as a “slush fund” to absorb losses on property sales and devised unusual metrics to swell their bonuses by $100 million, the investors said in their complaint, citing a report by ARCP’s accountants.

The fraudulent accounting was necessary to oil the fee engine, investors said: American Realty was borrowing money for acquisitions so it had to show good numbers, and it was using cash and stock for the acquisitions so the stock had to be propped up by rigging the numbers.

‘Overvalued’ Securities

In the investors’ words, the deals were “predicated on the use of ARCP securities that were overvalued as a result of defendants’ misconduct.”

Complaining of misleading registration statements, investors are also suing underwriters of bonds and stock, including Morgan Stanley. Mary Claire Delaney, a Morgan Stanley spokeswoman, declined to comment.

American Realty has dropped to less than $10 from its 2014 peak of almost $15. Led by TIAA-CREF, the investors want compensation and damages.

Darren Robbins, the lawyer handling the lawsuit, has experience with accounting maneuvers. He wrested $7.3 billion for Enron Corp. investors, mostly from banks that settled allegations of engineering sham transactions to keep debt off Enron’s balance sheet.

The case is In re American Realty Capital Properties Inc. Litigation, 15-mc-00040, U.S. District Court, Southern District of New York (Manhattan).
 

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