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CALDERWOOD & HARKNESS LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131
INTERIM STATUS REPORT NO. 2
INTERNAL INVESTIGATION — VERIMARK COASTAL RESORTS LLC
C&H Matter No. 1021-00008
October 20, 2023
TO: Audit Committee of the Board of Directors Verimark Hospitality Group Inc.
Diane Kowalski, Chair Reginald Faulkner, Member Sandra Yeung, Member
FROM: Howard Quinn, Partner Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131
RE: Internal Investigation — Verimark Coastal Resorts LLC (C&H Matter No. 1021-00008)
DISTRIBUTION RESTRICTION: This report is furnished solely to the members of the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. and is protected by the attorney-client privilege and the work-product doctrine. The contents of this report reflect the mental impressions, conclusions, and legal analyses of counsel and are prepared in anticipation of litigation and for the purpose of rendering legal advice. This report should not be disseminated to any person outside the Audit Committee — including other members of the Board of Directors, officers of Verimark Hospitality Group Inc. or its subsidiaries, or any third party — without prior consultation with Calderwood & Harkness LLP. Unauthorized disclosure may result in waiver of applicable privileges.
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I. Executive Summary
This is the second interim status report submitted by Calderwood & Harkness LLP ("C&H") in connection with its independent investigation on behalf of the Audit Committee of the Board of Directors (the "Audit Committee") of Verimark Hospitality Group Inc. ("VHG" or the "Company"; Nasdaq: VMRK) into revenue-recognition irregularities and expense-reporting misconduct at Verimark Coastal Resorts LLC ("VCR"), a wholly owned subsidiary of VHG. The investigation was opened on July 24, 2023, at the direction of the Audit Committee, following the identification by the Company's independent auditor, Hargrove, Steen & Aldrich LLP ("HSA"), of approximately $9.8 million in potentially prematurely recognized timeshare-interest deposits during its interim review of VCR's first-quarter 2023 financial results.
Since the submission of the first interim status report on September 8, 2023, the investigation team has made substantial progress. Most significantly, the team has completed initial interviews of the three principal subjects of the investigation — Garrett W. Daskine (VCR Division President), Nicole Prescott (VCR Vice President of Finance), and Ryan Mateo Serrano (VCR Controller). In addition, the document review has advanced materially, with approximately 347,000 documents reviewed to date, and the forensic accounting analysis conducted by Crestline Forensic Advisory LLC ("Crestline") has yielded detailed preliminary findings concerning both the revenue-recognition irregularities and the expense-reimbursement misconduct.
The evidence developed to date supports two principal findings:
1. Revenue Overstatement. VCR overstated revenue by approximately $26.4 million across four fiscal quarters (Q3 2022 through Q2 2023) as a result of the premature recognition of timeshare-interest purchase deposits as completed-sale revenue upon execution of the purchase agreement, rather than upon the expiration of the ten-day statutory rescission period mandated by Florida Statute § 721.10. This practice was inconsistent with ASC 606 requirements governing recognition of revenue upon satisfaction of performance obligations and transfer of control. The revenue overstatement is material to VHG's consolidated financial statements and is consistent with, and significantly expands upon, the initial discrepancy identified by HSA.
2. Expense-Reimbursement Irregularities. Approximately $1.83 million in VCR funds was channeled through forty-seven (47) fictitious purchase orders directed to three shell entities — Gulf Standard Contracting LLC, Clearwater Design Collective Inc., and Suncoast Property Services LLC — that are beneficially owned and controlled by Daskine and Prescott, with the assistance of Serrano. Preliminary fund tracing indicates that these funds were ultimately used for the personal benefit of Daskine and Prescott, including personal credit-card payments, residential renovation expenditures, boat-slip fees, and luxury-goods purchases.
The investigation remains on track for completion in the first quarter of 2024. The final investigation report is currently targeted for delivery to the Audit Committee in early January 2024, subject to the investigation team's ability to obtain follow-up interviews and additional document production from the subjects, as detailed in this report.
The sections that follow provide detailed updates concerning the investigation team's staffing, document collection and review, witness interviews, preliminary forensic accounting findings, coordination with external parties, personnel actions, insurance considerations, budget, and anticipated next steps.
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II. Investigation Team and Staffing
The investigation team remains as constituted since the commencement of the engagement in July 2023. There have been no changes to staffing since the first interim report.
Calderwood & Harkness LLP. The C&H investigation team is comprised of the following personnel:
• Howard Quinn, Partner — Responsible Partner with overall supervisory authority over the investigation, including direction of the interview program, coordination with external parties, and preparation of all reports to the Audit Committee.
• Conrad Ashby, Partner — Billing Partner and senior advisor on securities-law and disclosure matters relevant to the investigation.
• Liam Donahue, Senior Associate — Lead Associate responsible for day-to-day management of the document review, coordination with Crestline and Triton discovery Solutions Inc., and preparation of interview memoranda.
• Steven Hollander, Associate — Working Associate supporting the document review, forensic accounting coordination, and factual research.
• Paralegal support — C&H's Miami office litigation-support team provides ongoing paralegal and project-management support for the document review and privilege logging.
Crestline Forensic Advisory LLC. Crestline was retained under the Kovel doctrine to provide forensic accounting services under the direction and supervision of C&H, such that Crestline's work is protected by the attorney-client privilege and work-product doctrine. Crestline's engagement is designated as engagement number CFA-VHG-2023-0089. The Crestline team is comprised of:
• Douglas Reinhardt, CPA, CFF — Engagement Partner, responsible for overall direction of the forensic accounting analysis, including the revenue-recognition analysis and the fund-tracing analysis.
• Priya Venkatesh, CPA — Senior Manager, responsible for day-to-day execution of the forensic accounting work, including analysis of VCR's timeshare-interest sales transactions, review of capital-improvement expenditures, and tracing of fund flows through the shell entities.
Triton discovery Solutions Inc. Triton provides e-discovery hosting, data processing, and Technology-Assisted Review ("TAR 2.0") platform support for the investigation. Triton's services include document ingestion, de-duplication, de-NISTing, predictive-coding model training and validation, and production capabilities.
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III. Document Collection and Review Update
A. Collection Status
At the outset of the investigation, the investigation team identified eleven (11) custodians whose documents were potentially relevant to the matters under investigation. These custodians include the three principal subjects (Daskine, Prescott, and Serrano) as well as eight additional VCR personnel in the operations, accounting, and vendor-management functions. To date, documents have been collected from eight (8) of the eleven identified custodians. Collections from the remaining three custodians are either in progress or under evaluation for relevance and proportionality.
Approximately 1.2 million documents have been collected across all custodians. The collected documents encompass a broad range of source types, including:
• Email communications and attachments from VHG and VCR email systems (Strathmore Data Systems / Ashbury Software environment);
• Documents stored on VHG and VCR shared network drives and departmental file repositories;
• Financial accounting records extracted from VCR's enterprise accounting platform (Northgate Solutions);
• Contracts, purchase agreements, and closing documents related to timeshare-interest sales;
• Purchase orders, vendor invoices, and payment records from VCR's vendor-management system; and
• Other miscellaneous documents, including corporate-formation records, bank statements, and correspondence with third parties.
All collected documents have been transferred to Triton discovery Solutions Inc. for ingestion and processing in Triton's secure hosted environment.
B. Review Progress
Following standard e-discovery processing — including de-duplication, de-NISTing (removal of system files and other non-user-generated content), and application of date-range and keyword search-term filters — the investigation team implemented a TAR 2.0 predictive-coding workflow through Triton's platform. The TAR 2.0 model was trained on an initial seed set of manually reviewed documents and has been iteratively refined through multiple rounds of quality-control sampling.
As of the date of this report, approximately 347,000 documents have been reviewed for substantive relevance and responsiveness. Document review is substantially complete for the three core custodians — Daskine, Prescott, and Serrano — whose documents constitute the primary evidentiary base for the investigation. The review of documents from secondary custodians (VCR operations and accounting staff) is ongoing and is expected to conclude by mid-November 2023.
The investigation team has identified and tagged key document categories, including documents relating to (i) timeshare-interest sales transactions and revenue-recognition practices, (ii) purchase orders and vendor invoices associated with the three suspect entities, (iii) communications among Daskine, Prescott, and Serrano concerning financial reporting and vendor management, and (iv) communications with HSA and other external parties. Key documents ("hot documents") have been segregated into a separate review set for detailed analysis and potential use in witness interviews.
C. Privilege Log
Privilege logging is proceeding concurrently with the substantive document review. The investigation team is logging all documents withheld or redacted on the basis of attorney-client privilege and/or work-product doctrine protection. As of the date of this report, approximately 3,100 documents have been logged as withheld or redacted. The final privilege log is expected to encompass a larger total as the review of the remaining secondary custodians is completed. The privilege log is being maintained in a format consistent with the requirements of the Federal Rules of Civil Procedure and applicable local rules, in anticipation of potential production obligations arising from the SEC's preliminary inquiry or any subsequent proceedings.
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IV. Witness Interviews — Summary of Subject Interviews
A. Overview. Since the first interim report, the investigation team has made significant progress in the interview phase of the investigation. The team has conducted initial interviews of all three principal subjects — Serrano, Daskine, and Prescott — bringing the total number of interviews conducted to date to thirteen (13) interviews of eleven (11) unique witnesses. The previous interviews, summarized in the first interim report, included interviews of VCR accounting staff, operations personnel, and other non-subject witnesses.
All subject interviews were conducted at C&H's Miami office. At the outset of each subject interview, the investigation team administered Upjohn warnings, advising each subject that (i) C&H represents VHG and the Audit Committee, not the individual subject; (ii) the purpose of the interview is to gather facts in connection with the investigation; (iii) the attorney-client privilege belongs to VHG and the Audit Committee, not to the individual; and (iv) VHG and the Audit Committee may choose to waive the privilege and disclose the substance of the interview to third parties, including government regulators. Each subject's individual counsel was present throughout the interview.
The following subsections summarize the key substance of each subject interview.
B. Interview of Ryan Mateo Serrano — Session 1 (September 27, 2023)
Ryan Mateo Serrano has served as VCR's Controller for approximately five years. Serrano was interviewed at C&H's Miami office on September 27, 2023. His individual counsel, Marco A. Ruiz of Coletti & Ruiz PA (Tampa, FL), was present throughout the interview. Upjohn warnings were administered and acknowledged at the outset.
Serrano's interview covered both the revenue-recognition practices at VCR and his role in the expense-reimbursement scheme. With respect to the fictitious vendor scheme, Serrano acknowledged his role in creating purchase orders attributed to purported vendors that, upon investigation, appear to be shell entities with no legitimate contracting operations. However, Serrano characterized his actions as having been undertaken at the express direction of Daskine, whom Serrano described as having instructed him to generate purchase orders for "capital improvement" work at various VCR properties. Serrano stated that Daskine communicated these instructions both verbally and, on certain occasions, via text messages on personal mobile devices.
Serrano described the mechanics of the fictitious vendor scheme in detail. According to Serrano, purchase orders were created in VCR's vendor-management system for purported capital-improvement work — including lobby renovations, pool-area landscaping, and building-exterior maintenance — at VCR's Coral Dune Resort & Residences (Destin, FL) and Palmetto Bluff Club (Sarasota, FL) properties. These purchase orders were then directed to bank accounts held by three entities:
• Gulf Standard Contracting LLC ("GSC");
• Clearwater Design Collective Inc. ("CDC"); and
• Suncoast Property Services LLC ("SPS").
Serrano confirmed that he served as the registered agent for both Gulf Standard Contracting LLC and Clearwater Design Collective Inc. with the Florida Division of Corporations. Serrano stated that Daskine asked him to serve as registered agent and that he agreed to do so. Serrano stated that he did not receive any direct financial compensation from the shell entities beyond his regular VCR salary, although he acknowledged that Daskine had provided him with several gifts, including tickets to sporting events and a fishing trip, which Serrano characterized as expressions of gratitude for his cooperation.
Regarding the revenue-recognition practices, Serrano stated that the practice of booking timeshare-interest deposits as completed-sale revenue upon execution of the purchase agreement, rather than upon expiration of the rescission period, was established before his tenure as Controller and was directed by Prescott and, ultimately, by Daskine. Serrano stated that he raised concerns about this practice with Prescott on at least one occasion in late 2022 but was told that the practice was consistent with VCR's historical treatment and that it would be "cleaned up" during the quarterly close process.
Serrano indicated willingness to cooperate further with the investigation. C&H has commenced discussions with Serrano's counsel, Mr. Ruiz, regarding the terms of a formal cooperation agreement. Those discussions are underway and are expected to be finalized in November 2023.
C. Interview of Garrett W. Daskine (October 4, 2023)
Garrett W. Daskine has served as VCR's Division President for seventeen years and is among the longest-tenured senior executives in the VHG organization. Daskine was interviewed at C&H's Miami office on October 4, 2023. His individual counsel, James Corwin Merritt of Merritt & Dunleavy LLP (Miami, FL), was present throughout the interview. Upjohn warnings were administered and acknowledged at the outset.
Daskine's interview addressed both the revenue-recognition practices and the expense-reimbursement scheme. With respect to revenue recognition, Daskine denied directing the premature recognition of timeshare-interest deposits and characterized VCR's revenue-recording practices as consistent with procedures that had been in place at VCR for many years prior to his assumption of the Division President role. When asked specifically whether he was aware that timeshare-interest deposits were being booked as completed-sale revenue before the expiration of the ten-day statutory rescission period under Florida Statute § 721.10, Daskine stated that he understood the finance team to be handling revenue recognition in accordance with applicable accounting standards and that he relied on the expertise of Prescott and Serrano in that regard.
With respect to the fictitious vendor scheme, Daskine denied knowledge of the shell entities Gulf Standard Contracting LLC and Suncoast Property Services LLC despite documentary evidence obtained by the investigation team — including Florida Division of Corporations records and bank-account ownership records — indicating that Daskine is the beneficial owner of both entities. When presented with the Florida Division of Corporations filing for Gulf Standard Contracting LLC reflecting his name as the sole member (through a nominee arrangement), Daskine stated that he could not recall the specific details of that filing and suggested that his name may have been used without his authorization. Daskine provided no further explanation or documentation to support this assertion.
Daskine was asked about specific vendor invoices associated with the shell entities. In particular, the investigation team questioned Daskine regarding Invoice No. GSC-2023-007, a $94,500 invoice dated February 14, 2023, from Gulf Standard Contracting LLC, purportedly for "lobby renovation materials — Coral Dune Phase III." Daskine stated that he did not recall the specific invoice and could not provide any information regarding the work purportedly performed or the materials purportedly supplied. The investigation team noted that no evidence of any lobby renovation work corresponding to this invoice has been identified through physical site inspections or contractor-licensing database searches.
At the conclusion of the interview, Daskine, through his counsel, declined a follow-up interview. Mr. Merritt stated that Daskine had cooperated fully and that further interviews would be unproductive. Notwithstanding this refusal, on October 25, 2023, C&H sent a letter to Merritt & Dunleavy LLP requesting additional documents in Daskine's possession, custody, or control — including personal financial records, personal email and text-message communications relating to VCR business, and bank statements for accounts held by or for the benefit of Gulf Standard Contracting LLC and Suncoast Property Services LLC — and renewing the request for a follow-up interview. As of the date of this report, a response from Merritt & Dunleavy LLP is pending.
D. Interview of Nicole Prescott — Session 1 (October 11, 2023)
Nicole Prescott has served as VCR's Vice President of Finance for nine years. Prescott was interviewed at C&H's Miami office on October 11, 2023. Her individual counsel, Candace O'Brien Langford of Langford Pace LLP (Tallahassee, FL), was present throughout the interview. Upjohn warnings were administered and acknowledged at the outset.
Prescott's interview addressed both the revenue-recognition practices and her knowledge of the shell entities involved in the expense-reimbursement scheme.
With respect to revenue recognition, Prescott made a significant acknowledgment. Prescott confirmed that timeshare-interest purchase deposits at VCR were booked as completed-sale revenue upon the signing of the purchase agreement, prior to the expiration of the ten-day statutory rescission period mandated by Florida Statute § 721.10. When asked why this practice was followed, Prescott stated that she believed it was an "operational efficiency" designed to ensure timely revenue reporting and that it was consistent with guidance she had received from division leadership — specifically, from Daskine. Prescott stated that she understood any rescissions would be reversed in the normal course and that the net effect over time would be immaterial. The investigation team notes that this characterization is inconsistent with the evidence, which demonstrates a persistent rolling overstatement that was material to VHG's consolidated financial statements.
With respect to the shell entities, Prescott was questioned about her knowledge of and involvement with Clearwater Design Collective Inc. ("CDC"). Prescott initially declined to answer questions about CDC. Following a sidebar consultation with her counsel, Ms. Langford, Prescott confirmed that she was aware of the entity but denied receiving any personal financial benefit from CDC. This denial is contradicted by documentary evidence obtained by the investigation team, including Florida Division of Corporations records reflecting that Prescott is the sole shareholder of Clearwater Design Collective Inc., which was formed on June 4, 2021. In addition, preliminary fund-tracing analysis conducted by Crestline has identified fund flows from CDC's bank account to accounts held by or for the benefit of Prescott, as described in Section V.B below.
Given the discrepancies between Prescott's statements and the documentary evidence, C&H sent a letter to Langford Pace LLP on October 30, 2023, requesting a second interview to address additional evidence regarding Clearwater Design Collective Inc. and the revenue-recognition scheme. The second interview has been scheduled for November 8, 2023.
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V. Preliminary Forensic Accounting Findings — Crestline Forensic Advisory LLC
Crestline Forensic Advisory LLC has made substantial progress in its forensic accounting analysis since the first interim report. The following subsections summarize Crestline's preliminary findings with respect to (A) the revenue-recognition analysis and (B) the expense-reimbursement irregularity analysis. Crestline's work remains ongoing, and its final analysis will be incorporated into the final investigation report.
A. Revenue-Recognition Analysis
1. Scope and Methodology. Crestline analyzed VCR's timeshare-interest sales transactions for the period beginning with the third fiscal quarter of 2022 (quarter ending September 30, 2022) through the second fiscal quarter of 2023 (quarter ending June 30, 2023) — a total of four fiscal quarters. The analysis focused on the timing of revenue recognition relative to the ten-day rescission period mandated by Florida Statute § 721.10, which provides purchasers of timeshare interests in Florida with an unconditional right to cancel the purchase agreement within ten days of execution. The analysis examined whether VCR's revenue-recognition practices resulted in the premature recording of revenue before the contractual rescission right had lapsed and, if so, the magnitude of the resulting overstatement.
The analysis encompassed timeshare-interest sales transactions at two VCR properties:
• Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, FL 32541 — specifically, Phase III timeshare units; and
• Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, FL 34228 — specifically, Phase II timeshare units.
Crestline's methodology included a transaction-by-transaction analysis of all timeshare-interest purchase agreements executed during the relevant period, comparison of the date of revenue recognition in VCR's accounting records against the date of expiration of the statutory rescission period for each transaction, identification of all rescission events and the timing of the corresponding revenue reversals, and calculation of the net revenue overstatement for each fiscal quarter.
2. Findings — Revenue Overstatement by Quarter. Crestline's analysis confirmed that VCR systematically booked timeshare-interest purchase deposits as completed-sale revenue upon execution of the purchase agreement, rather than upon expiration of the ten-day statutory rescission period. This practice resulted in the premature recognition of revenue across all four quarters examined.
Moreover, in numerous cases during the investigated period, purchasers exercised their statutory rescission rights within the ten-day window, but the corresponding revenue reversal was not recorded until the following quarter. This practice created a persistent rolling overstatement of revenue that carried forward from quarter to quarter, inflating VCR's reported financial results on a sustained basis.
Crestline also determined that VCR's rescission rate during the investigated period was approximately 14.3%, which is notably higher than the industry-average rescission rate of approximately 11% for comparable timeshare-interest sales transactions. This elevated rescission rate amplified the magnitude of the revenue overstatement because a greater proportion of prematurely recognized revenue was ultimately reversed.
The aggregate revenue overstatement, as determined by Crestline's analysis, is summarized by fiscal quarter in the following table:
The Q1 2023 overstatement of $9.8 million is consistent with the figure initially flagged by HSA during its interim review, which served as the catalyst for the Audit Committee's decision to initiate this investigation. The expanded analysis reveals that the premature revenue-recognition practice was not limited to Q1 2023 but extended across at least four consecutive fiscal quarters, with the aggregate impact nearly three times the amount initially identified.
3. Impact on VHG Consolidated Financial Statements. The revenue overstatement at VCR is material to VHG's consolidated financial statements. The following analysis quantifies the impact:
• VCR FY 2022 revenue as reported: $438.7 million. VCR's revenue constituted approximately 23.46% of VHG's consolidated revenue of $1.87 billion for FY 2022, making VCR a significant reporting segment.
• FY 2022 revenue overstatement (Q3 + Q4 2022): $10.8 million ($4.7 million + $6.1 million). This overstatement represents approximately 2.46% of VCR's reported FY 2022 revenue of $438.7 million.
• FY 2022 after-tax income overstatement: Approximately $8.17 million. This figure is derived by applying VHG's effective tax rate of 24.3% to the pre-tax overstatement of $10.8 million ($10.8 million × (1 – 0.243) = $8.17 million).
• Materiality assessment: The $8.17 million after-tax income overstatement represents approximately 5.74% of VHG's reported FY 2022 net income of $142.3 million. Under standard quantitative materiality thresholds — generally, a 5% threshold applied to net income is a commonly referenced benchmark — this overstatement exceeds the threshold for materiality.
Crestline's analysis is consistent with, and provides detailed support for, HSA's initial identification of the potential material weakness in VCR's internal controls over financial reporting, as communicated to the Audit Committee on June 19, 2023.
4. ASC 606 Implications. As a preliminary matter, Crestline and C&H have evaluated VCR's revenue-recognition practices against the requirements of ASC 606, Revenue from Contracts with Customers. The preliminary conclusion is that VCR's practice of recognizing revenue upon execution of the purchase agreement — before the expiration of the statutory rescission period — was inconsistent with ASC 606's requirements in several respects.
Under ASC 606, revenue is recognized when (or as) an entity satisfies a performance obligation by transferring a promised good or service to a customer. A critical element of this framework is the concept of "transfer of control," which requires assessment of whether the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Where a contract includes a right of return or rescission, ASC 606 requires the entity to consider the existence of the rescission right as a form of variable consideration and to apply the variable-consideration constraint, recognizing revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
The existence of the ten-day statutory rescission right under Florida Statute § 721.10 created precisely this type of variable-consideration constraint. By booking deposits as completed-sale revenue before the rescission period expired, VCR failed to appropriately constrain its revenue recognition to account for the probability that purchasers would exercise their rescission rights — a probability that was, in fact, realized at a rate of approximately 14.3% during the investigated period.
Additional analysis under ASC 606 is ongoing and will be presented in the final investigation report.
B. Expense-Reimbursement Irregularity Analysis
1. Scope and Methodology. In addition to the revenue-recognition analysis, Crestline analyzed VCR's capital-improvement expenditures for the period from July 2021 through June 2023 — a span of approximately twenty-four (24) months. The purpose of this analysis was to identify payments to vendors that could not be corroborated as legitimate contractors and to trace the flow of funds from VCR through any such vendors to their ultimate disposition.
Crestline's methodology included a comprehensive review of all purchase orders, vendor invoices, and payment records in VCR's vendor-management system for the relevant period. For each vendor identified as a recipient of capital-improvement payments, Crestline sought to corroborate the vendor's legitimacy through (i) Florida contractor-licensing databases maintained by the Department of Business and Professional Regulation, (ii) certificates of insurance and liability coverage, (iii) physical site inspections at the addresses listed for the vendor, and (iv) cross-referencing against corporate-formation records maintained by the Florida Division of Corporations.
This process identified three purported vendors that could not be corroborated as legitimate contracting entities through any of these verification methods.
2. Shell Entity Identification. The three entities identified as shell entities, together with key details regarding their formation, ownership, and invoicing activity, are as follows:
Gulf Standard Contracting LLC ("GSC")
• Entity type: Florida limited liability company
• Date of formation: March 12, 2021
• Registered agent: Ryan Mateo Serrano
• Sole member: Garrett W. Daskine (through a nominee arrangement)
• Number of invoices submitted to VCR: 19
• Total invoiced and paid: $812,400
• Purported services: Capital-improvement work including lobby renovation, building-exterior maintenance, and related construction services at Coral Dune Resort & Residences and Palmetto Bluff Club
Clearwater Design Collective Inc. ("CDC")
• Entity type: Florida corporation
• Date of formation: June 4, 2021
• Registered agent: Ryan Mateo Serrano
• Sole shareholder: Nicole Prescott
• Number of invoices submitted to VCR: 16
• Total invoiced and paid: $587,600
• Purported services: Interior-design consulting and furnishing procurement for VCR properties
Suncoast Property Services LLC ("SPS")
• Entity type: Florida limited liability company
• Date of formation: November 18, 2021
• Registered agent: Panhandle Agent Services Inc. (Tallahassee, FL) — a commercial registered-agent service
• Sole member: Garrett W. Daskine
• Number of invoices submitted to VCR: 12
• Total invoiced and paid: $430,000
• Purported services: Grounds maintenance, landscaping, and property-services work at VCR properties
None of these three entities holds a valid Florida contractor's license, maintains commercial general-liability insurance, or operates from a verifiable business address. Physical site inspections at the addresses listed on the entities' invoices confirmed that no contracting or design operations are conducted at those locations. In each case, the listed address corresponds to either a residential property or a commercial mailbox service.
3. Aggregate Improper Payments. The total payments from VCR to the three shell entities during the investigated period are as follows:
The aggregate improper payments total $1,830,000 (approximately $1.83 million), disbursed through 47 fictitious purchase orders over an approximately two-year period.
The largest single invoice identified in the analysis is Invoice No. GSC-2023-007, in the amount of $94,500, dated February 14, 2023, from Gulf Standard Contracting LLC. The invoice purports to cover "lobby renovation materials — Coral Dune Phase III." No evidence of any corresponding renovation work or materials delivery has been identified. As noted in Section IV.C above, Daskine stated during his interview that he did not recall this specific invoice.
4. Fund Tracing — Preliminary Results. Crestline has commenced the process of tracing fund flows from VCR's operating bank accounts through the three shell entities to the ultimate recipients and uses of the diverted funds. This analysis involves review of bank statements, wire-transfer records, check images, and credit-card statements associated with the shell entities and their beneficial owners.
While the fund-tracing analysis is ongoing, preliminary results have identified payments from the shell entities directed to the following categories of expenditures:
• Personal credit-card payments of Daskine and Prescott, including payments on Pinnacle Partners LLC and Visa accounts held in their individual names;
• Residential renovation expenditures at Daskine's personal residence, located at 312 Harbor View Lane, Destin, FL 32541, including payments to legitimate contractors for kitchen and bathroom remodeling work;
• Boat-slip fees at a marina facility in the Destin, Florida area; and
• Luxury-goods purchases, including high-end electronics and designer merchandise.
The fund-tracing analysis is ongoing. Crestline anticipates completing its comprehensive fund-tracing memorandum in late November or early December 2023. The memorandum will provide a detailed accounting of all fund flows from VCR through the shell entities to the ultimate recipients and will be incorporated into the final investigation report.
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VI. Coordination with External Parties
A. Hargrove, Steen & Aldrich LLP (Independent Auditor)
C&H continues to coordinate with HSA lead engagement partner William Gentry pursuant to the communication and information-sharing protocols established in C&H's letter to HSA dated August 9, 2023. These protocols were designed to facilitate appropriate information sharing between the investigation team and the independent auditor while preserving the attorney-client privilege and work-product protections applicable to the investigation.
HSA's interim review of VCR's Q2 2023 financial results remains on hold pending the outcomes of the investigation. HSA has indicated that it will not be in a position to complete its interim review or to issue any comfort with respect to VCR's financial statements until the investigation has concluded and the scope and magnitude of any necessary restatements have been determined.
The investigation team's findings regarding the revenue overstatement are consistent with, and substantially expand upon, HSA's initial identification of approximately $9.8 million in potentially prematurely recognized timeshare-interest deposits in Q1 2023. The investigation has confirmed that the premature revenue-recognition practice was not isolated to a single quarter but extended across at least four consecutive fiscal quarters, with an aggregate overstatement of $26.4 million. C&H has communicated the general parameters of these findings to Mr. Gentry in accordance with the established protocols.
B. Westlake Burris & Holt LLP (Outside Securities Counsel)
C&H continues to coordinate with Irene Castellanos at Westlake Burris & Holt LLP ("Westlake Burris"), which serves as VHG's outside securities counsel, regarding SEC disclosure obligations and related securities-law matters arising from the investigation.
As previously reported, VHG filed a Form 8-K on August 14, 2023, under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review), disclosing that VHG's previously issued financial statements for FY 2022 (specifically, Q3 and Q4 2022) and Q1 2023 should no longer be relied upon pending the completion of the investigation and any necessary restatements. The Item 4.02 disclosure was prepared in consultation with C&H and HSA.
Preliminary discussions are underway between C&H, Westlake Burris, and HSA regarding the scope and timing of potential amended filings, including an amended Form 10-K for FY 2022 and amended Forms 10-Q for the affected interim periods, once the investigation concludes and the full scope of any necessary restatements has been determined. These discussions remain at a preliminary stage, and no definitive timeline for amended filings has been established.
C. SEC Division of Enforcement — Preliminary Inquiry
In September 2023, the SEC Division of Enforcement opened a preliminary inquiry into the matters under investigation. The inquiry has been assigned File No. HO-14237. To date, the SEC has not issued a subpoena or a formal order of investigation. The inquiry remains at the preliminary stage.
C&H has coordinated with Westlake Burris regarding the strategy for voluntary production of non-privileged investigation materials to the SEC staff, as addressed in detail in C&H's September 15, 2023 memorandum to the Audit Committee. That memorandum analyzed the strategic considerations associated with voluntary production, including the potential benefits of demonstrating cooperation, the risks of premature disclosure of investigative findings, and the privilege implications of any production. The Audit Committee authorized the approach recommended in that memorandum, and C&H and Westlake Burris are proceeding accordingly.
As of the date of this report, no Department of Justice referral has been identified in connection with the SEC's preliminary inquiry or otherwise. C&H and Westlake Burris continue to monitor for any indication of a parallel criminal investigation.
D. Individual Counsel for Subjects
The investigation team continues to coordinate with individual counsel for each of the three subjects regarding interview scheduling, document production, and related matters. The current status of each subject's representation is as follows:
• Garrett W. Daskine: Represented by James Corwin Merritt of Merritt & Dunleavy LLP, Miami, FL. As noted in Section IV.C, Daskine has declined a follow-up interview. A document-request letter was sent to Merritt & Dunleavy LLP on October 25, 2023; a response is pending as of the date of this report.
• Nicole Prescott: Represented by Candace O'Brien Langford of Langford Pace LLP, Tallahassee, FL. A request for a second interview was sent to Langford Pace LLP on October 30, 2023. The second interview has been scheduled for November 8, 2023.
• Ryan Mateo Serrano: Represented by Marco A. Ruiz of Coletti & Ruiz PA, Tampa, FL. Discussions regarding a formal cooperation agreement between Serrano and VHG/the Audit Committee are in progress and are expected to be finalized in November 2023. A follow-up interview of Serrano will be scheduled following the execution of the cooperation agreement.
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VII. Status of Personnel Actions
As reported in the first interim status report, Daskine, Prescott, and Serrano were placed on administrative leave, effective August 7, 2023, pending the outcome of the investigation. Administrative leave was implemented at the recommendation of C&H in order to preserve the integrity of the investigation and to prevent potential spoliation of evidence or interference with witnesses.
All three subjects remain on administrative leave as of the date of this report. No further personnel actions have been taken pending the completion of the investigation. The Company has continued to provide the subjects with their regular compensation and benefits during the period of administrative leave, consistent with the terms of their respective employment agreements and applicable Company policies.
C&H will provide the Audit Committee with specific recommendations regarding personnel actions — including potential termination for cause under the applicable employment agreements, clawback of incentive compensation, and related matters — in a future memorandum once the evidentiary record is complete and the investigation's factual findings have been finalized.
VIII. D&O Insurance Considerations
C&H has coordinated with VHG's general counsel and outside insurance-coverage counsel to ensure the preservation of the Company's rights under its directors' and officers' liability insurance program. The relevant policies are as follows:
• Primary D&O Policy: Issued by North Atlantic Indemnity Corp., Policy No. NAI-DOL-2023-004891, for the policy period January 1, 2023 through December 31, 2023. The primary-tower limit is $25 million per claim / $50 million aggregate.
• Side A DIC Policy: Issued by Ironbridge Specialty Insurance Ltd., providing non-indemnifiable Side A excess difference-in-conditions coverage with a limit of $15 million.
A timely notice of circumstances has been provided to both carriers, advising them of the facts giving rise to the investigation and the potential for claims against the Company, its directors, and its officers. As of the date of this report, no coverage disputes have been identified by either carrier. C&H and outside insurance-coverage counsel continue to monitor the carriers' responses and to preserve all applicable rights under the policies, including with respect to potential advancement of defense costs for the individual subjects.
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IX. Budget and Cost Update
The following is a summary of investigation costs incurred to date and projected total costs through the anticipated close of the investigation:
Calderwood & Harkness LLP
Fees incurred through October 15, 2023: approximately $1,850,000 (of an estimated total of $3,420,000 through investigation close). Current billing rates for the C&H investigation team are as follows:
Crestline Forensic Advisory LLC
Fees incurred to date: approximately $680,000 (of a $1,150,000 flat-fee engagement). Crestline's work to date represents approximately 1,813 hours at a blended rate of approximately $375/hr, of an anticipated total of approximately 3,067 hours through the completion of the engagement.
Triton discovery Solutions Inc.
Fees incurred to date: approximately $310,000 (of an estimated total of $487,000 for hosting, processing, TAR licensing, and production services).
Total Investigation Cost Summary
The investigation budget remains within the parameters discussed with and approved by the Audit Committee at the commencement of the engagement. C&H will promptly notify the Audit Committee if any developments arise that may cause the investigation costs to exceed the approved budget parameters.
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X. Anticipated Next Steps
The investigation team anticipates undertaking the following key activities in the coming weeks:
1. Second interview of Nicole Prescott. The second interview of Prescott has been scheduled for November 8, 2023, at C&H's Miami office, with her counsel, Ms. Langford, present. The interview will address, among other topics, the additional documentary evidence regarding Prescott's ownership of Clearwater Design Collective Inc. and her role in the revenue-recognition practices at VCR.
2. Finalization of cooperation agreement with Ryan Mateo Serrano. Discussions with Serrano's counsel, Mr. Ruiz, regarding the terms of a formal cooperation agreement are ongoing and are expected to be finalized in mid-November 2023. The cooperation agreement will establish the terms and scope of Serrano's further cooperation with the investigation.
3. Follow-up interview of Ryan Mateo Serrano. A follow-up interview of Serrano will be scheduled promptly following the execution of the cooperation agreement. The follow-up interview will seek to obtain additional detail regarding the mechanics of both the revenue-recognition scheme and the fictitious vendor scheme, including any additional individuals who may have been aware of or participated in the misconduct.
4. Continued pursuit of follow-up interview and document production from Daskine. C&H will continue to pursue, through Merritt & Dunleavy LLP, a follow-up interview and production of personal documents from Daskine. If Daskine continues to decline cooperation, C&H will assess the implications for the investigation's findings and will advise the Audit Committee accordingly.
5. Completion of Crestline fund-tracing analysis. Crestline's comprehensive fund-tracing analysis is expected to be completed in late November or early December 2023. The analysis will trace all fund flows from VCR's operating accounts through the three shell entities to their ultimate disposition and will quantify the amounts diverted for the personal benefit of each subject.
6. Preparation of shell-entity analysis memorandum. C&H and Crestline will prepare a comprehensive memorandum analyzing the formation, ownership, invoicing activity, and fund flows associated with each of the three shell entities. This memorandum is expected to be completed in late November 2023.
7. Completion of document review for remaining secondary custodians. The review of documents from secondary custodians (VCR operations and accounting staff) is expected to be completed by mid-November 2023, at which point the document review phase of the investigation will be substantially concluded.
8. Continued coordination with Westlake Burris regarding SEC inquiry and amended filings. C&H will continue to coordinate with Westlake Burris regarding the SEC Division of Enforcement's preliminary inquiry (File No. HO-14237), including any voluntary production of non-privileged materials, and regarding the scope and timing of potential amended SEC filings once the investigation has concluded.
9. Final Investigation Report. The final investigation report, including comprehensive factual findings, legal analysis, and recommendations, is targeted for delivery to the Audit Committee in early January 2024. This timeline is contingent upon the investigation team's ability to complete the remaining interviews, the cooperation agreement with Serrano, and the Crestline analyses as described above.
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XI. Concluding Observations
The evidence developed to date strongly indicates that Daskine directed, and Prescott implemented, a scheme to prematurely recognize timeshare-interest deposit revenue at VCR in violation of the requirements of ASC 606 and the contractual and statutory constraints imposed by Florida Statute § 721.10. This scheme resulted in an aggregate overstatement of approximately $26.4 million in VCR revenue over four consecutive fiscal quarters (Q3 2022 through Q2 2023), with a material impact on VHG's consolidated financial statements, including an after-tax income overstatement of approximately $8.17 million for FY 2022 alone — representing approximately 5.74% of VHG's reported FY 2022 net income.
Concurrently, the evidence strongly indicates that Daskine, Prescott, and Serrano participated in a fictitious vendor scheme that diverted approximately $1.83 million in VCR funds through forty-seven fictitious purchase orders directed to three shell entities — Gulf Standard Contracting LLC, Clearwater Design Collective Inc., and Suncoast Property Services LLC — that are beneficially owned by Daskine and Prescott. Preliminary fund tracing indicates that the diverted funds were used for the personal benefit of Daskine and Prescott.
These findings have potential implications under the federal securities laws, including but not limited to the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, the books-and-records and internal-controls provisions of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and the officer-certification requirements of Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 ("SOX"). In addition, the findings may implicate SOX Section 404's requirements regarding management's assessment of internal controls over financial reporting. A comprehensive analysis of these legal implications will be provided in the final investigation report.
We will continue to provide regular updates to the Audit Committee as the investigation progresses and are available to discuss this report, or any aspect of the investigation, at the Committee's convenience. We recommend that the Audit Committee schedule a meeting at its earliest opportunity to discuss the findings and next steps addressed in this report.