NEW YORK CITY—American Realty Capital Properties' former chief accounting officer on Thursday brought a defamation suit against the embattled net lease REIT, as well as former chairman Nicholas Schorsch and former CEO David S. Kay. The suit from Lisa McAlister, filed in New York State Supreme Court in Manhattan, alleges that then-CEO Schorsch ordered her and then-CFO Brian Block to cover up accounting errors, and that she was then terminated for bringing the financial improprieties to light. AR Capital, which sponsors ARCP and several other traded and non-traded companies, says the lawsuit is “without merit.”

McAlister says in her lawsuit that beginning in the fourth quarter of 2013, ARCP stopped pro-rating certain non-recurring transaction and deferred financing costs, therefore increasng its adjusted funds from operations. The suit alleges that although McAlister raised a red flag on the practice, it continued until late July 28, when Schorsch directed Block and McAlister to to reallocate the funds used to calculate the AFFO and shift the numbers on the REIT's Q2 2014 10Q report. The company also changed the starting point for its AFFO calculations from “net loss attributable to stockholders (in accordance with US GAAP)” to “net loss (in accordance with US GAAP).”

Although the change per se wasn't improper, “it made it more difficult for stockholders to see the fraudulent change in the add-backs of non-recuning transaction and deferred financing costs,” the complaint alleges. “In other words, Mr. Schorsch instructed Mr. Block to take steps that would cover up the improper change in accounting with both further fraudulent accounting and a proper change that helped the cover-up.”

McAlister repeatedly voiced her concerns about the accounting practices, according to the suit, and unbeknownst to her, the issues she raised led to the formation of an internal audit committee to investigate the practices. A month later, Schorsch and Kay had McAlister fired “in retaliation for blowing the whistle on ARCP” and made her “a scapegoat for defendants' fraudulent conduct,” the complaint states.

AR Capital, of which Schorsch is chairman, says in a statement that Schorsch “denies the allegations and intends to defend against the claims vigorously.  We are confident that Mr. Schorsch has engaged in no unlawful conduct.”

An attorney for McAlister raised similar allegations in a letter sent last month to Schorsch, who “immediately arranged for the letter to be forwarded to the appropriate government authorities,” AR Capital says. Although the ARCP audit committee's investigation is continuing, “we understand that to date there has not been any conclusion of unlawful conduct by Mr. Schorsch.”

Similarly, RCS Capital Corp., which terminated its agreement to buy Cole Capital from ARCP following ARCP's Oct. 29 disclosure of accounting errors, issued a statement defending Schorsch. “Our confidence in the long-term prospects for the company is resolute," Michael Weil, RCAP's CEO, says in the statement. “There have been no reported accounting irregularities at RCS Capital, none, and the recent unfounded allegations reported in the press in connection with our chairman, Nicholas S. Schorsch, should not have any material impact on the long-term strength of our business model or our operating results.”

This past Monday, ARCP reported that Schorsch had resigned as its chairman on Dec. 12. Kay, who succeeded him as CEO in a planned succession this past October, resigned on Monday, as did president and COO Lisa Beeson. Neither the news release nor the related SEC filings gave a reason for the resignations.

The announcement of Schorsch and Kay's resignations spurred McAlister to bring her case forward because, she and her attorneys say, the company's statement indicate that senior management was at fault. The suit cites ARCP's press release; “ 'The actions taken today will stabilize the company and are necessary to strengthen future leadership and strategy, improve governance and complete a separation from Nick Schorsch and his affiliates…'

“It is apparent from these recent events—all of which post-date by six weeks McAlister's termination—that the Company now realizes Schorsch is to blame, which means, in effect, that the Company admits it defamed McAlister.” She is seeking at least $50 million in damages. 

Representatives of Schorsch or ARCP were not available for comment by press time. GlobeSt.com will continue to follow as it unfolds.