PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
December 12, 2023
FROM: Howard Quinn and Conrad Ashby Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, Florida 33131
TO: Audit Committee of the Board of Directors Verimark Hospitality Group Inc. — Diane Kowalski (Chair) — Reginald Faulkner — Sandra Yeung
RE: Recommendations Regarding Personnel Actions — Garrett W. Daskine, Nicole Prescott, and Ryan Mateo Serrano
MATTER NO.: 1021-00008
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I. Purpose and Executive Summary
This memorandum presents the recommendations of Calderwood & Harkness LLP ("Calderwood & Harkness" or "outside counsel") to the Audit Committee of the Board of Directors (the "Audit Committee") of Verimark Hospitality Group Inc. ("VHG" or the "Company") regarding employment actions for the three individuals who are the subjects of the internal investigation opened on July 24, 2023 (the "Investigation"). The Investigation concerns expense-reporting irregularities and premature revenue-recognition practices at Verimark Coastal Resorts LLC ("VCR"), a wholly owned subsidiary of VHG. Calderwood & Harkness was retained by the Audit Committee to conduct the Investigation on an independent basis, with the assistance of Crestline Forensic Advisory LLC ("Crestline"), a nationally recognized forensic accounting firm engaged under Kovel retention to provide accounting and financial analysis in support of the Investigation.
Based on the findings of the Investigation to date, Calderwood & Harkness respectfully recommends that the Audit Committee approve the following personnel actions:
• Garrett W. Daskine (Division President, VCR): Termination for cause, effective immediately upon Audit Committee approval. The evidence demonstrates that Mr. Daskine originated and directed both the premature revenue-recognition scheme and the fictitious vendor scheme, and that he was the beneficial owner of two shell entities that collectively received approximately $1,242,400 in fraudulent payments from VCR.
• Nicole Prescott (Vice President of Finance, VCR): Termination for cause, effective immediately upon Audit Committee approval. The evidence demonstrates that Ms. Prescott knowingly implemented the premature revenue-recognition scheme at Mr. Daskine's direction and was the sole shareholder of a shell entity that received $587,600 in fictitious vendor payments from VCR.
• Ryan Mateo Serrano (Controller, VCR): Termination on a non-cause basis, consistent with the terms of his cooperation agreement with VHG executed on November 15, 2023 (the "Cooperation Agreement"). While Mr. Serrano was an active participant in the fictitious vendor scheme—creating the 47 fictitious purchase orders and serving as registered agent for two of the three shell entities—his conduct was carried out at the direction of Mr. Daskine, and his subsequent cooperation with the Investigation has been substantial and, based on our assessment, truthful.
All three individuals have been on paid administrative leave since August 7, 2023, when the Audit Committee directed that they be placed on leave pending the outcome of the Investigation.
These recommendations are based on the Investigation's findings to date, which include twenty-two (22) interviews of eighteen (18) unique witnesses (four witnesses were interviewed on two occasions), the review and analysis of approximately 347,000 documents collected from VCR's email systems, shared drives, financial systems, and the personal devices of the three subjects (pursuant to voluntary consent and lawful preservation demands), and forensic accounting analysis performed by Crestline under the direction of engagement partner Douglas Reinhardt, CPA, CFF, and senior manager Priya Venkatesh, CPA.
This memorandum is intended to provide the Audit Committee with a sufficiently detailed factual and legal basis to support its deliberation and authorization of the recommended personnel actions. A comprehensive Final Investigation Report, which will address additional matters including the root causes of the control failures, recommendations for remediation of internal controls over financial reporting, and findings relevant to VHG's disclosure obligations, is expected to be presented to the Audit Committee on or about January 9, 2024.
II. Summary of Investigation Findings Relevant to Personnel Actions
The following summary sets forth the principal findings of the Investigation that bear directly on the recommended personnel actions. This summary is not intended to be exhaustive; a comprehensive recitation of all findings will be provided in the Final Investigation Report.
A. Revenue-Recognition Irregularities
Over a period spanning four fiscal quarters—from the third quarter of fiscal year 2022 (Q3 2022) through the second quarter of fiscal year 2023 (Q2 2023)—VCR prematurely recognized timeshare-interest purchase deposits as completed-sale revenue at the time of signing of purchase agreements, rather than deferring recognition until the expiration of the statutory ten-day rescission period mandated by Florida Statute § 721.10. Under applicable accounting standards (ASC 606, Revenue from Contracts with Customers), revenue from timeshare-interest sales may not be recognized until all conditions precedent to a completed sale have been satisfied, including the lapse of any contractual or statutory right of rescission. Florida law provides purchasers of timeshare interests with an unconditional right to rescind the purchase agreement within ten days of execution, and until that period has expired without the purchaser exercising the rescission right, the transaction has not been consummated for revenue-recognition purposes.
The aggregate revenue overstatement resulting from this premature recognition practice, as determined by Crestline's forensic accounting analysis, was approximately $26.4 million, distributed across the four affected quarters as follows:
The revenue overstatement for FY 2022 (Q3 and Q4 combined) totaled $10.8 million. Based on VHG's reported effective tax rate of 24.3% for FY 2022, this revenue overstatement produced an after-tax income overstatement of approximately $8.17 million (calculated as $10.8 million × (1 – 0.243)). VHG's reported net income for FY 2022 was $142.3 million, meaning the after-tax income overstatement represented approximately 5.74% of reported net income—a figure that is material under both quantitative and qualitative assessments of materiality.
The premature revenue-recognition practice was concentrated at two VCR properties:
• Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, Florida 32541, specifically in connection with Phase III timeshare units at that property; and
• Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, Florida 34228, specifically in connection with Phase II timeshare units at that property.
Compounding the impact of the premature recognition practice, VCR's timeshare rescission rate during the investigated period was approximately 14.3%, significantly above the industry average of approximately 11% (as benchmarked by Crestline using data from the American Resort Development Association's annual survey). This elevated rescission rate meant that a material portion of the prematurely recognized revenue was subsequently rescinded by purchasers exercising their statutory rights; however, the reversals of the corresponding revenue entries were delayed into subsequent fiscal quarters, further distorting the financial results of both the quarters in which revenue was prematurely recognized and the subsequent quarters in which reversals were belatedly recorded.
For context, VCR's total reported revenue for FY 2022 was $438.7 million, representing approximately 23.46% of VHG's consolidated revenue of $1.87 billion. VCR is thus a material subsidiary whose financial performance has a significant impact on VHG's consolidated financial statements.
B. Expense-Reimbursement Irregularities (Fictitious Vendor Scheme)
Over an approximately twenty-four-month period from July 2021 through June 2023, forty-seven (47) fictitious purchase orders were created within VCR's procurement system and attributed to three purported vendors for "capital improvement" work at VCR properties. None of the three vendors performed any actual work for VCR. The invoices submitted under these purchase orders described fabricated services—including lobby renovations, pool-deck resurfacing, landscaping improvements, and HVAC system upgrades—that either did not occur at all or, in a small number of instances, were performed by legitimate third-party contractors whose work was separately invoiced and paid through normal procurement channels.
Payments totaling $1,830,000 were directed to bank accounts controlled by shell entities that were beneficially owned by or affiliated with Mr. Daskine and Ms. Prescott. The three fictitious vendors and the payments traced to each are as follows:
Gulf Standard Contracting LLC ("GSC"):
• Total payments received: $812,400 across 19 invoices
• Entity formation date: March 12, 2021 (Florida limited liability company)
• Registered agent: Ryan Mateo Serrano
• Beneficial owner: Garrett W. Daskine (through a nominee arrangement, as established through Crestline's analysis of corporate formation records, bank account ownership documentation, and fund-flow tracing)
• Bank account: Seaboard Community Bank, Account No. ending in 7834
Clearwater Design Collective Inc. ("CDC"):
• Total payments received: $587,600 across 16 invoices
• Entity formation date: June 4, 2021 (Florida corporation)
• Registered agent: Ryan Mateo Serrano
• Sole shareholder: Nicole Prescott, as reflected in corporate records filed with the Florida Division of Corporations
• Bank account: Gulf Coast National Bank, Account No. ending in 2156
Suncoast Property Services LLC ("SPS"):
• Total payments received: $430,000 across 12 invoices
• Entity formation date: November 18, 2021 (Florida limited liability company)
• Registered agent: Panhandle Agent Services Inc. (Tallahassee, Florida)
• Sole member: Garrett W. Daskine, as reflected in the LLC operating agreement obtained by subpoena from the formation agent
• Bank account: Emerald Coast Credit Union, Account No. ending in 5091
The largest single fictitious invoice was Invoice No. GSC-2023-007, dated February 14, 2023, from Gulf Standard Contracting LLC, in the amount of $94,500, purportedly for "lobby renovation materials — Coral Dune Phase III." Crestline's forensic analysis determined that no lobby renovation work was performed at Coral Dune Resort & Residences during the period described in the invoice, and the funds were disbursed from the GSC bank account within three business days of receipt.
Crestline's forensic analysis traced the funds disbursed from the three shell entities' bank accounts to a range of personal expenditures, including: personal credit-card payments for both Mr. Daskine and Ms. Prescott; residential renovation work at Mr. Daskine's personal residence located at 312 Harbor View Lane, Destin, Florida 32541 (including payments to a legitimate general contractor, Bay Area Builders Inc., for a kitchen and master-bathroom renovation totaling approximately $187,000); boat-slip fees at HarborWalk Marina in Destin, Florida; luxury-goods purchases at various high-end retailers; and cash withdrawals. A detailed fund-flow analysis is included in Crestline's forensic accounting report, which is annexed to the separate Investigation work-product file maintained by Calderwood & Harkness.
C. Individual Culpability
The evidence developed in the Investigation establishes the following regarding the individual culpability of each of the three subjects.
1. Garrett W. Daskine
Mr. Daskine is a seventeen-year veteran of VHG and has served as Division President of VCR since 2018. In that role, he had overall operational and financial responsibility for VCR, including oversight of all revenue-generating activities and capital-expenditure approvals.
With respect to the revenue-recognition irregularities, the evidence—including contemporaneous email communications, internal memoranda, and testimony from multiple witnesses—establishes that Mr. Daskine originated and directed the practice of recognizing timeshare-interest purchase deposits as completed-sale revenue before the expiration of the statutory rescission period. Specifically, in July 2022, Mr. Daskine instructed Ms. Prescott to modify VCR's revenue-booking procedures to recognize deposits upon execution of purchase agreements rather than upon lapse of the rescission period, stating in an email dated July 18, 2022, that the existing methodology was "leaving revenue on the table" and that he wanted to "show the full pipeline in the quarter we close the deal." Ms. Prescott subsequently implemented this directive, and Mr. Daskine reviewed and approved the quarterly financial reports that reflected the prematurely recognized revenue.
With respect to the fictitious vendor scheme, Mr. Daskine was the beneficial owner of Gulf Standard Contracting LLC (which received $812,400) and the sole member of Suncoast Property Services LLC (which received $430,000). Mr. Daskine personally approved each of the fictitious invoices submitted by GSC and SPS within VCR's accounts-payable system, using his Division President authorization to approve payments above the $25,000 threshold that would otherwise have required additional review. For CDC invoices (Ms. Prescott's entity), Mr. Daskine also served as the approving authority.
Mr. Daskine was interviewed by Calderwood & Harkness on October 4, 2023. His personal counsel, James Corwin Merritt of Merritt & Dunleavy LLP (Miami, Florida), was present during the interview. During the interview, Mr. Daskine denied any wrongdoing, asserted that the revenue-recognition methodology was consistent with industry practice, and denied knowledge of the ownership or operations of GSC, CDC, or SPS. When presented with documentary evidence linking him to GSC and SPS, Mr. Daskine declined to answer further questions on the advice of counsel. Mr. Daskine subsequently declined a request for a follow-up interview, transmitted through Mr. Merritt on November 3, 2023.
Documentary evidence and the cooperation testimony of Mr. Serrano—provided during interviews conducted on September 27, 2023, and December 5, 2023—independently and consistently establishes that Mr. Daskine originated and directed both the revenue-recognition scheme and the fictitious vendor scheme. Mr. Serrano testified that Mr. Daskine recruited him to create the fictitious purchase orders, instructed him to serve as registered agent for GSC and CDC to obscure the connection to VCR executives, and personally reviewed each invoice before it was submitted for payment.
2. Nicole Prescott
Ms. Prescott is a nine-year veteran of VHG and has served as Vice President of Finance of VCR since 2020. In that role, she was responsible for VCR's financial reporting, budgeting, and accounting operations, reporting directly to Mr. Daskine at the division level and maintaining a dotted-line reporting relationship to VHG's Chief Financial Officer, Thomas Rhett Griffith.
With respect to the revenue-recognition irregularities, the evidence establishes that Ms. Prescott implemented the premature revenue-recognition scheme at Mr. Daskine's direction. Ms. Prescott modified the revenue-booking procedures in VCR's accounting system (Penmark Technologies) to recognize timeshare-interest deposits at the point of sale rather than upon lapse of the rescission period. She was responsible for preparing the quarterly financial schedules that were consolidated into VHG's financial statements and was aware that the booking methodology did not comply with ASC 606 or Florida timeshare law. Internal emails between Ms. Prescott and Mr. Daskine, as well as between Ms. Prescott and members of her finance team, reflect Ms. Prescott's awareness of the improper nature of the practice. In one email dated November 14, 2022, Ms. Prescott wrote to Mr. Daskine that "we need to be careful about how we handle the rescission reversals—if they all hit in Q1, it's going to look like a cliff," to which Mr. Daskine responded, "spread them out, we'll true up at year-end."
With respect to the fictitious vendor scheme, Ms. Prescott was the sole shareholder of Clearwater Design Collective Inc., which received $587,600 in fraudulent payments across 16 invoices. While Ms. Prescott did not approve the CDC invoices herself (those approvals were made by Mr. Daskine), she was responsible for the accounts-payable function at VCR and was in a position to—and did—facilitate the processing of all 47 fictitious invoices, including those attributable to GSC and SPS.
Ms. Prescott was interviewed by Calderwood & Harkness on two occasions: October 11, 2023, and November 8, 2023. Her personal counsel, Candace O'Brien Langford of Langford Pace LLP (Tallahassee, Florida), was present at both sessions. During the first interview, Ms. Prescott acknowledged that she had modified the revenue-booking procedures at Mr. Daskine's direction but asserted that she believed the methodology was permissible. During the second interview, when confronted with documentary evidence of her ownership of CDC and the fund flows from CDC's bank account to her personal accounts, Ms. Prescott declined to answer further questions regarding the fictitious vendor scheme on the advice of counsel.
The evidence, taken as a whole, demonstrates Ms. Prescott's knowing participation in both the premature revenue-recognition overstatement and the fictitious vendor scheme.
3. Ryan Mateo Serrano
Mr. Serrano is a five-year veteran of VHG and has served as Controller of VCR since 2021. In that role, he was responsible for VCR's general ledger, accounts payable, and internal financial controls, reporting directly to Ms. Prescott.
With respect to the fictitious vendor scheme, Mr. Serrano created the 47 fictitious purchase orders in VCR's procurement system and served as the registered agent for both GSC and CDC. Mr. Serrano did not have a beneficial ownership interest in any of the three shell entities, and no funds from the scheme have been traced to Mr. Serrano personally (other than his regular VCR salary and standard incentive compensation, which are addressed separately in the clawback analysis below).
Mr. Serrano entered into a cooperation agreement with VHG on November 15, 2023 (the "Cooperation Agreement"), which was negotiated between Patricia Navarro, VHG's General Counsel, and Marco A. Ruiz of Coletti & Ruiz PA (Tampa, Florida) on behalf of Mr. Serrano. The Cooperation Agreement was executed with the knowledge and approval of the Audit Committee.
Mr. Serrano was interviewed by Calderwood & Harkness on September 27, 2023, and December 5, 2023. His counsel, Mr. Ruiz, was present at both sessions. During these interviews, Mr. Serrano provided detailed and, in our assessment, credible and truthful testimony regarding: the creation of the fictitious purchase orders; the formation of GSC and CDC and his role as registered agent; the fund flows from the shell entities to personal accounts of Mr. Daskine and Ms. Prescott; Mr. Daskine's direction and oversight of the entire fictitious vendor scheme; and the circumstances under which Mr. Serrano was recruited to participate in the scheme, including Mr. Daskine's representations that the payments were for legitimate consulting services that could not be routed through normal channels due to "contracting restrictions."
While Mr. Serrano was an active and essential participant in the fictitious vendor scheme—and his conduct, standing alone, would support termination for cause—his cooperation has been substantial. Mr. Serrano's testimony has been corroborated by documentary evidence in all material respects, and his cooperation has materially advanced the Investigation's ability to establish the full scope and nature of both schemes and to attribute responsibility to the individuals who conceived and directed them.
III. Employment Agreement Analysis
Calderwood & Harkness has reviewed the employment agreements of each of the three subjects, as well as the Cooperation Agreement executed by Mr. Serrano, and has analyzed the contractual bases for the recommended personnel actions.
A. Daskine Employment Agreement
Mr. Daskine's employment with VCR/VHG is governed by an Amended and Restated Employment Agreement dated March 1, 2019 (the "Daskine Employment Agreement"), by and between VHG, VCR, and Garrett W. Daskine. The Daskine Employment Agreement provides for a base salary, annual cash bonus (targeted at 75% of base salary, payable upon achievement of specified financial performance targets for VCR), participation in VHG's long-term incentive plan (including restricted stock units and stock options), and certain severance and change-in-control benefits.
Section 7(c) of the Daskine Employment Agreement defines "Cause" to include, among other enumerated grounds:
(i) fraud, embezzlement, misappropriation of funds, or dishonesty by the Executive in connection with the performance of his duties;
(ii) the Executive's willful misconduct or gross negligence in the performance of his duties that is materially injurious to the Company;
(iii) material breach by the Executive of his fiduciary duties to the Company;
(iv) the Executive's conviction of, or plea of guilty or nolo contendere to, any felony or any crime involving moral turpitude; and
(v) material breach by the Executive of any provision of this Agreement, including the Executive's obligations under Section 9 (Confidentiality) and Section 10 (Non-Competition and Non-Solicitation).
Mr. Daskine's conduct as established by the Investigation falls squarely within multiple "Cause" triggers. His direction of the premature revenue-recognition practice constitutes fraud, dishonesty, and willful misconduct materially injurious to the Company. His creation and beneficial ownership of GSC and SPS, and his approval of fictitious invoices directing $1,242,400 in fraudulent payments to those entities, constitutes fraud, embezzlement, and misappropriation of funds. His conduct also constitutes a material breach of his fiduciary duties to VHG and VCR. While Mr. Daskine has not yet been convicted of any crime, the conduct identified may implicate federal criminal statutes, and the contractual definition of "Cause" does not require a criminal conviction for grounds (i), (ii), (iii), or (v).
Under Section 7(d) of the Daskine Employment Agreement, upon termination for Cause, Mr. Daskine forfeits all severance entitlements (which, under a without-cause termination, would include 18 months of base salary continuation, pro-rated bonus for the year of termination, and 18 months of continued health-insurance benefits), forfeits acceleration of any unvested equity awards, and forfeits any unpaid annual bonus for the fiscal year in which termination occurs. Mr. Daskine retains only the right to receive accrued and unpaid base salary through the date of termination and any vested benefits under ERISA-governed benefit plans that are not subject to forfeiture under the plan terms.
Recommendation: We recommend that the Audit Committee authorize the termination of Mr. Daskine for Cause, effective immediately upon Audit Committee approval.
B. Prescott Employment Agreement
Ms. Prescott's employment with VCR/VHG is governed by an Employment Agreement dated January 15, 2020 (the "Prescott Employment Agreement"), by and between VHG, VCR, and Nicole Prescott. The Prescott Employment Agreement provides for a base salary, annual cash bonus (targeted at 50% of base salary, payable upon achievement of specified financial performance targets for VCR), participation in VHG's long-term incentive plan, and certain severance benefits.
Section 6(c) of the Prescott Employment Agreement defines "Cause" in terms substantially similar to those in the Daskine Employment Agreement, encompassing fraud, embezzlement, misappropriation of funds, dishonesty, willful misconduct, material breach of fiduciary duties, criminal conviction or plea, and material breach of the employment agreement.
Ms. Prescott's conduct as established by the Investigation—including her knowing implementation of the premature revenue-recognition scheme, her sole ownership of CDC, and her facilitation of the processing of all 47 fictitious invoices—constitutes dishonesty, fraud, and material breach of her fiduciary duties to VHG and VCR. As with Mr. Daskine, Ms. Prescott's conduct falls squarely within the contractual definition of "Cause."
Under Section 6(d) of the Prescott Employment Agreement, upon termination for Cause, Ms. Prescott forfeits all severance entitlements (which, under a without-cause termination, would include 12 months of base salary continuation, pro-rated bonus, and 12 months of continued health-insurance benefits), forfeits acceleration of any unvested equity awards, and forfeits any unpaid annual bonus for the fiscal year in which termination occurs.
Recommendation: We recommend that the Audit Committee authorize the termination of Ms. Prescott for Cause, effective immediately upon Audit Committee approval.
C. Serrano Employment Agreement and Cooperation Agreement
Mr. Serrano's employment with VCR/VHG is governed by an Employment Agreement dated April 1, 2021 (the "Serrano Employment Agreement"), by and between VHG, VCR, and Ryan Mateo Serrano. The Serrano Employment Agreement provides for a base salary, annual cash bonus (targeted at 30% of base salary), and participation in VHG's long-term incentive plan. The "Cause" definition in the Serrano Employment Agreement is substantively identical to those in the Daskine and Prescott agreements.
As noted above, Mr. Serrano's conduct—including the creation of 47 fictitious purchase orders and service as registered agent for GSC and CDC—would independently support termination for Cause under the Serrano Employment Agreement. However, the Cooperation Agreement executed on November 15, 2023, specifically provides for Mr. Serrano's termination on a non-cause basis, preserving certain limited benefits, in consideration of Mr. Serrano's obligations to provide truthful and complete testimony and documents to VHG, its counsel, and its agents in connection with the Investigation and, if requested by VHG, to cooperate with governmental authorities investigating the matters at issue.
The Cooperation Agreement provides that, upon non-cause termination, Mr. Serrano will receive the following benefits:
(a) six months of base salary continuation, payable in accordance with VHG's regular payroll schedule;
(b) payment of COBRA premiums for health-insurance continuation for a period of six months following the termination date;
(c) a general release of claims by VHG against Mr. Serrano arising from the fictitious vendor scheme, subject to the carve-outs described below; and
(d) VHG's agreement not to initiate or refer criminal complaints against Mr. Serrano, provided that this obligation does not extend to VHG's obligation to respond truthfully to governmental inquiries or to produce documents in response to lawful process.
The Cooperation Agreement includes carve-outs preserving VHG's right to: (i) pursue mandatory clawback of erroneously awarded incentive-based compensation if triggered by a restatement, as required by applicable law and listing standards; (ii) recover any funds actually received by Mr. Serrano from the shell entities (although Crestline's analysis has not identified any such payments to Mr. Serrano personally beyond his regular compensation); and (iii) terminate the Cooperation Agreement and revert to for-cause termination if Mr. Serrano breaches his cooperation obligations, including by providing false testimony or destroying or concealing evidence.
The non-cause termination provision of the Cooperation Agreement was a material inducement for Mr. Serrano's decision to cooperate with the Investigation, and his cooperation has been, as noted, substantial and truthful. Honoring the terms of the Cooperation Agreement is consistent with VHG's interest in maintaining the credibility and enforceability of cooperation arrangements and in preserving Mr. Serrano's availability as a witness in any subsequent regulatory or civil proceedings.
Recommendation: We recommend that the Audit Committee authorize the termination of Mr. Serrano on a non-cause basis consistent with the terms of the Cooperation Agreement, effective on a date to be agreed (currently contemplated as December 20, 2023).
IV. Compensation Clawback Considerations
A. Applicable Clawback Policies and Authorities
VHG is subject to multiple clawback authorities, both mandatory and discretionary, that are potentially applicable to the incentive-based compensation received by the three subjects during the periods affected by the revenue overstatement.
Sarbanes-Oxley Act Section 304. Section 304 of the Sarbanes-Oxley Act of 2002 ("SOX") authorizes the recovery of bonuses, other incentive-based or equity-based compensation, and profits realized from the sale of Company securities received by the Chief Executive Officer and Chief Financial Officer during the twelve-month period following the first public issuance or filing of a financial document that is subsequently required to be restated due to material noncompliance resulting from misconduct. SOX Section 304 is, by its terms, limited to the CEO and CFO of the issuer. While Mr. Daskine, Ms. Prescott, and Mr. Serrano are division-level executives rather than the CEO or CFO of VHG, we note that the SEC has, in certain enforcement actions, taken the position that SOX Section 304 may be applied to executives who bear primary responsibility for the misconduct giving rise to the restatement. We do not rely on SOX Section 304 as the primary basis for clawback in this instance but flag it as a potentially applicable authority that should be evaluated in coordination with VHG's securities counsel at Westlake Burris & Holt LLP.
Dodd-Frank Act Section 954 / SEC Rule 10D-1 / Nasdaq Listing Rule 5608. Effective October 2, 2023, the SEC's final rules implementing Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Rule 10D-1) require listed companies to adopt and comply with clawback policies mandating the recovery of erroneously awarded incentive-based compensation received by current and former executive officers during the three completed fiscal years immediately preceding the date on which the company is required to prepare an accounting restatement. Under Rule 10D-1 and Nasdaq Listing Rule 5608, the clawback is mandatory and applies on a "no fault" basis—i.e., it is triggered by the restatement itself, without regard to whether the executive officer engaged in misconduct. Incentive-based compensation is "erroneously awarded" to the extent it exceeds the amount that would have been received had the financial statements been correctly stated. VHG adopted a compliant clawback policy in September 2023, as disclosed in its most recent proxy statement.
The mandatory clawback under Rule 10D-1 applies to "executive officers" as defined in Rule 10D-1(d), which incorporates the definition of "officer" under Exchange Act Rule 16a-1(f). Whether Mr. Daskine, Ms. Prescott, and Mr. Serrano qualify as "executive officers" of VHG (as opposed to officers of the VCR subsidiary) is a factual determination that should be evaluated by VHG's securities counsel. However, to the extent that any of these individuals are deemed "executive officers" for purposes of Rule 10D-1, the mandatory clawback will be triggered upon the filing of the restated financial statements.
VHG Internal Clawback Policy. In addition to the mandatory clawback framework, VHG's internal executive compensation clawback policy, as described in VHG's proxy statement filed on April 14, 2023, provides the Board of Directors and the Audit Committee with broader discretionary authority to recover incentive-based compensation paid to any employee of VHG or its subsidiaries in the event that: (i) the compensation was based on the achievement of financial results that are subsequently restated; (ii) the employee engaged in fraud, misconduct, or a violation of Company policy that contributed to the need for the restatement; or (iii) a lower amount of compensation would have been paid based on the restated results. This discretionary policy is not limited to "executive officers" and would apply to all three subjects.
B. Application to Daskine
Calderwood & Harkness recommends that VHG, acting through the Audit Committee and the Compensation Committee, identify all incentive-based compensation received by Mr. Daskine during the three-year lookback period (fiscal years 2020, 2021, and 2022, and the partial fiscal year 2023 through the date of his administrative leave). This compensation includes:
• Annual cash bonuses tied to VCR revenue targets, to the extent that those targets were achieved or exceeded as a result of the prematurely recognized revenue. Based on preliminary information, Mr. Daskine's FY 2022 annual bonus was calculated at approximately $487,500, reflecting 100% achievement of the VCR revenue target. Absent the $10.8 million FY 2022 revenue overstatement, VCR's revenue achievement would have been approximately 97.5% of target, which would have resulted in a reduced bonus payout.
• Any equity awards—including restricted stock units, performance stock units, and stock options—that vested during the lookback period based in whole or in part on financial performance metrics (such as revenue, EBITDA, or earnings per share) that were affected by the revenue overstatement.
• Any profits realized by Mr. Daskine from the sale of VHG common stock during the lookback period, to the extent such sales occurred during a period in which VHG's stock price was inflated by the overstated financial results.
In addition to the clawback of incentive-based compensation, VHG should assess its right to pursue civil recovery of the funds traced to Mr. Daskine through the two shell entities he beneficially owned: $812,400 through GSC and $430,000 through SPS, totaling $1,242,400 attributable to Mr. Daskine's shell entities. This civil recovery is addressed in greater detail in Section VIII below.
C. Application to Prescott
Similarly, VHG should identify all incentive-based compensation received by Ms. Prescott during the three-year lookback period, including annual cash bonuses tied to VCR financial performance and any equity awards that vested based on affected financial performance metrics. Based on preliminary information, Ms. Prescott's FY 2022 annual bonus was calculated at approximately $162,500, reflecting 100% achievement of the VCR revenue target.
VHG's right to recover bonuses tied to VCR financial performance is clear under the discretionary clawback policy, and may also be available under the mandatory clawback policy if Ms. Prescott is determined to be an "executive officer" for purposes of Rule 10D-1. VHG should also pursue civil recovery of the $587,600 traced to CDC (Ms. Prescott's entity), as discussed in Section VIII below.
D. Application to Serrano
The Cooperation Agreement addresses clawback considerations as follows. Section 4(c) of the Cooperation Agreement provides that VHG reserves its right to pursue mandatory clawback of erroneously awarded incentive-based compensation to the extent required by applicable law, regulation, or listing standard in connection with a restatement. The Cooperation Agreement does not waive or limit VHG's obligation to comply with mandatory clawback requirements under Rule 10D-1 or Nasdaq Listing Rule 5608. However, Section 4(d) of the Cooperation Agreement provides that VHG will not exercise discretionary clawback authority against Mr. Serrano for incentive-based compensation paid during the lookback period, except to the extent that the mandatory clawback policy independently requires recovery.
Mr. Serrano's cooperation does not extinguish VHG's obligation to recover erroneously awarded incentive-based compensation under the mandatory clawback policy if triggered by a restatement. However, the practical impact of the mandatory clawback on Mr. Serrano is expected to be limited, given that his compensation level as Controller is significantly lower than that of Mr. Daskine or Ms. Prescott, and the incremental amount of incentive compensation attributable to the revenue overstatement is correspondingly smaller.
The restatement of VHG's financial statements—specifically, the filing of an amended Annual Report on Form 10-K for FY 2022 and amended Quarterly Reports on Form 10-Q for Q1 and Q2 of FY 2023—is currently anticipated to be filed on or about February 28, 2024. The filing of the restated financial statements will trigger the mandatory clawback analysis under Rule 10D-1 and Nasdaq Listing Rule 5608, and VHG should be prepared to compute the erroneously awarded compensation amounts promptly upon filing.
V. Indemnification Analysis
A. VHG's Indemnification Obligations
VHG is incorporated in the State of Delaware. Section 145 of the Delaware General Corporation Law ("DGCL") governs the scope of permissive and mandatory indemnification for officers and directors of Delaware corporations.
Under DGCL § 145(a), a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding (other than a derivative action) by reason of the fact that the person is or was a director, officer, employee, or agent of the corporation, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with such action, suit, or proceeding, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful.
Under DGCL § 145(c), a corporation is required to indemnify a director, officer, employee, or agent who has been successful on the merits or otherwise in defense of any such action, suit, or proceeding against expenses (including attorneys' fees) actually and reasonably incurred in connection therewith.
VHG's Amended and Restated Certificate of Incorporation (Article IX) and Amended and Restated Bylaws (Article VI) contain standard broad indemnification provisions that generally indemnify officers and directors to the fullest extent permitted by Delaware law. VHG has also entered into individual indemnification agreements with certain senior executives, including Mr. Daskine and Ms. Prescott (though not Mr. Serrano, whose position as Controller was below the threshold for individual indemnification agreements under VHG's governance policies).
The critical limitation on VHG's indemnification obligation, under both the DGCL and VHG's governing documents, is the standard-of-conduct requirement: indemnification is available only to the extent that the individual acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification is not available for acts involving intentional misconduct, a knowing violation of law, or conduct undertaken in bad faith.
The evidence developed in the Investigation establishes that Mr. Daskine and Ms. Prescott each engaged in intentional misconduct and knowing violations of law, including fraud, embezzlement, and intentional overstatement of financial results. Their conduct was manifestly not undertaken in good faith or in a manner reasonably believed to be in the best interests of VHG or VCR. Accordingly, Mr. Daskine and Ms. Prescott are ineligible for indemnification under the standard of conduct required by DGCL § 145(a), VHG's Certificate of Incorporation and Bylaws, and their individual indemnification agreements.
B. Advancement of Legal Fees
VHG's Bylaws and the individual indemnification agreements entered into with Mr. Daskine and Ms. Prescott contain mandatory advancement provisions, which require VHG to advance defense costs to covered individuals pending a final determination of their entitlement to indemnification. Under these provisions, advancement is mandatory upon receipt of an undertaking by the individual to repay the advanced amounts if it is ultimately determined that the individual is not entitled to indemnification.
As of the date of this memorandum, VHG has been advancing defense costs to Mr. Daskine (through his counsel, Merritt & Dunleavy LLP) and to Ms. Prescott (through her counsel, Langford Pace LLP). The aggregate amounts advanced through November 30, 2023, are approximately $218,000 for Mr. Daskine and approximately $147,000 for Ms. Prescott. Both individuals executed undertakings to repay advanced amounts at the commencement of the Investigation.
Upon for-cause termination and a final determination that indemnification is not available—whether by agreement, court order, or arbitral determination—VHG should demand repayment of all advanced amounts pursuant to the undertakings. We note that the obligation to advance defense costs may continue post-termination during the pendency of any proceedings arising from their conduct as officers of VCR, subject to the terms of the applicable indemnification agreements and any reservation of rights by VHG. VHG should carefully evaluate the timing and manner of any cessation of advancement to minimize the risk of litigation over advancement obligations.
Mr. Serrano's advancement and indemnification status presents different considerations. Mr. Serrano did not have an individual indemnification agreement, and his entitlement to advancement, if any, derives solely from VHG's Bylaws. The Cooperation Agreement does not address advancement or indemnification obligations, and VHG has not advanced defense costs to Mr. Serrano or his counsel. To the extent that Mr. Serrano's cooperation leads to his involvement as a witness (rather than a defendant) in future proceedings, the question of advancement may be moot. However, if Mr. Serrano becomes a party to any proceeding by reason of his former role as Controller of VCR, his entitlement to advancement and indemnification should be evaluated under the Bylaws, with consideration given to the Cooperation Agreement's general release provisions.
C. Interaction with D&O Insurance
The interplay between VHG's indemnification obligations and its directors' and officers' liability insurance coverage is addressed in Section VI below.
VI. D&O Insurance Implications
A. Primary D&O Policy — North Atlantic Indemnity Corp.
VHG maintains a directors' and officers' liability insurance program with the following primary policy:
Carrier: North Atlantic Indemnity Corp. Policy Number: NAI-DOL-2023-004891 Policy Period: January 1, 2023 – December 31, 2023 Primary Tower Limit: $25 million per claim / $50 million aggregate Retention (Side B/C): $1 million per claim
The primary D&O policy provides three insuring agreements:
Side A (Non-Indemnifiable Loss): Covers individual directors and officers for loss arising from claims made against them in their capacity as directors or officers, where VHG is unable or unwilling to indemnify. Side A coverage has no retention and is typically the broadest coverage available under the policy. Side A is potentially implicated for defense costs incurred by Mr. Daskine, Ms. Prescott, and Mr. Serrano to the extent that VHG is unable or unwilling to indemnify them.
Side B (Corporate Reimbursement): Reimburses VHG for indemnification payments made to directors and officers in connection with covered claims. Side B coverage may reimburse VHG for advancement payments made to Mr. Daskine's and Ms. Prescott's counsel, subject to the policy retention and applicable exclusions.
Side C (Entity Coverage): Covers VHG for loss arising from securities claims made against the entity. Side C coverage is potentially implicated if securities litigation arises from the anticipated restatement (e.g., shareholder class actions or SEC enforcement proceedings alleging violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934).
The following policy exclusions require analysis in connection with the matters at issue:
Fraud/Dishonesty Exclusion. The policy contains a standard fraud/dishonesty exclusion that bars coverage for loss arising from any deliberately fraudulent act or omission or any willful violation of any statute or regulation by an insured. Critically, the fraud/dishonesty exclusion is subject to a "final adjudication" trigger—i.e., the exclusion applies only if a court of competent jurisdiction enters a final, non-appealable judgment or order determining that the insured committed the excluded conduct, or if the insured pleads guilty to or is convicted of the underlying criminal conduct. The exclusion is also severable, meaning it applies only to the individual insured who committed the fraudulent act and does not bar coverage for innocent co-insureds.
Until there is a final adjudication of fraud—such as a court judgment, guilty plea, or criminal conviction—the insurer is generally obligated to advance defense costs to the insured, subject to a reservation of rights. This means that North Atlantic Indemnity Corp. may be required to advance defense costs to Mr. Daskine and Ms. Prescott (and potentially to Mr. Serrano) pending final adjudication of the fraud/dishonesty issues, even though the evidence developed in the Investigation strongly supports a finding of intentional fraud.
Personal-Profit Exclusion. The policy excludes coverage for loss arising from an insured's gaining any personal profit, remuneration, or advantage to which the insured was not legally entitled, if such gain is established by a final adjudication. This exclusion is directly implicated by the fictitious vendor scheme, but, like the fraud/dishonesty exclusion, is subject to the final-adjudication trigger.
Prior-Knowledge / Pending or Prior Proceedings Exclusions. The policy may contain exclusions for claims based on facts or circumstances known to the insured prior to the inception of the policy period, or for claims arising from proceedings that were pending or had been initiated prior to the policy period. The Investigation was opened in July 2023, within the current policy period, and the underlying conduct commenced in July 2021, prior to the inception of the current policy. The application of any prior-knowledge or pending/prior exclusion will depend on the specific policy language and the date on which notice was provided to the insurer.
Timely notice of the Investigation and the underlying circumstances to North Atlantic Indemnity Corp. is essential to preserving coverage. We understand that VHG's General Counsel, Patricia Navarro, provided initial notice of the Investigation to North Atlantic Indemnity Corp. on or about August 15, 2023. Calderwood & Harkness recommends that VHG confirm the completeness and adequacy of the notice provided and provide supplemental notice as appropriate in light of the Investigation's findings.
B. Side A DIC Policy — Ironbridge Specialty Insurance Ltd.
VHG maintains a Side A Difference in Conditions ("DIC") excess policy with Ironbridge Specialty Insurance Ltd., providing a limit of $15 million. The Side A DIC policy is designed to provide an additional layer of protection for individual directors and officers by "dropping down" to provide coverage in circumstances where the primary Side A coverage is exhausted, unavailable, or impaired—for example, due to insolvency of the primary carrier, rescission of the primary policy, coverage denials, or exhaustion of limits by defense costs or settlements.
The Ironbridge DIC policy may be implicated in several scenarios:
• If North Atlantic Indemnity Corp. denies coverage for any or all of the subjects' defense costs under the fraud/dishonesty or personal-profit exclusions (whether properly or improperly), the DIC policy may drop down to provide coverage for non-indemnifiable loss incurred by the subjects.
• If the primary policy limits are exhausted by defense costs, settlement payments, or judgments arising from the Investigation, the SEC preliminary inquiry, or any related securities litigation, the DIC policy will provide excess coverage for individual directors and officers.
• The DIC policy typically has broader coverage terms and fewer exclusions than the primary policy, and may not contain the same prior-knowledge or pending/prior-proceedings exclusions. The specific terms of the Ironbridge policy should be reviewed carefully.
Notice to Ironbridge Specialty Insurance Ltd. should be confirmed, and VHG should ensure that both the primary and DIC carriers are kept apprised of developments in the Investigation and related proceedings.
C. Recommended Actions
In light of the foregoing, Calderwood & Harkness recommends the following actions with respect to D&O insurance:
1. Confirm timely notice. VHG should confirm that timely and adequate notice of circumstances and/or claims has been provided to both North Atlantic Indemnity Corp. (under the primary D&O policy) and Ironbridge Specialty Insurance Ltd. (under the Side A DIC policy), and should provide supplemental notice as warranted by the Investigation's findings and the anticipated restatement.
2. Insurance-tender strategy. VHG should coordinate with General Counsel Patricia Navarro on the development of an insurance-tender strategy to maximize recovery of defense costs, investigation expenses, and any liability exposure arising from the matters under investigation.
3. Monitor reservation-of-rights positions. VHG should carefully monitor and respond to any reservation-of-rights letters issued by either insurer, and should be prepared to dispute any overly broad reservations or coverage denials.
4. Defense-cost advancement. In the event that Mr. Daskine or Ms. Prescott assert claims for defense-cost advancement under the D&O policy (as opposed to advancement under VHG's indemnification obligations), VHG should analyze the interplay between the policy's duty-to-advance provisions and the fraud/dishonesty exclusion. As noted, until there is a final adjudication of fraud, the insurer generally must advance defense costs subject to a reservation of rights.
5. SEC preliminary inquiry. The SEC Division of Enforcement's preliminary inquiry (File No. HO-14237, opened September 2023) may independently trigger coverage obligations under the D&O policy, particularly under Side C (entity coverage) if the inquiry matures into a formal investigation or enforcement action, and under Sides A and B to the extent that individual directors and officers incur defense costs in connection with the inquiry. Timely notice of the SEC inquiry should be confirmed.
VII. Process Recommendations for Implementing Personnel Actions
A. Daskine Termination
Calderwood & Harkness recommends that the termination of Mr. Daskine be effectuated through the following process:
1. Formal notification. Upon Audit Committee authorization, Calderwood & Harkness will prepare and transmit a formal termination notification letter to Mr. Daskine through his counsel, James Corwin Merritt of Merritt & Dunleavy LLP, 1200 Brickell Avenue, Suite 1800, Miami, Florida 33131. Notification through counsel is appropriate given that Mr. Daskine is represented and that direct communication with a represented party would raise ethical concerns.
2. Termination letter. The termination letter will: (a) confirm that Mr. Daskine's employment with VHG and VCR is terminated for Cause, effective as of the date specified; (b) specify the contractual grounds for Cause, referencing the applicable provisions of the Daskine Employment Agreement and summarizing the factual basis for the termination (with appropriate limitations to preserve privilege where possible); (c) outline Mr. Daskine's post-termination obligations, including the return of all Company property (including electronic devices, access credentials, and Company records), ongoing document-preservation obligations, the obligation to cooperate with any regulatory proceedings as required by law, and his continuing obligations under the non-disparagement and confidentiality provisions of the Daskine Employment Agreement; (d) confirm that Mr. Daskine has forfeited all severance entitlements, unvested equity awards, and unpaid incentive compensation; and (e) reserve VHG's rights with respect to clawback of previously paid incentive compensation and civil recovery of misappropriated funds.
3. Proposed effective date. Calderwood & Harkness recommends that the termination be effective December 18, 2023, which will allow sufficient time for preparation and transmission of the termination letter following Audit Committee authorization.
B. Prescott Termination
The process for Ms. Prescott's termination will be substantially identical to that for Mr. Daskine:
1. Formal notification. Calderwood & Harkness will prepare and transmit a formal termination notification letter to Ms. Prescott through her counsel, Candace O'Brien Langford of Langford Pace LLP, 315 South Calhoun Street, Suite 600, Tallahassee, Florida 32301.
2. Termination letter. The letter will confirm termination for Cause, specify the contractual grounds and factual basis, outline post-termination obligations (return of Company property, preservation obligations, regulatory cooperation, non-disparagement, and confidentiality), confirm forfeiture of severance and unvested compensation, and reserve VHG's rights regarding clawback and civil recovery.
3. Proposed effective date. December 18, 2023, consistent with Mr. Daskine's termination date.
C. Serrano Termination
The process for Mr. Serrano's termination will reflect the non-cause basis of the termination and the provisions of the Cooperation Agreement:
1. Formal notification. Calderwood & Harkness will prepare and transmit a termination notification letter to Mr. Serrano through his counsel, Marco A. Ruiz of Coletti & Ruiz PA, 100 North Tampa Street, Suite 2200, Tampa, Florida 33602.
2. Termination letter. The letter will confirm that Mr. Serrano's employment is terminated on a non-cause basis pursuant to Section 3 of the Cooperation Agreement, identify the specific benefits to which Mr. Serrano is entitled under the Cooperation Agreement (six months of salary continuation, six months of COBRA premium payment), and confirm Mr. Serrano's continuing cooperation obligations, including his obligation to provide truthful testimony and documents to VHG and, if requested, to governmental authorities. The letter will also confirm the mutual release provisions set forth in the Cooperation Agreement and the cooperating-witness protections negotiated therein, including VHG's agreement not to initiate or refer criminal complaints against Mr. Serrano.
3. Proposed effective date. December 20, 2023, consistent with the date contemplated in the Cooperation Agreement. The two-day separation between Mr. Serrano's termination date and the termination dates for Mr. Daskine and Ms. Prescott is intended to allow for any necessary coordination regarding Mr. Serrano's continuing cooperation obligations and to avoid any appearance that the three terminations are undifferentiated.
D. Coordination with Ongoing Matters
The implementation of the recommended personnel actions should be coordinated with the following stakeholders and ongoing matters:
1. VHG senior management. VHG's Chief Executive Officer, Margaret Calder, Chief Financial Officer, Thomas Rhett Griffith, and General Counsel, Patricia Navarro, should be notified of the Audit Committee's authorization of the personnel actions promptly following the Audit Committee's decision. Calderwood & Harkness recommends that the Audit Committee authorize Ms. Kowalski, as Chair, to communicate the Audit Committee's decision to VHG senior management and to coordinate on internal communications and operational transition planning at VCR. VCR will require interim management to assume the functions previously performed by Mr. Daskine, Ms. Prescott, and Mr. Serrano, and VHG management should be prepared to implement a transition plan promptly upon the effective dates of the terminations.
2. Securities counsel. VHG's securities counsel at Westlake Burris & Holt LLP (engagement partner Irene Castellanos) should be consulted regarding any additional disclosure obligations under SEC rules, including whether the departure of Mr. Daskine (as Division President of a material subsidiary) triggers a Form 8-K disclosure obligation under Item 5.02 (Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers). While Item 5.02 disclosure is generally required only for "named executive officers" or principal officers of the registrant, the materiality of VCR to VHG's consolidated operations and the circumstances of Mr. Daskine's departure may warrant disclosure. Similar analysis should be performed with respect to Ms. Prescott, although her position as VP of Finance of a subsidiary is less likely to trigger Item 5.02 obligations.
3. Crestline Forensic Advisory LLC. VHG should coordinate with Crestline regarding any additional forensic analysis needed to support civil-recovery or clawback actions against Mr. Daskine and Ms. Prescott, including updated asset-tracing analysis and computation of erroneously awarded incentive-based compensation.
4. Operational transition. VHG management should designate interim leadership for VCR's operations, finance, and controllership functions. Given the sensitivity of the circumstances, VHG may wish to consider seconding experienced personnel from VHG's corporate headquarters or from other operating subsidiaries to assume these roles on an interim basis.
VIII. Potential Civil Recovery Actions
Calderwood & Harkness recommends that VHG evaluate and, upon completion of the necessary preparatory steps, pursue civil claims against Mr. Daskine and Ms. Prescott to recover the funds misappropriated through the fictitious vendor scheme, the incentive compensation paid based on overstated financial results, and the costs and expenses incurred by VHG in connection with the Investigation and the forthcoming restatement.
Recoverable amounts. The following categories of potential recovery have been identified:
1. Fraudulently diverted funds. The total funds traced to the three shell entities is $1,830,000, allocated as follows:
• Attributable to Mr. Daskine's shell entities: $812,400 (GSC) + $430,000 (SPS) = $1,242,400
• Attributable to Ms. Prescott's entity: $587,600 (CDC)
• Total: $1,830,000
2. Incentive compensation. Annual cash bonuses and equity-based compensation received by Mr. Daskine and Ms. Prescott that were calculated on the basis of VCR financial performance metrics inflated by the revenue overstatement. The precise amounts will be determined through the clawback analysis described in Section IV and will require coordination with VHG's Compensation Committee and external compensation consultants.
3. Investigation and restatement costs. VHG has incurred, and will continue to incur, significant costs in connection with the Investigation and the forthcoming restatement. The total Investigation cost through November 30, 2023, is approximately $5.057 million, consisting of:
• Calderwood & Harkness LLP fees and expenses: $3,420,000
• Crestline Forensic Advisory LLC fees and expenses: