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Testing Sarbanes-Oxley: The American Realty Capital Properties Scandal

American Realty Capital Properties’ stock price plunged nearly 20% on October 29th after the company disclosed that it had intentionally left mistakes in its financial statement uncorrected.  ((Reynolds Holding, REIT Scandal Could Be Perfect Test for Sarbanes-Oxley, N.Y. Times (Oct. 30, 2014, 12:41 PM), http://dealbook.nytimes.com/2014/10/30/r-e-i-t-scandal-could-be-perfect-test-for-sarbanes-oxley/?_r=0.))  By November 3rd, less than a week later, American Realty Capital Properties’ shares had plummeted nearly 37% since the announcement.  ((Maxwell Murphy, The Big Number, Wall St. J. (Nov. 3, 2014, 7:40 PM), http://online.wsj.com/articles/the-big-number-24-1415061603.))  According to Pennsylvania Governor Edward Rendell, an independent director and audit committee member of American Realty Capital Properties, accounting mistakes were rooted in bonus calculations.  ((Robbie Whelan, American Realty Capital Accounting Errors Tied to Employee Bonuses, Wall St. J. (Nov. 7, 2014, 5:32 PM), http://online.wsj.com/articles/american-realty-capital-accounting-errors-tied-to-employee-bonuses-1415387998.))

The issue of misleading financials was forced into the regulatory spotlight after accounting scandals such as Enron and WorldCom. The Sarbanes–Oxley Act, enacted in 2002, was the regulatory response to these scandals.  The Sarbanes-Oxley regulatory regime attempted to reign in deceptive financial records, making the American Realty Capital Properties scandal “tailor-made for a case under the often-ignored law inspired by Enron, WorldCom and other accounting debacles” ((Holding, supra note 1.))

Sarbanes-Oxley has often been criticized as being unduly burdensome and discouraging companies from going public and making overseas business opportunities more attractive.  ((Id.))  The American Realty Capital Properties’ scandal may be a welcome opportunity for the courts to flex the muscle of Sarbanes-Oxley regulations.

On October 29th, two of the company’s top executives, including the CFO, resigned, effective immediately.  ((See Charles Sizemore, Is American Realty Capital Properties Enron Part II?, Forbes (Oct. 29, 2014, 1:59 PM), http://www.reuters.com/article/2014/10/31/us-usa-arcp-investigation-exclusive-idUSKBN0IK2CR20141031.))  Both the Federal Bureau of Investigation and the Securities and Exchange Commission are investigating the company.  ((See Emily Flitter, Exclusive: American Realty Capital Facing Criminal Probe over Accounting – Sources, Reuters (Oct. 31, 2014, 6:22 PM), http://www.reuters.com/article/2014/10/31/us-usa-arcp-investigation-exclusive-idUSKBN0IK2CR20141031.))