letter-to-langford-pace-termination.docx

1021-00008 · Client 1021 · Correspondence

letter-to-langford-pace-termination.docx DOCUMENT Litigation

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CALDERWOOD & HARKNESS LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Telephone: (305) 814-7200 Facsimile: (305) 814-7201 www.calderwoodharkness.com

December 18, 2023

VIA HAND DELIVERY AND EMAIL

PRIVILEGED AND CONFIDENTIAL

Candace O'Brien Langford, Esq. Langford Pace LLP 215 South Monroe Street, Suite 1020 Tallahassee, Florida 32301

Re: Termination of Employment — Nicole Prescott, Vice President of Finance, Verimark Coastal Resorts LLC

C&H Matter No.: 1021-00008

Dear Ms. Langford:

I. Purpose and Authority

I write on behalf of the Audit Committee of the Board of Directors (the "Audit Committee") of Verimark Hospitality Group Inc. ("VHG"), a Delaware corporation whose common stock is publicly traded on the Nasdaq Global Select Market under the ticker symbol "VMRK," and which maintains its principal executive offices at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. As you are aware, Calderwood & Harkness LLP serves as independent investigation counsel to the Audit Committee, having been retained pursuant to an engagement letter dated July 17, 2023, executed by Audit Committee Chair Diane Kowalski on behalf of the Audit Committee.

The purpose of this letter is to notify you, as counsel of record for Nicole Prescott ("Ms. Prescott"), that VHG and its wholly owned subsidiary Verimark Coastal Resorts LLC ("VCR"), a Florida limited liability company with its principal office at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541, have determined to terminate Ms. Prescott's employment for cause, effective immediately as of the date of this letter, December 18, 2023. The Audit Committee has authorized this communication following its review of the findings and recommendations set forth in Calderwood & Harkness's confidential memorandum to the Audit Committee dated December 12, 2023, and the Board of Directors' subsequent ratification of the Audit Committee's recommendation at an emergency session held on December 15, 2023. This letter sets forth the grounds for Ms. Prescott's termination, the logistics and consequences thereof, and certain continuing obligations of Ms. Prescott following the cessation of her employment.

II. Background — Investigation Context

As you know, on July 24, 2023, the Audit Committee authorized Calderwood & Harkness LLP to conduct an internal investigation (the "Investigation") into expense-reporting irregularities and premature revenue-recognition practices at VCR. The Investigation was prompted by a communication dated June 19, 2023, from Hargrove, Steen & Aldrich LLP ("HSA"), VHG's independent registered public accounting firm, in which HSA identified a potential material weakness in VCR's internal controls over financial reporting relating to VCR's revenue-recognition practices. HSA's identification of this potential material weakness arose during HSA's interim review of VHG's consolidated financial statements for the fiscal quarter ended March 31, 2023 (Q1 2023).

Ms. Prescott has served as Vice President of Finance at VCR since her appointment to that role, and during the relevant period she was a nine-year veteran of the VHG organization. In her capacity as Vice President of Finance, Ms. Prescott was responsible for, among other things, oversight of VCR's financial reporting, maintenance of VCR's internal controls over financial reporting, and supervision of VCR's accounting and finance personnel.

In light of the scope and seriousness of the matters under investigation, Ms. Prescott was placed on paid administrative leave effective August 7, 2023, along with VCR Division President Garrett W. Daskine and VCR Controller Ryan Mateo Serrano. Ms. Prescott's administrative leave was communicated to her in writing on that same date, and the terms of the leave were subsequently confirmed in correspondence directed to you on August 14, 2023.

During the course of the Investigation, Ms. Prescott was interviewed on two occasions: the first interview took place on October 11, 2023 ("Session 1"), and the second interview took place on November 8, 2023 ("Session 2"). You were present as Ms. Prescott's counsel at both interviews. At the outset of each interview, Ms. Prescott was provided with customary Upjohn advisements. The substance of Ms. Prescott's testimony during both sessions has been considered in connection with the findings summarized below.

III. Grounds for Termination — For Cause

The Investigation, which included the review of approximately 1.4 million documents and electronically stored information, interviews of twenty-three current and former employees and contractors, and forensic accounting analysis performed by Crestline Forensic Advisory LLC, identified the following categories of misconduct attributable to Ms. Prescott. The Audit Committee has determined that these findings constitute "cause" for the termination of Ms. Prescott's employment under the applicable provisions of her employment arrangement with VCR and VHG.

A. Revenue-Recognition Irregularities

The Investigation found that Ms. Prescott implemented and directed a scheme to prematurely recognize revenue from timeshare-interest deposit sales at VCR properties, including the Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541, and the Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228. Specifically, the Investigation determined that, at Ms. Prescott's direction, timeshare-interest purchase deposits were booked as completed-sale revenue upon the signing of purchase agreements by prospective purchasers, rather than upon the expiration of the statutory ten-day rescission period mandated by Section 721.10, Florida Statutes. This practice was implemented notwithstanding Ms. Prescott's acknowledged understanding — confirmed during her Session 1 interview — that the applicable accounting guidance under ASC 606 and ASC 978-605 required deferral of revenue recognition until the rescission period had lapsed without the purchaser exercising rescission rights.

When purchasers exercised their statutory rescission rights, the previously recognized revenue was not reversed until the following fiscal quarter, creating a persistent overstatement of VCR's — and, by consolidation, VHG's — reported revenue. The Investigation determined that the aggregate revenue overstatement attributable to this practice totaled approximately $26.4 million across four consecutive fiscal quarters, distributed as follows:

The fiscal year 2022 revenue overstatement resulting from this scheme totaled approximately $10.8 million, which produced an after-tax income overstatement of approximately $8.17 million. This figure represents approximately 5.74% of VHG's reported consolidated net income of $142.3 million for fiscal year 2022, a magnitude the Audit Committee considers material. Ms. Prescott's role in the implementation of this scheme was central: she was the senior VCR finance officer responsible for VCR's financial reporting, she personally directed the accounting treatment at issue, and she failed to disclose the true nature of VCR's revenue-recognition practices to HSA during the course of HSA's audit and interim review procedures.

B. Expense-Reimbursement Irregularities — Fictitious Vendor Scheme

The Investigation also identified Ms. Prescott as the sole shareholder of Clearwater Design Collective Inc. ("CDC"), a Florida corporation organized and filed with the Florida Division of Corporations on June 4, 2021. CDC served as one of three shell entities used to funnel improper payments from VCR under the guise of capital-improvement work at VCR-operated properties. Ms. Prescott's ownership of CDC was not disclosed on any VHG or VCR conflict-of-interest questionnaire, related-party-transaction certification, or annual compliance attestation during the relevant period, in violation of VHG's Related-Party Transaction Policy and VHG's Code of Business Conduct and Ethics.

The Investigation identified a total of sixteen (16) fictitious invoices submitted in the name of Clearwater Design Collective Inc. to VCR's accounts-payable function, totaling $587,600. These invoices purported to reflect capital-improvement work — including interior renovation, landscaping design, and furniture procurement — at the Coral Dune Resort & Residences and the Palmetto Bluff Club, but the Investigation found no evidence that any such work was actually performed by CDC. In multiple instances, the scope of work described in CDC's invoices duplicated work that had been separately contracted to, and performed by, legitimate third-party vendors.

The fictitious invoicing through CDC was part of a broader scheme involving a total of forty-seven (47) fictitious purchase orders totaling approximately $1.83 million across three shell entities: CDC, Gulf Standard Contracting LLC, and Suncoast Property Services LLC. The Investigation, through forensic accounting analysis conducted by Crestline Forensic Advisory LLC, traced funds disbursed by VCR to these shell entities to personal expenditures, including residential real-property purchases, personal automobile payments, and personal credit-card obligations. The scheme spanned a period of approximately two years, from July 2021 through June 2023.

C. Breach of Fiduciary and Employment Obligations

Ms. Prescott's conduct, as described above, constitutes serious and pervasive violations of her obligations under her employment agreement with VCR (effective March 15, 2019, as amended), VHG's Code of Business Conduct and Ethics (as most recently updated and distributed to all covered employees in January 2023), VHG's Related-Party Transaction Policy, VHG's Expense Reimbursement Policy, and VHG's Financial Reporting and Internal Controls Policy. Additionally, Ms. Prescott's conduct implicates potential violations of federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as VHG's obligations under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002. The foregoing conduct, individually and in the aggregate, constitutes "cause" for termination under the applicable provisions of Ms. Prescott's employment arrangement with VCR and VHG.

IV. Effective Date and Logistics of Termination

Ms. Prescott's employment with VCR and VHG is terminated for cause effective as of December 18, 2023. Ms. Prescott's administrative leave, which has been in effect since August 7, 2023, concludes simultaneously with the termination of her employment on this date.

All compensation, benefits, and perquisites provided to Ms. Prescott by VCR or VHG shall cease as of the termination date, except as otherwise required by applicable federal or state law, including, without limitation, Ms. Prescott's right to elect continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), for which VHG's benefits administrator will separately provide the required election notice.

We request that Ms. Prescott return all property of VHG and VCR in her possession, custody, or control within five (5) business days of the date of this letter, that is, no later than December 27, 2023. Such property includes, but is not limited to, any laptops, desktop computers, tablets, access cards, key fobs, mobile devices, corporate credit cards, printed or electronic documents, files, reports, memoranda, financial records, proprietary materials, and any other VHG or VCR property. All such property should be delivered to Patricia Navarro, General Counsel, Verimark Hospitality Group Inc., at VHG's headquarters located at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. Ms. Navarro may be reached at (813) 555-4200 to coordinate the logistics of return.

V. Post-Termination Obligations

A. Continuing Confidentiality Obligations

Ms. Prescott remains bound by all confidentiality, non-disclosure, and non-disparagement provisions contained in her employment agreement and any ancillary agreements entered into between Ms. Prescott and VHG or VCR, including, without limitation, the Proprietary Information and Inventions Assignment Agreement executed by Ms. Prescott on March 15, 2019. These obligations survive the termination of Ms. Prescott's employment in accordance with their terms.

We also remind Ms. Prescott, through you, that the Investigation and its findings are confidential. Any disclosure of the substance, findings, or proceedings of the Investigation to third parties — including but not limited to former colleagues, media outlets, or competitors of VHG — is prohibited, except as may be required by applicable law, court order, or in connection with regulatory proceedings. Nothing in this paragraph is intended to restrict Ms. Prescott's right to communicate with the Securities and Exchange Commission, the Department of Justice, or any other governmental authority, or to avail herself of any whistleblower protections to which she may be entitled under applicable law.

B. Document Preservation

Ms. Prescott's obligation to preserve all documents, electronically stored information, and tangible materials relevant to the Investigation continues notwithstanding the termination of her employment and shall remain in full force and effect until further notice from this firm or from VHG's General Counsel. This obligation is consistent with, and in addition to, the document-preservation notices issued on July 24, 2023, including both the company-wide preservation notice issued to all VHG and VCR personnel and the targeted custodian-specific preservation notice directed to Ms. Prescott and other VCR custodians identified as having potentially relevant materials in their possession, custody, or control.

To the extent Ms. Prescott possesses any personal devices — including personal laptops, smartphones, tablets, external storage drives, or personal email accounts — containing VHG or VCR business communications, records, or data, such devices and accounts must be preserved in their current state and made available for collection and forensic imaging by Crestline Forensic Advisory LLC or Calderwood & Harkness's litigation-support team, if such collection has not already been completed. We request that Ms. Langford contact the undersigned within ten (10) business days to confirm the status of preservation and to schedule any necessary collection of personal devices.

Any destruction, alteration, or concealment of potentially relevant materials following receipt of this letter and the prior preservation notices would constitute a serious matter and could result in adverse consequences in any subsequent judicial or regulatory proceeding.

C. Cooperation. VHG reserves the right to request Ms. Prescott's reasonable cooperation in connection with ongoing and future regulatory matters, including the preliminary inquiry opened by the SEC Division of Enforcement in September 2023 under File No. HO-14237. VHG further reserves the right to seek Ms. Prescott's cooperation in connection with any future litigation, arbitration, or regulatory proceedings related to the matters under investigation, including any third-party claims, class actions, or derivative proceedings that may be filed. Any such cooperation requests will be directed through you as Ms. Prescott's counsel.

D. Clawback and Indemnification

VHG reserves all rights under applicable law, its Amended and Restated Certificate of Incorporation, its Amended and Restated Bylaws, and any compensation agreements, plans, or arrangements (including, without limitation, the VHG 2019 Omnibus Incentive Plan and the VHG Executive Incentive Compensation Policy) to pursue clawback of any incentive compensation, performance bonuses, equity awards, or other compensation paid or awarded to Ms. Prescott during the period of misconduct, as permitted or required by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Rule 10D-1 under the Securities Exchange Act of 1934, and VHG's Compensation Recovery Policy adopted in compliance with Nasdaq Listing Rule 5608.

We further note that the termination of Ms. Prescott's employment for cause may affect Ms. Prescott's rights, if any, to indemnification and advancement of expenses under VHG's organizational documents and applicable directors' and officers' liability insurance coverage. Specifically, we note that VHG maintains a primary directors' and officers' liability insurance policy issued by North Atlantic Indemnity Corp. (policy number NAI-DOL-2023-004891, with a policy period of January 1, 2023 through December 31, 2023) and Side A difference-in-conditions coverage through Ironbridge Specialty Insurance Ltd. The terms and conditions of these policies, including any exclusions applicable to conduct determined to constitute fraud, dishonesty, or willful misconduct, will govern the availability of coverage, and VHG makes no representations regarding Ms. Prescott's entitlement to coverage thereunder.

VHG expressly reserves all rights and remedies at law and in equity arising from or related to Ms. Prescott's conduct as described in this letter and as more fully set forth in Calderwood & Harkness's confidential memorandum to the Audit Committee dated December 12, 2023.

VI. Regulatory and Disclosure Context

For your reference, VHG filed a Current Report on Form 8-K with the Securities and Exchange Commission 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 consolidated financial statements for fiscal year 2022 (specifically the quarters ended September 30, 2022 and December 31, 2022) and the fiscal quarter ended March 31, 2023 (Q1 2023) should no longer be relied upon due to the revenue-recognition issues identified during the Investigation.

VHG intends to file an amended Annual Report on Form 10-K/A for fiscal year 2022 and amended Quarterly Reports on Form 10-Q/A for the fiscal quarters ended March 31, 2023 and June 30, 2023, reflecting the restatement of the affected financial statements. VHG anticipates that these amended filings will be made in the first quarter of 2024, subject to the completion of HSA's re-audit procedures.

As noted above, the SEC Division of Enforcement has opened a preliminary inquiry under File No. HO-14237, and VHG is cooperating with the SEC staff and coordinating voluntary production of non-privileged investigation materials through its outside securities counsel, Westlake Burris & Holt LLP (contact partner: Irene Castellanos, Esq.). VHG's disclosure of the termination of Ms. Prescott's employment may be required in future filings with the SEC, including in VHG's next periodic report or, if deemed material, in a Current Report on Form 8-K.

VII. Reservation of Rights

VHG and VCR expressly reserve all rights and remedies available to them, whether at law, in equity, or under contract, including but not limited to claims for breach of fiduciary duty, breach of contract, fraud, constructive fraud, conversion, unjust enrichment, civil conspiracy, and any other cause of action arising from or related to Ms. Prescott's conduct as described in this letter. Nothing in this letter shall be construed as a waiver, release, or relinquishment of any claim that VHG, VCR, or any other VHG subsidiary or affiliate may have against Ms. Prescott, whether known or unknown, existing now or hereafter arising.

VHG further reserves the right to refer the matters described in this letter to appropriate federal, state, and local law-enforcement authorities for criminal investigation and potential prosecution, at such time and in such manner as VHG and the Audit Committee may determine in their sole discretion.

VIII. Request for Acknowledgment

We request that you confirm receipt of this letter and acknowledge the termination of Ms. Prescott's employment on behalf of your client at your earliest convenience, and in any event no later than December 22, 2023. Please direct all further communications regarding Ms. Prescott's termination, post-termination obligations, and any related matters to the undersigned at the following contact information:

Howard Quinn, Partner Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Direct Telephone: (305) 814-7248 Direct Facsimile: (305) 814-7249

Email: hquinn@calderwoodharkness.com

We ask that all further communications concerning Ms. Prescott continue to be directed through Langford Pace LLP, and we will likewise direct all communications intended for Ms. Prescott through your firm.

We trust that this letter provides clear and comprehensive notice of the termination and the continuing obligations described herein. We are available to discuss any logistical or procedural questions your client may have regarding the return of company property or the other matters addressed in this letter.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Howard Quinn, Partner 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131

cc: (via email)

Diane Kowalski, Audit Committee Chair, Board of Directors, Verimark Hospitality Group Inc.

Conrad Ashby, Calderwood & Harkness LLP

Liam Donahue, Calderwood & Harkness LLP

Patricia Navarro, General Counsel, Verimark Hospitality Group Inc.

Enclosures: None.

Note: The underlying personnel-actions recommendation memorandum dated December 12, 2023, constitutes privileged Audit Committee work product and has not been enclosed with this communication.

Quarter	Revenue Overstatement
Q3 2022 (quarter ended September 30, 2022)	$4.7 million
Q4 2022 (quarter ended December 31, 2022)	$6.1 million
Q1 2023 (quarter ended March 31, 2023)	$9.8 million
Q2 2023 (quarter ended June 30, 2023)	$5.8 million
Total	$26.4 million

CALDERWOOD & HARKNESS LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Telephone: (305) 814-7200 Facsimile: (305) 814-7201 www.calderwoodharkness.com
December 18, 2023
VIA HAND DELIVERY AND EMAIL
PRIVILEGED AND CONFIDENTIAL
Candace O'Brien Langford, Esq. Langford Pace LLP 215 South Monroe Street, Suite 1020 Tallahassee, Florida 32301
Re: Termination of Employment — Nicole Prescott, Vice President of Finance, Verimark Coastal Resorts LLC
C&H Matter No.: 1021-00008
Dear Ms. Langford:
I. Purpose and Authority
I write on behalf of the Audit Committee of the Board of Directors (the "Audit Committee") of Verimark Hospitality Group Inc. ("VHG"), a Delaware corporation whose common stock is publicly traded on the Nasdaq Global Select Market under the ticker symbol "VMRK," and which maintains its principal executive offices at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. As you are aware, Calderwood & Harkness LLP serves as independent investigation counsel to the Audit Committee, having been retained pursuant to an engagement letter dated July 17, 2023, executed by Audit Committee Chair Diane Kowalski on behalf of the Audit Committee.
The purpose of this letter is to notify you, as counsel of record for Nicole Prescott ("Ms. Prescott"), that VHG and its wholly owned subsidiary Verimark Coastal Resorts LLC ("VCR"), a Florida limited liability company with its principal office at 7820 Gulf Breeze Parkway, Suite 400, Destin, Florida 32541, have determined to terminate Ms. Prescott's employment for cause, effective immediately as of the date of this letter, December 18, 2023. The Audit Committee has authorized this communication following its review of the findings and recommendations set forth in Calderwood & Harkness's confidential memorandum to the Audit Committee dated December 12, 2023, and the Board of Directors' subsequent ratification of the Audit Committee's recommendation at an emergency session held on December 15, 2023. This letter sets forth the grounds for Ms. Prescott's termination, the logistics and consequences thereof, and certain continuing obligations of Ms. Prescott following the cessation of her employment.
II. Background — Investigation Context
As you know, on July 24, 2023, the Audit Committee authorized Calderwood & Harkness LLP to conduct an internal investigation (the "Investigation") into expense-reporting irregularities and premature revenue-recognition practices at VCR. The Investigation was prompted by a communication dated June 19, 2023, from Hargrove, Steen & Aldrich LLP ("HSA"), VHG's independent registered public accounting firm, in which HSA identified a potential material weakness in VCR's internal controls over financial reporting relating to VCR's revenue-recognition practices. HSA's identification of this potential material weakness arose during HSA's interim review of VHG's consolidated financial statements for the fiscal quarter ended March 31, 2023 (Q1 2023).
Ms. Prescott has served as Vice President of Finance at VCR since her appointment to that role, and during the relevant period she was a nine-year veteran of the VHG organization. In her capacity as Vice President of Finance, Ms. Prescott was responsible for, among other things, oversight of VCR's financial reporting, maintenance of VCR's internal controls over financial reporting, and supervision of VCR's accounting and finance personnel.
In light of the scope and seriousness of the matters under investigation, Ms. Prescott was placed on paid administrative leave effective August 7, 2023, along with VCR Division President Garrett W. Daskine and VCR Controller Ryan Mateo Serrano. Ms. Prescott's administrative leave was communicated to her in writing on that same date, and the terms of the leave were subsequently confirmed in correspondence directed to you on August 14, 2023.
During the course of the Investigation, Ms. Prescott was interviewed on two occasions: the first interview took place on October 11, 2023 ("Session 1"), and the second interview took place on November 8, 2023 ("Session 2"). You were present as Ms. Prescott's counsel at both interviews. At the outset of each interview, Ms. Prescott was provided with customary Upjohn advisements. The substance of Ms. Prescott's testimony during both sessions has been considered in connection with the findings summarized below.
III. Grounds for Termination — For Cause
The Investigation, which included the review of approximately 1.4 million documents and electronically stored information, interviews of twenty-three current and former employees and contractors, and forensic accounting analysis performed by Crestline Forensic Advisory LLC, identified the following categories of misconduct attributable to Ms. Prescott. The Audit Committee has determined that these findings constitute "cause" for the termination of Ms. Prescott's employment under the applicable provisions of her employment arrangement with VCR and VHG.
A. Revenue-Recognition Irregularities
The Investigation found that Ms. Prescott implemented and directed a scheme to prematurely recognize revenue from timeshare-interest deposit sales at VCR properties, including the Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541, and the Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228. Specifically, the Investigation determined that, at Ms. Prescott's direction, timeshare-interest purchase deposits were booked as completed-sale revenue upon the signing of purchase agreements by prospective purchasers, rather than upon the expiration of the statutory ten-day rescission period mandated by Section 721.10, Florida Statutes. This practice was implemented notwithstanding Ms. Prescott's acknowledged understanding — confirmed during her Session 1 interview — that the applicable accounting guidance under ASC 606 and ASC 978-605 required deferral of revenue recognition until the rescission period had lapsed without the purchaser exercising rescission rights.
When purchasers exercised their statutory rescission rights, the previously recognized revenue was not reversed until the following fiscal quarter, creating a persistent overstatement of VCR's — and, by consolidation, VHG's — reported revenue. The Investigation determined that the aggregate revenue overstatement attributable to this practice totaled approximately $26.4 million across four consecutive fiscal quarters, distributed as follows:
The fiscal year 2022 revenue overstatement resulting from this scheme totaled approximately $10.8 million, which produced an after-tax income overstatement of approximately $8.17 million. This figure represents approximately 5.74% of VHG's reported consolidated net income of $142.3 million for fiscal year 2022, a magnitude the Audit Committee considers material. Ms. Prescott's role in the implementation of this scheme was central: she was the senior VCR finance officer responsible for VCR's financial reporting, she personally directed the accounting treatment at issue, and she failed to disclose the true nature of VCR's revenue-recognition practices to HSA during the course of HSA's audit and interim review procedures.
B. Expense-Reimbursement Irregularities — Fictitious Vendor Scheme
The Investigation also identified Ms. Prescott as the sole shareholder of Clearwater Design Collective Inc. ("CDC"), a Florida corporation organized and filed with the Florida Division of Corporations on June 4, 2021. CDC served as one of three shell entities used to funnel improper payments from VCR under the guise of capital-improvement work at VCR-operated properties. Ms. Prescott's ownership of CDC was not disclosed on any VHG or VCR conflict-of-interest questionnaire, related-party-transaction certification, or annual compliance attestation during the relevant period, in violation of VHG's Related-Party Transaction Policy and VHG's Code of Business Conduct and Ethics.
The Investigation identified a total of sixteen (16) fictitious invoices submitted in the name of Clearwater Design Collective Inc. to VCR's accounts-payable function, totaling $587,600. These invoices purported to reflect capital-improvement work — including interior renovation, landscaping design, and furniture procurement — at the Coral Dune Resort & Residences and the Palmetto Bluff Club, but the Investigation found no evidence that any such work was actually performed by CDC. In multiple instances, the scope of work described in CDC's invoices duplicated work that had been separately contracted to, and performed by, legitimate third-party vendors.
The fictitious invoicing through CDC was part of a broader scheme involving a total of forty-seven (47) fictitious purchase orders totaling approximately $1.83 million across three shell entities: CDC, Gulf Standard Contracting LLC, and Suncoast Property Services LLC. The Investigation, through forensic accounting analysis conducted by Crestline Forensic Advisory LLC, traced funds disbursed by VCR to these shell entities to personal expenditures, including residential real-property purchases, personal automobile payments, and personal credit-card obligations. The scheme spanned a period of approximately two years, from July 2021 through June 2023.
C. Breach of Fiduciary and Employment Obligations
Ms. Prescott's conduct, as described above, constitutes serious and pervasive violations of her obligations under her employment agreement with VCR (effective March 15, 2019, as amended), VHG's Code of Business Conduct and Ethics (as most recently updated and distributed to all covered employees in January 2023), VHG's Related-Party Transaction Policy, VHG's Expense Reimbursement Policy, and VHG's Financial Reporting and Internal Controls Policy. Additionally, Ms. Prescott's conduct implicates potential violations of federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as VHG's obligations under Sections 302 and 404 of the Sarbanes-Oxley Act of 2002. The foregoing conduct, individually and in the aggregate, constitutes "cause" for termination under the applicable provisions of Ms. Prescott's employment arrangement with VCR and VHG.
IV. Effective Date and Logistics of Termination
Ms. Prescott's employment with VCR and VHG is terminated for cause effective as of December 18, 2023. Ms. Prescott's administrative leave, which has been in effect since August 7, 2023, concludes simultaneously with the termination of her employment on this date.
All compensation, benefits, and perquisites provided to Ms. Prescott by VCR or VHG shall cease as of the termination date, except as otherwise required by applicable federal or state law, including, without limitation, Ms. Prescott's right to elect continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), for which VHG's benefits administrator will separately provide the required election notice.
We request that Ms. Prescott return all property of VHG and VCR in her possession, custody, or control within five (5) business days of the date of this letter, that is, no later than December 27, 2023. Such property includes, but is not limited to, any laptops, desktop computers, tablets, access cards, key fobs, mobile devices, corporate credit cards, printed or electronic documents, files, reports, memoranda, financial records, proprietary materials, and any other VHG or VCR property. All such property should be delivered to Patricia Navarro, General Counsel, Verimark Hospitality Group Inc., at VHG's headquarters located at 4100 Bayshore Boulevard, Suite 1200, Tampa, Florida 33611. Ms. Navarro may be reached at (813) 555-4200 to coordinate the logistics of return.
V. Post-Termination Obligations
A. Continuing Confidentiality Obligations
Ms. Prescott remains bound by all confidentiality, non-disclosure, and non-disparagement provisions contained in her employment agreement and any ancillary agreements entered into between Ms. Prescott and VHG or VCR, including, without limitation, the Proprietary Information and Inventions Assignment Agreement executed by Ms. Prescott on March 15, 2019. These obligations survive the termination of Ms. Prescott's employment in accordance with their terms.
We also remind Ms. Prescott, through you, that the Investigation and its findings are confidential. Any disclosure of the substance, findings, or proceedings of the Investigation to third parties — including but not limited to former colleagues, media outlets, or competitors of VHG — is prohibited, except as may be required by applicable law, court order, or in connection with regulatory proceedings. Nothing in this paragraph is intended to restrict Ms. Prescott's right to communicate with the Securities and Exchange Commission, the Department of Justice, or any other governmental authority, or to avail herself of any whistleblower protections to which she may be entitled under applicable law.
B. Document Preservation
Ms. Prescott's obligation to preserve all documents, electronically stored information, and tangible materials relevant to the Investigation continues notwithstanding the termination of her employment and shall remain in full force and effect until further notice from this firm or from VHG's General Counsel. This obligation is consistent with, and in addition to, the document-preservation notices issued on July 24, 2023, including both the company-wide preservation notice issued to all VHG and VCR personnel and the targeted custodian-specific preservation notice directed to Ms. Prescott and other VCR custodians identified as having potentially relevant materials in their possession, custody, or control.
To the extent Ms. Prescott possesses any personal devices — including personal laptops, smartphones, tablets, external storage drives, or personal email accounts — containing VHG or VCR business communications, records, or data, such devices and accounts must be preserved in their current state and made available for collection and forensic imaging by Crestline Forensic Advisory LLC or Calderwood & Harkness's litigation-support team, if such collection has not already been completed. We request that Ms. Langford contact the undersigned within ten (10) business days to confirm the status of preservation and to schedule any necessary collection of personal devices.
Any destruction, alteration, or concealment of potentially relevant materials following receipt of this letter and the prior preservation notices would constitute a serious matter and could result in adverse consequences in any subsequent judicial or regulatory proceeding.
C. Cooperation. VHG reserves the right to request Ms. Prescott's reasonable cooperation in connection with ongoing and future regulatory matters, including the preliminary inquiry opened by the SEC Division of Enforcement in September 2023 under File No. HO-14237. VHG further reserves the right to seek Ms. Prescott's cooperation in connection with any future litigation, arbitration, or regulatory proceedings related to the matters under investigation, including any third-party claims, class actions, or derivative proceedings that may be filed. Any such cooperation requests will be directed through you as Ms. Prescott's counsel.
D. Clawback and Indemnification
VHG reserves all rights under applicable law, its Amended and Restated Certificate of Incorporation, its Amended and Restated Bylaws, and any compensation agreements, plans, or arrangements (including, without limitation, the VHG 2019 Omnibus Incentive Plan and the VHG Executive Incentive Compensation Policy) to pursue clawback of any incentive compensation, performance bonuses, equity awards, or other compensation paid or awarded to Ms. Prescott during the period of misconduct, as permitted or required by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Rule 10D-1 under the Securities Exchange Act of 1934, and VHG's Compensation Recovery Policy adopted in compliance with Nasdaq Listing Rule 5608.
We further note that the termination of Ms. Prescott's employment for cause may affect Ms. Prescott's rights, if any, to indemnification and advancement of expenses under VHG's organizational documents and applicable directors' and officers' liability insurance coverage. Specifically, we note that VHG maintains a primary directors' and officers' liability insurance policy issued by North Atlantic Indemnity Corp. (policy number NAI-DOL-2023-004891, with a policy period of January 1, 2023 through December 31, 2023) and Side A difference-in-conditions coverage through Ironbridge Specialty Insurance Ltd. The terms and conditions of these policies, including any exclusions applicable to conduct determined to constitute fraud, dishonesty, or willful misconduct, will govern the availability of coverage, and VHG makes no representations regarding Ms. Prescott's entitlement to coverage thereunder.
VHG expressly reserves all rights and remedies at law and in equity arising from or related to Ms. Prescott's conduct as described in this letter and as more fully set forth in Calderwood & Harkness's confidential memorandum to the Audit Committee dated December 12, 2023.
VI. Regulatory and Disclosure Context
For your reference, VHG filed a Current Report on Form 8-K with the Securities and Exchange Commission 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 consolidated financial statements for fiscal year 2022 (specifically the quarters ended September 30, 2022 and December 31, 2022) and the fiscal quarter ended March 31, 2023 (Q1 2023) should no longer be relied upon due to the revenue-recognition issues identified during the Investigation.
VHG intends to file an amended Annual Report on Form 10-K/A for fiscal year 2022 and amended Quarterly Reports on Form 10-Q/A for the fiscal quarters ended March 31, 2023 and June 30, 2023, reflecting the restatement of the affected financial statements. VHG anticipates that these amended filings will be made in the first quarter of 2024, subject to the completion of HSA's re-audit procedures.
As noted above, the SEC Division of Enforcement has opened a preliminary inquiry under File No. HO-14237, and VHG is cooperating with the SEC staff and coordinating voluntary production of non-privileged investigation materials through its outside securities counsel, Westlake Burris & Holt LLP (contact partner: Irene Castellanos, Esq.). VHG's disclosure of the termination of Ms. Prescott's employment may be required in future filings with the SEC, including in VHG's next periodic report or, if deemed material, in a Current Report on Form 8-K.
VII. Reservation of Rights
VHG and VCR expressly reserve all rights and remedies available to them, whether at law, in equity, or under contract, including but not limited to claims for breach of fiduciary duty, breach of contract, fraud, constructive fraud, conversion, unjust enrichment, civil conspiracy, and any other cause of action arising from or related to Ms. Prescott's conduct as described in this letter. Nothing in this letter shall be construed as a waiver, release, or relinquishment of any claim that VHG, VCR, or any other VHG subsidiary or affiliate may have against Ms. Prescott, whether known or unknown, existing now or hereafter arising.
VHG further reserves the right to refer the matters described in this letter to appropriate federal, state, and local law-enforcement authorities for criminal investigation and potential prosecution, at such time and in such manner as VHG and the Audit Committee may determine in their sole discretion.
VIII. Request for Acknowledgment
We request that you confirm receipt of this letter and acknowledge the termination of Ms. Prescott's employment on behalf of your client at your earliest convenience, and in any event no later than December 22, 2023. Please direct all further communications regarding Ms. Prescott's termination, post-termination obligations, and any related matters to the undersigned at the following contact information:
Howard Quinn, Partner Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131 Direct Telephone: (305) 814-7248 Direct Facsimile: (305) 814-7249
Email: hquinn@calderwoodharkness.com
We ask that all further communications concerning Ms. Prescott continue to be directed through Langford Pace LLP, and we will likewise direct all communications intended for Ms. Prescott through your firm.
We trust that this letter provides clear and comprehensive notice of the termination and the continuing obligations described herein. We are available to discuss any logistical or procedural questions your client may have regarding the return of company property or the other matters addressed in this letter.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Quinn, Partner 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131
cc: (via email)
Diane Kowalski, Audit Committee Chair, Board of Directors, Verimark Hospitality Group Inc.
Conrad Ashby, Calderwood & Harkness LLP
Liam Donahue, Calderwood & Harkness LLP
Patricia Navarro, General Counsel, Verimark Hospitality Group Inc.
Enclosures: None.
Note: The underlying personnel-actions recommendation memorandum dated December 12, 2023, constitutes privileged Audit Committee work product and has not been enclosed with this communication.
Quarter | Revenue Overstatement
Q3 2022 (quarter ended September 30, 2022) | $4.7 million
Q4 2022 (quarter ended December 31, 2022) | $6.1 million
Q1 2023 (quarter ended March 31, 2023) | $9.8 million
Q2 2023 (quarter ended June 30, 2023) | $5.8 million
Total | $26.4 million

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CALDERWOOD & HARKNESS LLP

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