PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
FINAL INVESTIGATION REPORT
Prepared by:
CALDERWOOD & HARKNESS LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131
Prepared for:
The Audit Committee of the Board of Directors of Verimark Hospitality Group Inc.
Diane Kowalski, Chair Reginald Faulkner, Member Sandra Yeung, Member
January 9, 2024
Matter Number: 1021-00008
This report is protected by the attorney-client privilege and work-product doctrine. It was prepared at the direction of the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. by its independent investigation counsel, Calderwood & Harkness LLP, and is not to be disclosed to any third party without the prior written consent of the Audit Committee.
I. EXECUTIVE SUMMARY
Calderwood & Harkness LLP ("C&H" or "the Firm") was retained by the Audit Committee (the "Audit Committee") of the Board of Directors of Verimark Hospitality Group Inc. ("VHG" or the "Company") to conduct an independent investigation into potential financial irregularities at VHG's wholly owned subsidiary, Verimark Coastal Resorts LLC ("VCR"). The engagement was authorized pursuant to an engagement letter executed by Audit Committee Chair Diane Kowalski on July 17, 2023. The investigation was formally opened on July 24, 2023, upon the issuance of C&H's first document-preservation notice to VHG and VCR personnel, and concluded on January 9, 2024, with the delivery of this Final Investigation Report.
The investigation examined two principal areas of misconduct at VCR:
1. Premature Revenue Recognition. VCR systematically recorded timeshare-interest purchase deposits as completed-sale revenue upon the execution of purchase agreements, rather than upon the expiration of the statutory 10-calendar-day rescission period mandated by Florida Statute § 721.10. This practice, which violated ASC 606 (Revenue from Contracts with Customers) and VHG's own stated revenue-recognition policies, resulted in aggregate revenue overstatements of $26.4 million across four fiscal quarters — Q3 2022 through Q2 2023.
2. Expense-Reimbursement Fraud (Fictitious Vendor Scheme). Over a period of approximately 24 months, from July 2021 through June 2023, VCR processed 47 fabricated purchase orders purportedly for capital-improvement work at VCR resort properties. These purchase orders directed aggregate payments of $1.83 million to three shell entities that were beneficially owned or controlled by VCR executives, and no legitimate work was performed by any of the entities.
The investigation identified three VCR executives as subjects of the misconduct:
• Garrett W. Daskine, Division President of VCR, who directed both the premature revenue-recognition scheme and the fictitious vendor scheme, and who was the beneficial owner of two of the three shell entities;
• Nicole Prescott, Vice President of Finance of VCR, who implemented the premature revenue-recognition scheme by directing accounting staff to override standard journal-entry processes, and who was the sole shareholder of the third shell entity, Clearwater Design Collective Inc.; and
• Ryan Mateo Serrano, Controller of VCR, who created the fictitious purchase orders and processed payments to the shell entities at Daskine's direction, and who served as the registered agent for two of the three shell entities.
Daskine and Prescott were terminated for cause on December 18, 2023. Serrano was terminated on a non-cause basis on December 20, 2023, pursuant to a cooperation agreement between VHG and Serrano dated November 15, 2023, under which Serrano provided truthful testimony and documentary evidence that was material to the investigation's findings.
The investigation was comprehensive in scope. C&H, with the assistance of its forensic accounting advisor, Crestline Forensic Advisory LLC ("Crestline"), and its e-discovery vendor, Triton discovery Solutions Inc. ("Triton"), collected approximately 1.2 million documents from identified custodians and data sources. Following processing, de-duplication, de-NISTing, and predictive-coding review using a TAR 2.0 workflow, the investigation team reviewed approximately 347,000 documents. The investigation team conducted 22 interviews of 18 unique witnesses, including the three subjects, VHG's CEO and CFO, and VCR finance, operations, and sales personnel. Crestline performed detailed forensic accounting analysis encompassing revenue-recognition testing, fund-flow tracing, and rescission-rate analysis.
In response to the issues identified during the investigation, VHG took several prompt remedial steps. On August 14, 2023, VHG filed a Form 8-K under Item 4.02 (Non-Reliance on Previously Issued Financial Statements), disclosing that VHG's previously issued financial statements for FY 2022 (Q3 and Q4) and Q1 2023 should no longer be relied upon. Amended financial statements — an amended 10-K for FY 2022 and amended 10-Qs for Q1 and Q2 2023 — reflecting the restatement were filed on February 28, 2024, in coordination with VHG's independent auditor, Hargrove, Steen & Aldrich LLP ("HSA"), and VHG's outside securities counsel, Westlake Burris & Holt LLP ("Westlake Burris").
The SEC Division of Enforcement opened preliminary inquiry File No. HO-14237 in September 2023. C&H coordinated a voluntary production strategy for non-privileged investigation materials with Westlake Burris in connection with this inquiry. As of the close of the investigation, no referral to the U.S. Department of Justice had been made.
The investigation did not find evidence that VHG's senior management — CEO Margaret "Meg" Calder, CFO Thomas Rhett Griffith, or General Counsel Patricia Navarro — had actual knowledge of either the premature revenue-recognition scheme or the fictitious vendor scheme prior to HSA's June 19, 2023 communication regarding its identification of a potential material weakness.
The total cost of the investigation was approximately $5.057 million, consisting of $3.42 million in fees and expenses billed by C&H, $1.15 million in fees billed by Crestline, and $487,000 in fees billed by Triton.
II. BACKGROUND
A. Verimark Hospitality Group Inc.
Verimark Hospitality Group Inc. is a Delaware corporation whose shares of common stock are publicly traded on the Nasdaq Stock Market under the ticker symbol "VMRK." The Company maintains its corporate headquarters at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611.
VHG operates in the hospitality and real-estate sectors, with business lines encompassing resort development, timeshare-interest sales, and hotel management. The Company owns, operates, or manages a portfolio of resort and hospitality properties located primarily in the southeastern United States and the Caribbean.
For its fiscal year ended December 31, 2022, VHG reported consolidated revenue of approximately $1.87 billion and net income of approximately $142.3 million. As of July 2023, the Company's market capitalization was approximately $3.4 billion, with approximately 88.6 million shares of common stock outstanding. VHG's effective tax rate for FY 2022 was 24.3%.
VHG's senior management team includes Margaret "Meg" Calder, Chief Executive Officer; Thomas Rhett Griffith, Chief Financial Officer; and Patricia Navarro, General Counsel and Corporate Secretary.
VHG's independent auditor is Hargrove, Steen & Aldrich LLP, a registered public accounting firm. The lead engagement partner for the VHG audit is William "Bill" Gentry, CPA, based at HSA's Tampa office located at 101 East Kennedy Boulevard, Suite 3200, Tampa, Florida 33602. HSA has served as VHG's independent auditor since FY 2018.
VHG's transfer agent and registrar is Continental Registrar & Trust Co., located at 1700 Broadway, Suite 1400, New York, New York 10019.
The Company's significant institutional shareholders include Ashford Capital Management LP, which held approximately 7.2% of VHG's outstanding shares (approximately 6.38 million shares) as of the most recent Schedule 13G filing, and Ridgepoint Institutional Partners LLC, which held approximately 5.1% of VHG's outstanding shares (approximately 4.52 million shares) as of the most recent Schedule 13G filing.
B. Verimark Coastal Resorts LLC
Verimark Coastal Resorts LLC is a Florida limited liability company and a wholly owned subsidiary of VHG. VCR maintains its principal office at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541. VCR is VHG's resort-development division, responsible for the development and sale of timeshare interests and the management and operation of resort properties along the Gulf Coast of Florida.
During the period under investigation, VCR was managed by the following senior executives:
• Garrett W. Daskine, Division President, a 17-year VHG veteran who had overall responsibility for VCR's operations, including sales, finance, and property management;
• Nicole Prescott, Vice President of Finance, a 9-year VHG veteran who reported directly to Daskine and oversaw VCR's financial reporting, accounting, and budgeting functions; and
• Ryan Mateo Serrano, Controller, a 5-year VHG veteran who reported to Prescott and was responsible for day-to-day accounting operations, including journal entries, purchase-order processing, and general-ledger maintenance.
For FY 2022, VCR reported revenue of $438.7 million (as originally reported, prior to restatement), representing approximately 23.46% of VHG's consolidated revenue of $1.87 billion. VCR was thus a material operating division within VHG's overall corporate structure.
VCR's key properties relevant to the investigation include:
• Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541. The Coral Dune Resort is a beachfront resort and timeshare property. During the investigated period, VCR was actively selling timeshare interests in the resort's Phase III development, which comprises 312 timeshare units. Coral Dune was the primary source of the prematurely recognized revenue identified in this investigation.
• Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228. The Palmetto Bluff Club is a luxury resort and timeshare property. During the investigated period, VCR was selling timeshare interests in the property's Phase II development. Palmetto Bluff was a secondary source of prematurely recognized revenue.
C. Genesis of the Investigation
The events giving rise to this investigation began on June 19, 2023, when HSA engagement partner William Gentry communicated to VHG CFO Thomas Rhett Griffith and Audit Committee Chair Diane Kowalski that HSA had identified a potential material weakness in VCR's internal controls over financial reporting during the course of HSA's interim review of VHG's Q1 2023 financial statements (for the quarterly period ending March 31, 2023).
Specifically, HSA's review identified that $9.8 million in timeshare-interest purchase deposits at VCR had been recorded as completed-sale revenue during Q1 2023, notwithstanding that the applicable statutory rescission periods — 10 calendar days under Florida Statute § 721.10 — had not expired before the close of the quarter on March 31, 2023. HSA noted that these deposits should have been classified as deferred revenue until the rescission period lapsed without the purchaser exercising rescission rights, and that the premature recognition of these amounts as revenue appeared inconsistent with VHG's stated revenue-recognition policy and with the requirements of ASC 606.
Gentry's communication to Griffith and Kowalski was made both orally, by telephone, and in a follow-up written communication, a letter addressed to the Audit Committee dated June 22, 2023. The communication characterized the issue as a potential material weakness in internal controls and recommended that the matter be investigated further.
Upon receipt of HSA's communication, CFO Griffith promptly notified CEO Margaret Calder and General Counsel Patricia Navarro. On July 10, 2023, the Audit Committee convened in executive session — without the presence of Company management — to discuss the matter and determine the appropriate course of action. At that meeting, the Audit Committee resolved to retain independent outside counsel to conduct a thorough investigation into the revenue-recognition irregularities identified by HSA and any related matters.
The Audit Committee at the time of these events comprised three independent directors:
• Diane Kowalski (Chair), an independent director who has served on VHG's Board since 2019. Ms. Kowalski is a former Chief Financial Officer of Palmetto Capital Advisors Inc. and brings significant financial expertise to the Committee.
• Reginald Faulkner, an independent director who has served on VHG's Board since 2020. Mr. Faulkner is a retired managing partner of Bayfield Consulting Group LLC, a management-consulting firm.
• Sandra Yeung, an independent director who has served on VHG's Board since 2021. Ms. Yeung is a former attorney with the SEC Division of Enforcement and brings regulatory and enforcement expertise to the Committee.
On July 17, 2023, the Audit Committee formally engaged Calderwood & Harkness LLP to serve as independent investigation counsel. The engagement letter, executed by Chair Kowalski on behalf of the Audit Committee, authorized C&H to investigate the revenue-recognition irregularities identified by HSA and any related financial irregularities at VCR, including any potential fraud or misconduct by VCR personnel.
On July 24, 2023, C&H issued its first document-preservation notice to VHG and VCR personnel, formally commencing the investigation. The preservation notice directed all recipients to preserve and refrain from destroying, altering, or discarding any documents or electronically stored information potentially relevant to the matters under investigation.
D. Engagement of Advisors
The Audit Committee, through C&H, engaged the following advisors to assist in the investigation:
Calderwood & Harkness LLP served as independent investigation counsel for the Audit Committee. The C&H team was led by Howard Quinn, Partner, who served as responsible partner for the engagement, and Conrad Ashby, Partner, who served as billing partner. The working team included Liam Donahue, Senior Associate, and Steven Hollander, Associate, along with paralegal support. C&H was responsible for the overall direction, management, and conduct of the investigation, including document review, witness interviews, and the preparation of this report.
Crestline Forensic Advisory LLC ("Crestline") was retained as a forensic accounting advisor under the Kovel doctrine, serving as an agent of C&H for purposes of maintaining the attorney-client privilege over Crestline's work product and communications with counsel. The Crestline engagement was authorized on July 21, 2023. The Crestline team was led by Douglas Reinhardt, CPA, CFF, Engagement Partner, and included Priya Venkatesh, CPA, Senior Manager. The engagement was assigned Crestline number CFA-VHG-2023-0089. Crestline's engagement was structured as a flat-fee arrangement of $1.15 million, with overage provisions applicable if professional hours exceeded 4,500 hours at a blended rate of $375 per hour. Actual professional hours incurred by Crestline totaled approximately 3,067 hours, and the engagement was completed within the flat-fee amount. Crestline was responsible for forensic accounting analysis, including revenue-recognition testing, fund-flow tracing, and rescission-rate analysis.
Triton discovery Solutions Inc. ("Triton") was engaged as the e-discovery vendor for the investigation. Triton is located at 500 Seventh Avenue, 14th Floor, New York, New York 10018. Triton provided document hosting, processing, de-duplication, de-NISTing, TAR 2.0 predictive-coding workflow administration, and production services. Triton's master services agreement was executed on August 1, 2023.
Westlake Burris & Holt LLP ("Westlake Burris") served as VHG's outside securities counsel throughout the investigation. The Westlake Burris team was led by Irene Castellanos, Partner, and is located at 600 Brickell Avenue, Suite 3100, Miami, Florida 33131. Westlake Burris advised VHG management and the Board on SEC disclosure obligations, Form 8-K filing requirements, and restatement matters. C&H coordinated closely with Westlake Burris on SEC-related matters, including the voluntary production of non-privileged investigation materials in connection with the SEC's preliminary inquiry, while maintaining the independence of the Audit Committee investigation.
III. INVESTIGATION METHODOLOGY
A. Scope. The scope of the investigation, as defined in the engagement letter and subsequently refined in consultation with the Audit Committee, encompassed two principal areas of inquiry:
1. Premature Revenue Recognition. The investigation examined VCR's revenue-recognition practices with respect to timeshare-interest purchase deposits during the period from Q3 2022 (the quarter ending September 30, 2022) through Q2 2023 (the quarter ending June 30, 2023), with particular focus on whether timeshare deposits were improperly recognized as completed-sale revenue prior to the expiration of statutory rescission periods, in violation of ASC 606 and VHG's stated accounting policies.
2. Expense-Reporting Irregularities (Fictitious Vendor Scheme). The investigation examined irregularities in VCR's expense-reporting and purchase-order processes during the period from approximately July 2021 through June 2023, with particular focus on whether fictitious vendor invoices were used to direct Company funds to entities lacking legitimate business operations.
The investigation also examined the potential implications of the identified misconduct under the federal securities laws, including potential violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, Section 13(a) of the Exchange Act (periodic reporting obligations), Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act (books-and-records and internal-controls provisions), and Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 ("SOX"). The investigation further considered the potential applicability of Section 304 of SOX (CEO/CFO clawback provisions) and whether any findings warranted referral for consideration by law-enforcement authorities.
The scope of the investigation did not extend to VHG's other business segments or operating divisions beyond VCR. C&H's review of senior VHG management's knowledge and involvement was limited to the question of whether senior management had actual or constructive knowledge of, or participated in, the misconduct at VCR.
B. Document Collection and Review
The investigation's document collection and review process was conducted in accordance with established best practices for internal investigations and e-discovery. The key elements of the process are summarized below.
Custodian Identification and Selection. C&H, in consultation with Crestline and VHG's information-technology personnel, identified 11 custodians whose documents were potentially relevant to the investigation. These custodians included the three subjects (Daskine, Prescott, and Serrano), senior VHG management (Calder, Griffith, and Navarro), HSA engagement partner Gentry, and additional VCR finance, operations, and sales personnel. Following an initial assessment, documents were collected from 8 custodians based on relevance and materiality considerations.
Documents Collected. Approximately 1.2 million documents were collected from the identified custodians. The collected documents included emails and attachments, financial records, general-ledger entries, purchase orders, vendor invoices, bank records and statements, internal memoranda, timeshare purchase agreements, rescission logs, capital-improvement budgets, expense reports, corporate formation documents (including articles of organization and corporate filings for the shell entities), and other records relevant to the investigation.
Processing. The collected documents were processed by Triton discovery Solutions Inc. using industry-standard processing methodologies. This processing included de-duplication (removal of exact-duplicate documents), de-NISTing (removal of system files and other known non-responsive file types based on the National Institute of Standards and Technology hash library), and file-type normalization and indexing.
Technology-Assisted Review. Following processing, C&H employed a TAR 2.0 (Technology-Assisted Review) predictive-coding workflow, administered by Triton, to prioritize documents for review. The TAR 2.0 workflow utilized continuous active learning, in which C&H attorneys reviewed and coded a seed set of documents, and the predictive-coding model iteratively ranked the remaining documents by relevance. This methodology enabled the investigation team to efficiently identify and review the most relevant documents within the larger collection.
Documents Reviewed. Following processing and TAR-assisted prioritization, C&H attorneys and paralegals reviewed approximately 347,000 documents. Documents were reviewed for relevance, responsiveness, and privilege.
Privileged Documents. The review identified 4,218 documents that were withheld in whole or redacted in part on the basis of the attorney-client privilege and/or the work-product doctrine. A privilege log was prepared, with the final version dated December 22, 2023.
Categories of Documents Reviewed. The documents reviewed during the investigation included, among other categories:
• VCR financial records, including general-ledger entries, trial balances, and subsidiary schedules;
• Purchase orders, vendor invoices, and accounts-payable records;
• Bank records and account statements for VCR operating accounts and for the three shell entities;
• Email correspondence among VCR personnel, including Daskine, Prescott, and Serrano;
• Internal memoranda and management reports;
• Timeshare purchase agreements and related closing documentation;
• Rescission logs and rescission-rate reports;
• Capital-improvement budgets and project-tracking records;
• Expense reports submitted by VCR personnel;
• Corporate formation documents for Gulf Standard Contracting LLC, Clearwater Design Collective Inc., and Suncoast Property Services LLC, obtained from the Florida Division of Corporations; and
• VHG's SEC filings, including Form 10-K (FY 2022), Forms 10-Q (Q1, Q2, and Q3 2023), proxy statements, and the Form 8-K filed on August 14, 2023.
C. Witness Interviews
The investigation team conducted a total of 22 interviews of 18 unique witnesses between August 15, 2023 and December 12, 2023. Four witnesses were interviewed on two separate occasions, as the investigation required follow-up questioning based on subsequently reviewed documentary evidence.
Upjohn Warnings. At the outset of each interview (with the exception of the informational interview of HSA engagement partner William Gentry, who is not an employee of VHG), the C&H attorneys conducting the interview administered Upjohn warnings in accordance with a standard Upjohn warning script prepared by C&H on August 14, 2023. Each witness was advised that:
(a) C&H represents the Audit Committee of VHG and not any individual witness or employee;
(b) the purpose of the interview is to gather facts relevant to the Audit Committee's investigation;
(c) the attorney-client privilege for the interview belongs to VHG, not to the individual witness, and may be waived by VHG at its discretion;
(d) while the interview is protected by the attorney-client privilege, the witness should not disclose the substance of the interview to others without C&H's prior approval; and
(e) the witness should provide truthful and complete responses.
Each witness acknowledged their understanding of the Upjohn warnings before the interview proceeded. Witnesses who appeared with personal counsel were permitted to consult with their attorneys during the interview.
Interview of HSA Engagement Partner. On August 15, 2023, C&H conducted an informational interview of William "Bill" Gentry, CPA, the HSA lead engagement partner for the VHG audit. The interview was conducted to obtain detailed information regarding HSA's identification of the potential material weakness and the specific observations that led to HSA's June 19, 2023 communication. Mr. Gentry is not a VHG employee, and Upjohn warnings were not administered. The interview was conducted with Mr. Gentry's voluntary cooperation.
Key Management Interviews. C&H interviewed the following members of VHG senior management:
• Thomas Rhett Griffith, Chief Financial Officer — interviewed August 22, 2023. Mr. Griffith provided information regarding VHG's revenue-recognition policies, the CFO's role in reviewing division-level financial reporting, and his receipt and handling of HSA's June 19, 2023 communication.
• Margaret "Meg" Calder, Chief Executive Officer — interviewed August 29, 2023. Ms. Calder provided information regarding VHG's corporate-governance structure, the relationship between corporate headquarters and operating divisions, and her knowledge of VCR's operations and financial performance.
Subject Interviews. C&H interviewed each of the three investigation subjects:
• Ryan Mateo Serrano, Controller, VCR — interviewed on two occasions. Session 1 took place on September 27, 2023, with Serrano's personal counsel, Marco A. Ruiz of Coletti & Ruiz PA, present. Session 2 took place on December 5, 2023, pursuant to the cooperation agreement executed on November 15, 2023, again with Mr. Ruiz present. In his cooperation interview, Serrano provided detailed and material information regarding the creation of fictitious purchase orders, the mechanics of the fund flows to the shell entities, and Daskine's direction and oversight of both schemes.
• Garrett W. Daskine, Division President, VCR — interviewed on October 4, 2023, with his personal counsel, James Corwin Merritt of Merritt & Dunleavy LLP, present. Daskine denied knowledge of improper revenue-recognition practices and denied receiving any personal financial benefit from the vendor payments. Daskine declined C&H's request for a follow-up interview, communicated through a letter from Mr. Merritt dated October 19, 2023.
• Nicole Prescott, Vice President of Finance, VCR — interviewed on two occasions. Session 1 took place on October 11, 2023, with her personal counsel, Candace O'Brien Langford of Langford Pace LLP, present. In that session, Prescott acknowledged that timeshare deposits were recorded as revenue upon the signing of purchase agreements but characterized this practice as consistent with "industry practice" and denied any intent to misstate financial results. Session 2 took place on November 8, 2023, again with Ms. Langford present. In that session, Prescott was confronted with additional documentary evidence, including corporate-formation records establishing her sole ownership of Clearwater Design Collective Inc. On advice of counsel, Prescott provided limited substantive responses to questions regarding CDC and the flow of funds to that entity.
In addition to the foregoing, C&H interviewed additional VCR finance, operations, and sales personnel. The full interview schedule, including the names, titles, dates, counsel present, and session details for all 22 interviews, is set forth in Appendix B to this report.
D. Forensic Accounting Analysis
Crestline Forensic Advisory LLC conducted a comprehensive forensic accounting analysis in support of the investigation, working under the direction and supervision of C&H and protected by the Kovel doctrine as an agent of counsel.
Crestline's forensic accounting work encompassed the following principal areas:
Revenue-Recognition Testing. Crestline performed a detailed comparison of VCR's revenue entries against the underlying transactional records, including timeshare purchase agreements, deposit records, rescission-period expiration dates (calculated based on the 10-calendar-day period prescribed by Florida Statute § 721.10), and reversal logs. This testing enabled the investigation team to identify and quantify specific instances in which VCR recognized revenue from timeshare-interest deposits before the applicable rescission period had expired, and to measure the aggregate overstatement on a quarterly basis.
Expense-Reimbursement Tracing. Crestline traced the flow of funds from VCR's operating accounts to the bank accounts of the three shell entities (Gulf Standard Contracting LLC, Clearwater Design Collective Inc., and Suncoast Property Services LLC). Crestline further traced funds from the shell-entity bank accounts to personal expenditures of the investigation subjects, including personal credit-card payments, residential renovation expenditures, boat-slip fees, and luxury-goods purchases. This tracing analysis was supported by bank records obtained through VHG's corporate-level bank relationships and through subpoenas issued in connection with the investigation.
Rescission-Rate Analysis. Crestline analyzed VCR's timeshare rescission rate during the investigated period and compared it to available industry benchmarks. The analysis determined that VCR's rescission rate during the investigated period was approximately 14.3%, compared to an industry average of approximately 11%. The elevated rescission rate was relevant to the investigation because it magnified the rolling overstatement: a higher proportion of prematurely recognized revenue was ultimately subject to reversal when purchasers exercised their rescission rights, creating a persistent gap between reported revenue and actual earned revenue.
E. Cooperation Agreement
On November 15, 2023, VHG and Ryan Mateo Serrano executed a cooperation agreement, the terms of which were drafted by C&H in consultation with VHG General Counsel Patricia Navarro. The agreement was executed by Patricia Navarro on behalf of VHG and by Marco A. Ruiz of Coletti & Ruiz PA on behalf of Serrano.
Under the terms of the cooperation agreement, Serrano agreed to:
(a) provide truthful and complete testimony in any interview, proceeding, or hearing relating to the matters under investigation;
(b) produce all documents in his possession, custody, or control relating to the matters under investigation; and
(c) cooperate fully with C&H and VHG in connection with any regulatory or enforcement proceedings.
In exchange, VHG agreed to:
(a) terminate Serrano's employment on a non-cause basis, rather than for cause, thereby preserving certain severance and benefit entitlements under Serrano's employment agreement; and
(b) enter into a mutual release of claims, subject to certain carve-outs for fraud, criminal conduct, and regulatory cooperation obligations.
The cooperation agreement was a significant development in the investigation. Serrano's cooperation, and in particular the information provided during his December 5, 2023 interview (Session 2), was material to the investigation's findings regarding the mechanics and direction of both the premature revenue-recognition scheme and the fictitious vendor scheme.
F. Coordination with Third Parties
Throughout the investigation, C&H coordinated with several third parties to ensure efficient information sharing while preserving applicable privileges:
Hargrove, Steen & Aldrich LLP (HSA). On August 9, 2023, C&H and HSA executed a letter establishing coordination protocols between the Audit Committee's investigation and HSA's ongoing audit activities. The letter addressed information-sharing procedures, privilege protections, and the respective roles of the investigation team and the auditor. HSA cooperated with the investigation, providing access to its workpapers and interim-review documentation to the extent consistent with professional standards and applicable privilege protections.
Westlake Burris & Holt LLP. On August 11, 2023, C&H and Westlake Burris exchanged a coordination letter establishing protocols for the sharing of information relevant to VHG's SEC disclosure obligations and Form 8-K filing requirements. The letter addressed privilege protections and the division of responsibilities between investigation counsel and securities counsel. C&H and Westlake Burris worked together on the drafting and review of the August 14, 2023 Form 8-K filing and on the development of the restatement plan.
SEC Division of Enforcement. Following the opening of the SEC's preliminary inquiry (File No. HO-14237) in September 2023, C&H and Westlake Burris developed a voluntary production strategy, memorialized in a joint memorandum dated September 15, 2023. Non-privileged investigation materials were produced to the SEC staff on a rolling basis in coordination with Westlake Burris. C&H carefully analyzed privilege considerations in connection with the voluntary production, including the selective-waiver doctrine and its application in the Eleventh Circuit, to ensure that the production of non-privileged materials did not result in an inadvertent waiver of the attorney-client privilege or work-product protection over privileged investigation materials.
IV. FINDINGS: REVENUE-RECOGNITION IRREGULARITIES
A. Applicable Accounting Standards and Legal Framework
The investigation's analysis of VCR's revenue-recognition practices was conducted against the framework of the applicable accounting standards and Florida statutory law. The key authorities are summarized below.
ASC 606 — Revenue from Contracts with Customers. Under ASC 606, revenue is recognized when (or as) a reporting entity satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. In the context of timeshare-interest sales, the transfer of control is not complete, and revenue recognition is not appropriate, until the purchaser's contractual and statutory rescission rights have expired. During the rescission period, the seller has an ongoing obligation, and the transaction is subject to a contingency that precludes the conclusion that control has transferred.
Florida Statute § 721.10 — Rescission Rights. Florida Statute § 721.10 grants purchasers of timeshare interests a mandatory 10-calendar-day rescission period following the execution of the purchase agreement. During this period, the purchaser may cancel the transaction and receive a full refund of all deposits paid. The rescission right is absolute and may not be waived by the purchaser. The existence of this statutory right creates a substantive contingency that, under ASC 606, must be resolved before revenue from the transaction can be recognized.
Proper Accounting Treatment. Under the applicable standards and law, the proper treatment of timeshare-interest purchase deposits received during the rescission period is to record those deposits as deferred revenue (a current liability on the balance sheet). Revenue recognition as a completed sale is permissible only after the expiration of the 10-calendar-day rescission period without the purchaser having exercised rescission rights. Only at that point has the contingency been resolved, control of the timeshare interest transferred to the customer, and the performance obligation satisfied.
VHG's Stated Policy. VHG's stated revenue-recognition policy, as disclosed in the Company's annual report on Form 10-K for FY 2022 (Note 2 to the Consolidated Financial Statements), was consistent with ASC 606 and expressly acknowledged the statutory rescission period under Florida law. The policy stated that timeshare-interest revenue is recognized "upon the expiration of the applicable statutory rescission period, provided that all other conditions for revenue recognition under ASC 606 have been satisfied." However, as detailed below, VCR's actual practices deviated materially from the stated policy during the investigated period.
B. The Scheme
The investigation determined that, during the period from Q3 2022 through Q2 2023, VCR systematically departed from VHG's stated revenue-recognition policy and the requirements of ASC 606 by booking timeshare-interest purchase deposits as completed-sale revenue upon the signing of the purchase agreement, rather than upon the expiration of the 10-calendar-day statutory rescission period.
This practice had the effect of prematurely accelerating revenue recognition by approximately 10 days for each timeshare transaction. While a 10-day acceleration might appear modest on a per-transaction basis, the cumulative effect across hundreds of timeshare transactions per quarter was substantial, creating significant quarter-end overstatements. The effect was compounded by the fact that, in cases where purchasers subsequently exercised their rescission rights during the 10-day period, VCR did not reverse the previously recognized revenue until the following quarter. This lag in reversal processing created a persistent rolling overstatement that carried across quarterly reporting periods.
The investigation determined that this practice was directed by Division President Garrett W. Daskine and implemented by VP of Finance Nicole Prescott. Specifically:
• Daskine instructed Prescott to record timeshare-interest purchase deposits as completed-sale revenue at the time of contract signing, rather than after the rescission period had expired. The evidence indicates that Daskine's motive was to ensure that VCR met or exceeded quarterly revenue targets, which were a component of VCR's management-incentive compensation structure and were closely monitored by VHG corporate management.
• Prescott, in turn, instructed VCR's accounting staff to override the standard journal-entry process — which included an automated hold on revenue recognition pending rescission-period expiration — and to manually record deposits as completed revenue upon contract signing. Prescott provided specific direction to accounting staff regarding the journal entries to be recorded and the general-ledger accounts to be used.
• Controller Ryan Serrano confirmed in his cooperation interviews (Session 2, December 5, 2023) that Daskine explicitly directed the premature booking of timeshare deposits as revenue and that Prescott communicated Daskine's directive to the accounting team. Serrano stated that he was aware the practice deviated from VHG's stated policy but that he was told by both Daskine and Prescott that the practice was necessary to meet division revenue targets.
The investigation identified email correspondence between Daskine and Prescott, dating from as early as August 2022, in which Daskine directed Prescott to "close the books on signed deals" and to "push through the deposits" before the end of the quarter. In one particularly direct communication, an email dated September 26, 2022 (four days before the close of Q3 2022), Daskine wrote to Prescott: "We need to get the Coral Dune Phase III numbers booked before Friday close. No reason to wait on the rescission clock — the deals are done." Prescott responded the same day: "Understood. Will have the team book them as closed sales." These communications, among others, demonstrate that the premature revenue recognition was a deliberate practice directed from the top of VCR's management structure.
C. Properties Involved
The premature revenue-recognition scheme was concentrated at VCR's two principal timeshare-development properties:
Coral Dune Resort & Residences (14200 Emerald Coast Parkway, Destin, Florida 32541). Coral Dune's Phase III timeshare units were VCR's most active selling property during the investigated period. The majority of the prematurely recognized revenue — approximately 68% of the total overstatement — was attributable to timeshare-interest sales at Coral Dune. The high volume of Phase III sales activity, combined with the concentrated closing patterns at quarter-end, created the largest single source of premature revenue recognition.
Palmetto Bluff Club (3950 Longboat Key Drive, Sarasota, Florida 34228). Palmetto Bluff's Phase II timeshare units were a secondary source of prematurely recognized revenue, accounting for approximately 32% of the total overstatement. While the sales volume at Palmetto Bluff was lower than at Coral Dune, the same improper booking practices were applied at this property.
D. Quantification of the Overstatement
Crestline's forensic accounting analysis, performed under C&H's direction, quantified the revenue overstatement attributable to the premature recognition of timeshare-interest deposits on a quarter-by-quarter basis. The analysis was based on a transaction-level review of VCR's timeshare purchase agreements, deposit records, rescission-period expiration dates, and reversal logs.
The results of the quantification are as follows:
The Q1 2023 overstatement of $9.8 million was the largest single quarterly overstatement and was the specific item identified by HSA engagement partner Gentry in his June 19, 2023 communication to CFO Griffith and Audit Committee Chair Kowalski. The elevated Q1 2023 figure reflected a particularly high volume of quarter-end closings at Coral Dune Phase III.
The Q2 2023 overstatement of $5.8 million was lower than the preceding two quarters, reflecting in part the effect of HSA's inquiry and the commencement of the investigation, which slowed the volume of new timeshare closings during the quarter.
E. Impact on VHG Consolidated Financial Statements
The premature revenue recognition at VCR had a material impact on VHG's consolidated financial statements for FY 2022 and the first two quarters of FY 2023:
FY 2022 Revenue Overstatement. The combined overstatement for FY 2022 (Q3 and Q4) was $10.8 million ($4.7 million in Q3 2022 and $6.1 million in Q4 2022).
• As a percentage of VCR's FY 2022 reported revenue of $438.7 million, the overstatement was $10.8M ÷ $438.7M = 2.46%.
• As a percentage of VHG's FY 2022 consolidated revenue of $1.87 billion, the overstatement was $10.8M ÷ $1,870M = 0.58%.
After-Tax Income Impact (FY 2022). Applying VHG's FY 2022 effective tax rate of 24.3%, the after-tax impact of the FY 2022 revenue overstatement on net income was approximately $10.8 million × (1 – 0.243) = $8.17 million.
• As a percentage of VHG's FY 2022 reported net income of $142.3 million, the after-tax overstatement was $8.17M ÷ $142.3M = 5.74%.
The 5.74% overstatement of net income is significant in terms of both quantitative and qualitative materiality assessments. While the revenue overstatement as a percentage of consolidated revenue (0.58%) is below typical quantitative thresholds, the net-income impact exceeds the commonly applied 5% materiality threshold and, when considered in conjunction with the qualitative factors — including the deliberate nature of the misstatement, its effect on trend analysis and period-over-period comparisons, and its relevance to management-incentive compensation — supports the conclusion that the misstatements were material.
The investigation confirmed that VHG's previously issued financial statements for FY 2022 and the first two quarters of FY 2023 contain material misstatements requiring restatement. This conclusion is consistent with the determination reached by VHG management, the Audit Committee, and HSA in connection with the August 14, 2023 Form 8-K filing under Item 4.02.
F. Rescission-Rate Analysis
As noted above, Crestline analyzed VCR's timeshare rescission rate during the investigated period and determined that the rate was approximately 14.3%, compared to an industry average of approximately 11%. This means that approximately 14.3% of timeshare purchasers at VCR's properties exercised their statutory rescission rights within the 10-calendar-day period following the signing of the purchase agreement.
VCR's elevated rescission rate was relevant to the revenue-recognition overstatement in two respects:
First, the higher rescission rate magnified the rolling overstatement. Because a larger percentage of prematurely recognized revenue was ultimately reversed (when purchasers exercised rescission), the gap between reported revenue and actual earned revenue was larger than it would have been at a lower rescission rate. The 14.3% rescission rate meant that approximately $3.77 million of the $26.4 million in prematurely recognized revenue was ultimately reversed due to rescission — but the reversals were not processed until the following quarter, creating the persistent rolling overstatement identified in the investigation.
Second, the elevated rescission rate raises questions about the sales practices employed at VCR's properties, including whether high-pressure sales tactics may have contributed to a higher-than-average rate of buyer's remorse. While a detailed examination of VCR's sales practices was outside the scope of this investigation, the Audit Committee may wish to consider whether further review is warranted.
G. SOX Implications
The investigation's findings have significant implications under the Sarbanes-Oxley Act of 2002:
SOX Section 302 — CEO/CFO Certifications. Section 302 of SOX requires the CEO and CFO of a public company to certify, in connection with each quarterly and annual filing, that the financial statements fairly present, in all material respects, the financial condition and results of operations of the company, and that the signing officer has evaluated the effectiveness of the company's disclosure controls and procedures. CEO Calder and CFO Griffith signed Section 302 certifications accompanying VHG's Form 10-K for FY 2022 and Forms 10-Q for Q1 and Q2 2023 — each of which included VCR's overstated revenue figures. The investigation found no evidence that either Calder or Griffith had actual knowledge of the premature revenue-recognition scheme at the time they signed the certifications. Nevertheless, the certifications were rendered inaccurate as a result of VCR's practices, and the restated financial statements will require new certifications.
SOX Section 404 — Internal Controls Over Financial Reporting. Section 404 of SOX requires management to assess and report on the effectiveness of the company's internal controls over financial reporting, and requires the independent auditor to attest to management's assessment. The premature revenue-recognition practice at VCR constitutes a material weakness in VHG's internal controls over financial reporting, as it allowed material misstatements to be included in VHG's financial statements without detection by the Company's control environment. This conclusion is consistent with HSA's preliminary identification of a potential material weakness in June 2023. The material weakness will require disclosure in VHG's amended filings and remediation, as discussed in Section X of this report.
V. FINDINGS: EXPENSE-REIMBURSEMENT IRREGULARITIES (FICTITIOUS VENDOR SCHEME)
A. Overview of the Scheme
The investigation determined that, from approximately July 2021 through June 2023 — a period of approximately 24 months — VCR Controller Ryan Mateo Serrano created 47 fictitious purchase orders purportedly for "capital improvement" work at VCR resort properties. The purchase orders were attributed to three purported vendors — Gulf Standard Contracting LLC, Clearwater Design Collective Inc., and Suncoast Property Services LLC — which were, in fact, shell entities with no employees, no physical office space, no equipment, and no operational capabilities. These entities were beneficially owned by or affiliated with investigation subjects Daskine and Prescott.
Payments totaling $1.83 million were directed to bank accounts controlled by the shell entities over the course of the scheme. The investigation determined that no legitimate capital-improvement work was performed by any of the three entities. The purchase orders and corresponding invoices described fabricated work, including "lobby renovation materials," "pool-deck resurfacing," "HVAC system upgrades," and other purported capital improvements that were never actually contracted for or performed.
The scheme was directed by Division President Garrett W. Daskine, who had unilateral approval authority for capital-improvement expenditures below $100,000 at the division level. Daskine approved all 47 fictitious purchase orders. VP of Finance Nicole Prescott benefited financially from the scheme through her ownership of Clearwater Design Collective Inc. Controller Serrano created the fictitious purchase orders and processed the payments at Daskine's direction, as confirmed through Serrano's cooperation.
B. Shell Entity Analysis
Crestline's forensic accounting analysis, supplemented by C&H's review of corporate formation records obtained from the Florida Division of Corporations and bank records, established the following regarding the three shell entities:
1. Gulf Standard Contracting LLC ("GSC"). Gulf Standard Contracting LLC is a Florida limited liability company formed on March 12, 2021 — approximately four months before the first fictitious invoice attributed to the entity. The registered agent listed in GSC's articles of organization was Ryan Mateo Serrano. The sole member of GSC was Garrett W. Daskine, who held his ownership interest through a nominee arrangement designed to obscure his beneficial ownership.
GSC received 19 invoices totaling $812,400 over the course of the scheme. The invoices described purported capital-improvement work at Coral Dune Resort & Residences, including "lobby renovation materials," "exterior landscaping," and "guest-unit fixture upgrades." The largest single invoice attributed to GSC was Invoice No. GSC-2023-007, dated February 14, 2023, in the amount of $94,500, described as "lobby renovation materials — Coral Dune Phase III." Crestline's analysis confirmed that no work corresponding to any of the 19 GSC invoices was performed at any VCR property.
2. Clearwater Design Collective Inc. ("CDC"). Clearwater Design Collective Inc. is a Florida corporation formed on June 4, 2021. The registered agent listed in CDC's articles of incorporation was Ryan Mateo Serrano. The sole shareholder and sole director of CDC was Nicole Prescott. Prescott's ownership of CDC was established through corporate-formation records, Florida Annual Report filings, and bank-account records identifying Prescott as the sole signatory on CDC's bank accounts.
CDC received 16 invoices totaling $587,600 over the course of the scheme. The invoices described purported design and renovation services at both Coral Dune and Palmetto Bluff properties.
3. Suncoast Property Services LLC ("SPS"). Suncoast Property Services LLC is a Florida limited liability company formed on November 18, 2021, approximately five months after the formation of GSC and CDC. Unlike GSC and CDC, for which Serrano served as registered agent, SPS used a commercial registered-agent service — Panhandle Agent Services Inc., based in Tallahassee, Florida. The sole member of SPS was Garrett W. Daskine.
SPS received 12 invoices totaling $430,000 over the course of the scheme. The invoices described purported property-maintenance and repair services at Coral Dune Resort & Residences.
C. Aggregate Improper Payments
The total improper payments directed to the three shell entities were as follows:
The aggregate improper payments of $1,830,000 ($1.83 million) were directed through 47 fictitious purchase orders over a period of approximately 24 months. The average payment per invoice was approximately $38,936. The invoices were structured to fall below Daskine's unilateral approval threshold of $100,000, thereby avoiding the dual-approval requirements that applied to larger capital-improvement expenditures.
D. Tracing of Fund Flows
Crestline's forensic fund-flow analysis traced the path of payments from VCR's operating accounts to the shell-entity bank accounts and from the shell-entity accounts to the personal benefit of the subjects. The tracing revealed the following patterns:
• Personal Credit-Card Payments. Funds from the GSC and SPS accounts were transferred to personal bank accounts of Garrett W. Daskine, from which Daskine made personal credit-card payments. Funds from the CDC account were transferred to personal bank accounts of Nicole Prescott, from which Prescott made personal credit-card payments. Crestline identified aggregate transfers from shell-entity accounts to personal accounts totaling approximately $1.62 million, with the balance remaining in shell-entity accounts or used for entity-level expenses (e.g., bank fees, registered-agent fees, and minimal office supplies to maintain the appearance of legitimate operations).
• Residential Renovation. Crestline traced approximately $287,000 in payments from the GSC and SPS accounts to contractors and vendors performing renovation work on Daskine's personal residence at 312 Harbor View Lane, Destin, Florida 32541. This included payments for kitchen and bathroom remodeling, outdoor pool construction, and landscaping work.
• Boat-Slip Fees. Crestline identified payments totaling approximately $42,000 from the GSC account to a marina in Destin, Florida for boat-slip rental fees associated with a recreational vessel registered to Daskine.
• Luxury-Goods Purchases. Both Daskine and Prescott made luxury-goods purchases traceable to funds originating from the shell-entity accounts, including designer merchandise, fine jewelry, and high-end electronics.
The fund-flow analysis confirmed that no legitimate capital-improvement work was performed by any of the three shell entities and that the funds were diverted to the personal benefit of Daskine and Prescott.
E. Internal Controls Failures
The fictitious vendor scheme was made possible by several significant deficiencies and failures in VCR's internal controls over procurement and disbursement:
• Lack of Segregation of Duties. VCR's purchase-order approval process lacked adequate segregation of duties. As Division President, Daskine had unilateral approval authority for all capital-improvement expenditures below $100,000 — a threshold that the fictitious invoices were deliberately structured to remain beneath. There was no requirement for a second approver or an independent review of purchase orders approved by the Division President.
• Absence of Vendor-Verification Procedures. No independent verification of vendor legitimacy was performed at the division level. VCR did not maintain a centralized approved-vendor list, did not require documentation of vendor credentials (such as contractor licenses, certificates of insurance, or tax identification verification), and did not conduct any due diligence on new vendors before adding them to the accounts-payable system.
• Reliance on Division-Level Approvals. VHG's corporate accounting function relied on VCR division-level approvals without independent confirmation. Capital-improvement expenditures approved at the division level were processed for payment by VHG corporate accounting without a second-level review of the underlying invoices, purchase orders, or vendor legitimacy. The corporate accounting function treated division-level approval as sufficient authorization for payment.
• Absence of Periodic Vendor Audits. VHG did not conduct periodic audits of vendor relationships at any of its operating divisions, including VCR. There was no process for reviewing vendor activity patterns, identifying vendors with no history of prior work, or verifying the continued existence and operational capacity of vendors receiving payments.
The scheme exploited these control gaps systematically. Daskine, as the sole approver, was positioned to approve his own fictitious invoices without oversight. Serrano, as Controller, created the purchase orders and processed the payments, giving the transactions an appearance of routine business activity. The absence of any independent verification at either the division or corporate level allowed the scheme to persist for approximately 24 months before being detected.
VI. INDIVIDUAL FINDINGS
This section sets forth the investigation's findings with respect to each of the three investigation subjects.