PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
July 26, 2023
MEMORANDUM
FROM: Howard Quinn, Responsible Partner, and Liam Donahue, Lead Associate Calderwood & Harkness LLP 200 South Biscayne Boulevard, Suite 4400 Miami, FL 33131
TO: Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. Diane Kowalski, Chair Reginald Faulkner, Member Sandra Yeung, Member
RE: Preliminary Investigation Protocol and Upjohn Procedures — Internal Investigation of Verimark Coastal Resorts LLC
MATTER NO.: 1021-00008
This memorandum is a privileged and confidential communication prepared by Calderwood & Harkness LLP at the direction of the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. It is protected by the attorney-client privilege and the attorney work-product doctrine. This memorandum should not be disclosed to any person or entity outside of the authorized recipients identified herein without prior written authorization from the Audit Committee. Unauthorized disclosure may result in waiver of applicable privileges.
I. Introduction and Purpose
Calderwood & Harkness LLP ("Calderwood & Harkness" or the "Firm") was retained by the Audit Committee of the Board of Directors (the "Audit Committee") of Verimark Hospitality Group Inc. ("VHG") pursuant to the engagement letter executed by Audit Committee Chair Diane Kowalski on July 17, 2023 (the "Engagement Letter"). The Firm was retained to conduct an independent internal investigation (the "Investigation") into two categories of potential misconduct at Verimark Coastal Resorts LLC ("VCR"), a wholly owned Florida subsidiary of VHG. VHG is a Delaware corporation publicly traded on the Nasdaq Stock Market under ticker symbol VMRK, with its principal executive offices located at 4100 Bayshore Boulevard, Suite 1200, Tampa, FL 33611. The two categories of concern that form the basis of the Investigation are: (1) expense-reporting irregularities involving potentially fictitious vendor invoices at VCR; and (2) premature revenue-recognition practices at VCR, specifically the recording of timeshare-interest deposits as completed-sale revenue before the expiration of applicable statutory rescission periods.
The Investigation was formally opened on July 24, 2023, when the first document-preservation notices were issued to relevant VHG and VCR personnel. Since that date, the investigation team has been engaged in custodian identification, vendor retention, and the development of the protocols and procedures described in this memorandum.
The purpose of this memorandum is to set forth, in comprehensive detail, the protocols that will govern the Investigation. These protocols address the following critical areas: (a) the Upjohn warning procedures that will be administered to all employee witnesses prior to investigative interviews; (b) the privilege and confidentiality frameworks that will protect the Audit Committee's communications and the Firm's work product; (c) the protocols governing interactions with the individual subjects of the Investigation and their respective personal counsel; (d) the guidelines for coordination and communication with VHG management, including General Counsel Patricia Navarro; (e) the framework for coordination with Hargrove, Steen & Aldrich LLP ("HSA"), VHG's independent auditor; and (f) the protocols for coordination with Westlake Burris & Holt LLP ("Westlake Burris"), VHG's outside securities counsel.
It is essential that the Audit Committee have a thorough understanding of these procedural and legal frameworks at the outset of the Investigation. Adherence to these protocols will preserve the integrity of the Investigation, protect the Audit Committee's privileges, ensure compliance with applicable legal and regulatory requirements, and position VHG to respond effectively to any subsequent regulatory inquiry or litigation. We respectfully request that the Audit Committee review this memorandum carefully and formally approve the protocols described herein at its next meeting, currently anticipated for early August 2023.
II. Scope of the Investigation — Summary
The full scope of the Investigation is defined in the Investigation Scope Memorandum & Work Plan dated July 24, 2023 (the "Work Plan"), which was distributed separately to the Audit Committee. This Section provides a summary overview for purposes of contextualizing the protocols and procedures that follow.
A. The Two Workstreams
The Investigation encompasses two distinct but potentially interrelated workstreams:
Workstream A — Premature Revenue Recognition of Timeshare-Interest Deposits. This workstream concerns the recognition of revenue from timeshare-interest sales at two VCR properties: (i) Coral Dune Resort & Residences, located at 14200 Emerald Coast Parkway, Destin, FL 32541; and (ii) Palmetto Bluff Club, located at 3950 Longboat Key Drive, Sarasota, FL 34228. The concern is that timeshare-interest deposits were recorded as completed-sale revenue before the expiration of the ten-day rescission period mandated by Florida Statute § 721.10, which grants purchasers of timeshare interests a ten-day cancellation period following execution of the purchase contract. Premature recognition of such deposits as revenue may result in a material overstatement of VCR's reported revenue and, by extension, VHG's consolidated financial statements for affected periods. HSA's preliminary analysis identified approximately $9.8 million in timeshare-interest deposits that may have been prematurely recognized during Q1 2023 alone (the period ending March 31, 2023). The Investigation will examine whether this practice was isolated to Q1 2023 or extended to prior reporting periods, and whether it was the result of an intentional scheme, a failure of internal controls, or a combination thereof.
Workstream B — Expense-Reporting Irregularities. This workstream concerns potentially fictitious vendor invoices submitted for payment through VCR's accounts payable system. Preliminary indications suggest that invoices from certain vendors may lack adequate supporting documentation, that certain vendor entities may not correspond to bona fide third-party service providers, and that payments to such vendors may have been diverted for improper purposes. The Investigation will examine the nature and extent of these irregularities, identify the individuals responsible, quantify any financial harm to VHG, and assess whether adequate internal controls were in place to detect and prevent such irregularities.
B. Origin of the Investigation
The Investigation arose from a communication dated June 19, 2023, from William "Bill" Gentry, CPA, lead engagement partner at HSA, to Thomas Rhett Griffith, Chief Financial Officer of VHG, and Diane Kowalski, Chair of the Audit Committee. In that communication, Mr. Gentry identified a potential material weakness in VCR's internal controls over financial reporting, which HSA had detected during its interim review of VHG's financial statements for the quarter ended March 31, 2023 (Q1 2023). Specifically, HSA noted that $9.8 million in timeshare-interest deposits had been recorded as completed-sale revenue in VCR's books despite the fact that the applicable ten-day rescission periods under Florida Statute § 721.10 had not expired as of the dates of recognition. HSA further noted that it had identified certain vendor invoices at VCR that lacked adequate supporting documentation, and that it intended to expand its testing in this area.
Following receipt of the HSA communication, the Audit Committee convened in executive session on July 10, 2023, without VHG management present. After deliberation, the Audit Committee resolved to retain independent outside counsel to conduct an internal investigation. Calderwood & Harkness was engaged pursuant to the Engagement Letter executed on July 17, 2023.
C. Subjects of the Investigation
Three individuals have been identified as subjects of the Investigation:
1. Garrett W. Daskine — Division President, Verimark Coastal Resorts LLC. Mr. Daskine has overall operational and financial responsibility for VCR and reports to VHG's Chief Executive Officer, Margaret Calder.
2. Nicole Prescott — Vice President of Finance, Verimark Coastal Resorts LLC. Ms. Prescott oversees VCR's financial reporting, budgeting, and accounting functions and reports to Mr. Daskine with a dotted-line reporting relationship to VHG's CFO, Thomas Rhett Griffith.
3. Ryan Mateo Serrano — Controller, Verimark Coastal Resorts LLC. Mr. Serrano is responsible for VCR's day-to-day accounting operations, including revenue recognition and accounts payable processing, and reports to Ms. Prescott.
The designation of these individuals as "subjects" means that evidence developed to date indicates that their conduct is within the scope of the Investigation and that they may bear some degree of responsibility for the matters under review. This designation does not constitute a finding of wrongdoing at this stage.
D. Regulatory Implications
The matters under investigation implicate potential federal securities law concerns. VHG is a publicly traded issuer subject to the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002 ("SOX"). If the Investigation determines that VCR's revenue-recognition practices resulted in material misstatements in VHG's previously filed periodic reports (including Forms 10-K and 10-Q), VHG may be required to restate its financial statements, file a Form 8-K under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review), and address deficiencies in its internal controls over financial reporting as required by SOX Sections 302 and 404. Additionally, the SEC Division of Enforcement may open a preliminary inquiry or formal investigation into the circumstances giving rise to any restatement.
III. The Client Relationship and Privilege Framework
A. Identity of the Client
It is critical to establish, at the outset, the precise contours of the attorney-client relationship in this matter. Calderwood & Harkness LLP represents the Audit Committee of VHG's Board of Directors. The Firm does not represent VHG's management, including the Chief Executive Officer, the Chief Financial Officer, or the General Counsel. The Firm does not represent any individual officer, director, or employee of VHG or VCR, including any of the subjects of the Investigation. The Firm does not separately represent VCR as an entity.
The attorney-client privilege for purposes of this Investigation belongs to VHG as a corporate entity. Under established law, the Audit Committee exercises the privilege on VHG's behalf with respect to this Investigation, consistent with the Audit Committee's authority under VHG's Amended and Restated Certificate of Incorporation, VHG's Amended and Restated Bylaws, and the Audit Committee Charter adopted by the Board of Directors on March 15, 2021 (as amended). The Audit Committee retains sole authority to determine whether and to what extent any privilege is waived, and no waiver may occur without the Audit Committee's prior written authorization.
All Investigation communications, work product, findings, memoranda, notes, analyses, and reports generated by Calderwood & Harkness, Crestline Forensic Advisory LLC ("Crestline"), or any other agent of counsel are privileged and confidential. The Audit Committee's exclusive control over privilege decisions is a cornerstone of the Investigation's integrity and must be scrupulously maintained throughout the Investigation and in any subsequent proceedings.
B. Attorney-Client Privilege
All communications between Calderwood & Harkness attorneys and the Audit Committee members — Diane Kowalski, Reginald Faulkner, and Sandra Yeung — made for the purpose of seeking or providing legal advice in connection with the Investigation are protected by the attorney-client privilege. This protection extends to communications made in person, by telephone, by videoconference, or in writing (including email), provided that such communications are made in confidence and for the purpose of facilitating the rendition of legal services.
Work product generated by Calderwood & Harkness in connection with the Investigation — including memoranda, interview notes, research memoranda, analytical summaries, draft and final reports, and internal communications among the investigation team — is protected as attorney work product under Federal Rule of Civil Procedure 26(b)(3) and its state-law analogs. Materials reflecting the mental impressions, conclusions, opinions, or legal theories of Calderwood & Harkness attorneys constitute opinion work product, which is entitled to near-absolute protection from disclosure.
The privilege framework extends to work performed by Crestline Forensic Advisory LLC, which was retained under the Kovel doctrine pursuant to a separate engagement letter dated July 21, 2023 (engagement number CFA-VHG-2023-0089). The Kovel doctrine, established in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), extends the attorney-client privilege to communications between counsel and non-lawyer experts — such as forensic accountants — where the expert is retained to assist counsel in providing legal advice and the expert's work is performed at the direction of and for the benefit of counsel. Crestline's engagement partner is Douglas Reinhardt, CPA, CFF, and its senior manager assigned to this matter is Priya Venkatesh, CPA. Crestline was retained at the direction of the Audit Committee and Calderwood & Harkness to perform forensic accounting analysis of the revenue-recognition and expense-reporting matters at issue, and all of Crestline's work in this engagement is performed as an agent of counsel in furtherance of Calderwood & Harkness's legal analysis and advice.
The Kovel protection requires that Crestline's engagement be structured and maintained as an extension of counsel's legal work. Accordingly, Crestline will report exclusively to Calderwood & Harkness (and not to VHG management) and will not independently communicate its findings to any third party, including HSA or any regulatory body, without Calderwood & Harkness's prior authorization.
C. Work-Product Protection
All memoranda, interview notes, analyses, chronologies, summaries, and reports prepared by Calderwood & Harkness and Crestline in connection with the Investigation constitute opinion and/or fact work product prepared in anticipation of litigation and/or regulatory proceedings. Given the nature of the matters under investigation — which involve potential violations of federal securities laws, accounting fraud, and breach of fiduciary duties — it is reasonable to anticipate that litigation and/or regulatory proceedings may ensue. The work-product doctrine therefore applies with full force.
We emphasize that the SEC Division of Enforcement may open a preliminary inquiry or formal investigation in connection with these matters. If that occurs, the work-product protections must be maintained with heightened vigilance. The Audit Committee should be aware that the work-product doctrine, while robust, is not absolute for fact work product; opinion work product, however, enjoys near-absolute protection. Calderwood & Harkness will take all reasonable measures to ensure that its Investigation materials are prepared and maintained in a manner that maximizes their protection under the work-product doctrine.
D. Privilege Maintenance Protocols
To preserve the integrity of the privilege and work-product protections, the following protocols will be observed throughout the Investigation:
1. Document Markings. All privileged documents generated in connection with the Investigation — including memoranda, correspondence, reports, notes, and electronic communications — will bear the legend: "PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT." This marking serves as a visible indicator of the privileged nature of the document and supports the assertion of privilege in any subsequent proceeding.
2. Secure Storage. All privileged materials will be stored on secured, access-controlled systems. Electronic materials will be maintained on encrypted servers and platforms accessible only to authorized personnel. Physical materials, to the extent they exist, will be maintained in locked files at Calderwood & Harkness's Miami office. Distribution of privileged materials will be strictly limited to the following authorized individuals:
• Audit Committee members: Diane Kowalski, Reginald Faulkner, Sandra Yeung
• Calderwood & Harkness investigation team: Howard Quinn (Responsible Partner), Conrad Ashby (Billing Partner), Liam Donahue (Lead Associate), Steven Hollander (Working Associate), and designated paralegals as identified by the investigation team
• Crestline investigation team: Douglas Reinhardt, CPA, CFF (Engagement Partner), and Priya Venkatesh, CPA (Senior Manager)
3. Privilege Log. A comprehensive privilege log will be maintained by the investigation team for all documents withheld or redacted on privilege grounds during the course of the Investigation. The privilege log will be prepared in accordance with applicable federal and state procedural requirements and will include, for each withheld or redacted document: the document identifier, custodian, date, author and recipient(s), the specific privilege basis asserted (attorney-client privilege, work product, or both), and a brief, non-privileged description of the document's subject matter. Triton discovery Solutions Inc. ("Triton"), the e-discovery vendor retained for this matter (with offices at 500 Seventh Avenue, 14th Floor, New York, NY 10018), will assist with privilege-log creation and maintenance.
4. No Sharing Without Authorization. No privileged materials — including memoranda, reports, interview summaries, legal analyses, or work product of any kind — may be shared with VHG management (including the CEO, CFO, or General Counsel), HSA, Westlake Burris, or any other third party without prior written authorization from the Audit Committee. This restriction is essential to prevent inadvertent waiver of the Audit Committee's privilege. Any request for sharing of privileged materials with third parties should be directed to Calderwood & Harkness for evaluation prior to any Audit Committee decision.
IV. Upjohn Warning Procedures
A. Legal Background
The Upjohn warning procedure derives from the Supreme Court's decision in Upjohn Co. v. United States, 449 U.S. 383 (1981). In Upjohn, the Court recognized that in the corporate context, the attorney-client privilege protects communications between corporate counsel and employees of the corporation when those communications are made for the purpose of obtaining legal advice for the corporation. The Court emphasized, however, that the privilege belongs to the corporation — not to the individual employee — and that the corporation may choose to waive the privilege at its discretion.
The practical implication of Upjohn for internal investigations is that counsel for the entity must take affirmative steps to advise employees, at the outset of each investigative interview, that: (1) counsel represents the entity (in this case, the Audit Committee of VHG), not the individual employee; (2) the attorney-client privilege for the interview belongs to VHG, not to the individual; (3) VHG may choose, in its sole discretion, to waive the privilege and disclose the contents of the interview to third parties, including government regulators such as the SEC or the Department of Justice; and (4) while the employee is asked to keep the interview confidential, the employee is not prohibited from consulting with his or her own personal counsel and may retain personal counsel to attend the interview.
These warnings — commonly referred to as "Upjohn warnings," "corporate Miranda warnings," or, in some jurisdictions, "Johnnie's Poultry admonitions" — serve two essential functions. First, they protect the integrity of the Investigation by ensuring that the employee understands the nature and purpose of the interview and does not mistakenly believe that he or she has an individual attorney-client relationship with investigation counsel. Second, they protect the corporation's privilege by establishing a clear record that the communications were made in the context of a corporate representation, not an individual representation, thereby avoiding the complications that arise when an employee later claims that he or she reasonably believed that investigation counsel was representing the employee's personal interests.
The administration of Upjohn warnings is a matter of professional responsibility as well as privilege preservation. If an employee reasonably but mistakenly believes that investigation counsel represents the employee's personal interests, an implied attorney-client relationship may be found to exist, which would create conflicts of interest for investigation counsel, potentially disqualify the Firm from the Investigation, and compromise the corporation's ability to waive the privilege and cooperate with regulators. The careful and consistent administration of Upjohn warnings at the outset of every employee interview eliminates this risk.
B. Standard Upjohn Warning Script
Calderwood & Harkness will prepare a standard-form Upjohn warning script (the "Upjohn Script") that will be read aloud to each employee witness at the beginning of every investigative interview. The Upjohn Script is currently in draft form and will be finalized and distributed to all members of the investigation team by mid-August 2023, in advance of the first scheduled interviews.
The Upjohn Script will include the following core elements, which will be read to the witness verbatim:
1. "We are attorneys with Calderwood & Harkness LLP. We represent the Audit Committee of the Board of Directors of Verimark Hospitality Group Inc. We do not represent you personally in any capacity."
2. "The purpose of this interview is to gather facts as part of an internal investigation that has been authorized by the Audit Committee. The investigation concerns certain financial reporting and accounting matters at Verimark Coastal Resorts LLC."
3. "The attorney-client privilege for this interview and for any communications between us belongs to Verimark Hospitality Group Inc. The privilege does not belong to you. Verimark Hospitality Group Inc., through its Audit Committee, may choose in its sole discretion to waive the privilege and disclose the contents of this interview, including your statements, to third parties. Those third parties may include government agencies such as the Securities and Exchange Commission or the Department of Justice."
4. "We ask that you treat this interview and its substance as confidential. Please do not discuss the fact that you were interviewed, or any of the questions we asked or the answers you provided, with other employees, supervisors, or any third parties, except your own personal attorney."
5. "You have the right to consult with your own personal attorney at any time. If you have retained a personal attorney, your attorney is welcome to attend this interview. If you wish to retain a personal attorney before proceeding, we can reschedule this interview to allow you to do so."
The Upjohn warnings will be administered by the lead interviewer, who will typically be Howard Quinn (Responsible Partner) for subject interviews and either Howard Quinn or Liam Donahue (Lead Associate) for non-subject interviews. A second attorney or paralegal will be present at every interview to document the administration of the warnings and to take notes on the substance of the interview. The presence of a second member of the investigation team ensures an accurate record and provides corroboration in the event that any dispute arises regarding the administration of the warnings.
Following the reading of the Upjohn Script, the lead interviewer will ask the witness to confirm verbally that he or she understands the warnings. The witness will not be asked to sign a written acknowledgment, as this may create unnecessary formality and inhibit candor; however, the witness's verbal acknowledgment will be documented in the memorandum of interview. If the witness expresses confusion or asks questions about the warnings, the lead interviewer will provide additional explanation until the witness confirms understanding. If the witness declines to acknowledge understanding or refuses to proceed with the interview, that fact will be documented and reported to the Audit Committee.
C. Application to Different Categories of Witnesses
The Upjohn warning requirements vary depending on the category of witness being interviewed. Calderwood & Harkness has identified the following categories and will apply the warnings as described below:
Subjects of the Investigation (Garrett W. Daskine, Nicole Prescott, Ryan Mateo Serrano). Full Upjohn warnings will be administered to each subject at the beginning of every interview. Because these individuals have been identified as subjects — meaning their personal conduct is within the scope of the Investigation and they may bear some degree of responsibility for the matters under review — the administration of clear and comprehensive Upjohn warnings is of the highest importance. The warnings will emphasize that Calderwood & Harkness does not represent them and that the attorney-client privilege belongs exclusively to VHG. Each subject has retained personal counsel (as described in Section V.C below), and personal counsel will be invited to attend all interviews. The lead interviewer will confirm on the record at the outset of each subject interview that the subject's personal counsel has been notified and given the opportunity to attend.
Senior Management of VHG (CEO Margaret Calder, CFO Thomas Rhett Griffith, General Counsel Patricia Navarro). Full Upjohn warnings will be administered to each member of senior management who is interviewed. Although these individuals are not subjects of the Investigation and are expected to cooperate fully, the administration of Upjohn warnings is required to preserve the privilege framework and to ensure that no implied attorney-client relationship is created between Calderwood & Harkness and any member of management. This is particularly important given that management may have interests that diverge from the Audit Committee's interests as the Investigation progresses.
Other VCR and VHG Employees. Full Upjohn warnings will be administered to all employee witnesses, regardless of their seniority or role. This includes VCR finance and operations staff, VHG corporate finance and accounting personnel, and any other employees who are interviewed in connection with the Investigation. Consistent administration of Upjohn warnings to all employees ensures uniform treatment and eliminates any argument that a particular employee was not adequately warned.
Third Parties and External Witnesses (e.g., HSA Personnel). Upjohn warnings are not applicable to individuals who are not employees of VHG or VCR, because the Upjohn framework governs the relationship between a corporation's counsel and the corporation's employees. However, interviews of third-party witnesses will be conducted with appropriate disclaimers regarding the informational nature of the interview. Specifically, the lead interviewer will advise any third-party witness that: (a) Calderwood & Harkness represents the Audit Committee of VHG; (b) the interview is being conducted for informational purposes in connection with an internal investigation; and (c) no attorney-client relationship is being created between Calderwood & Harkness and the third-party witness. William Gentry, lead engagement partner at HSA, will be interviewed on an informational basis without Upjohn warnings, as he is not an employee of VHG or VCR.
D. Documentation of Upjohn Warnings
Each memorandum of interview prepared by the investigation team will contain a prefatory statement confirming the following:
• That the Upjohn warnings were administered to the witness (for employee witnesses) or that appropriate disclaimers were provided (for third-party witnesses);
• The identity of the interviewer who administered the warnings;
• Whether the witness acknowledged understanding of the warnings;
• Whether the witness asked any questions about the warnings, and if so, the substance of those questions and the interviewer's responses; and
• Whether the witness's personal counsel was present at the interview, and if so, the identity of personal counsel.
This documentation is essential to establish a contemporaneous record of the warning process and to support the Audit Committee's privilege position in any subsequent proceeding.
V. Witness Interview Protocols
A. Interview Scheduling and Logistics
Calderwood & Harkness will manage the scheduling of all witness interviews. The investigation team estimates that the Investigation will require approximately twenty to twenty-five interviews of fifteen to twenty unique witnesses. Some witnesses — particularly subjects and key management witnesses — may be interviewed more than once as the Investigation progresses and new information is developed. The need for follow-up interviews will be assessed on a rolling basis as document review and forensic accounting analysis yield additional evidence.
Eleven custodians have been identified in connection with the document-preservation and collection process; of these, eight will be subject to active document collection. All custodians and other relevant personnel will be scheduled for interviews in a phased approach, as described in Section V.D below.
Interviews will generally be conducted at one of the following locations, depending on the witness's location, the logistics of document production, and other practical considerations:
• Calderwood & Harkness's Miami office, located at 200 South Biscayne Boulevard, Suite 4400, Miami, FL 33131;
• VHG's corporate headquarters, located at 4100 Bayshore Boulevard, Suite 1200, Tampa, FL 33611; or
• VCR's Destin office, located at 7820 Gulf Breeze Parkway, Suite 400, Destin, FL 32541.
In certain circumstances, interviews may be conducted by videoconference if in-person attendance is impracticable, provided that the interview can be conducted in a secure and confidential setting. The investigation team will make reasonable efforts to accommodate witness schedules, but the scheduling of interviews will be driven by the Investigation's needs and timeline.
B. Interview Teams
The interview teams will be composed as follows:
Howard Quinn, Responsible Partner, will conduct or directly supervise all interviews of the three subjects of the Investigation (Daskine, Prescott, and Serrano). Mr. Quinn will also conduct interviews of senior management witnesses (Calder, Griffith, and Navarro) and certain other key witnesses as the Investigation warrants. Mr. Quinn will serve as the lead interviewer in all subject interviews, responsible for questioning the witness and managing the interview process.
Liam Donahue, Lead Associate, will serve as the primary note-taker during interviews conducted by Mr. Quinn and will draft the memoranda of interview for all interviews in which he participates. Mr. Donahue will also serve as the lead interviewer for certain non-subject interviews, as directed by Mr. Quinn.
Steven Hollander, Working Associate, will assist with document preparation for interviews, including the assembly of document binders or electronic document sets to be used during witness questioning. Mr. Hollander may conduct certain non-subject interviews of operational and finance personnel, under Mr. Quinn's supervision, and will draft memoranda of interview for those interviews.
Conrad Ashby, Billing Partner, will participate in interviews as needed, particularly where his expertise in securities law matters is relevant to the line of questioning or where the complexity of the issues warrants the presence of a second senior attorney.
At least two members of the investigation team will be present at every interview. This ensures the accuracy of the interview record and provides a second witness to the administration of Upjohn warnings and the substance of the witness's statements.
C. Attendance by Personal Counsel for Subjects
Each of the three subjects of the Investigation has retained personal counsel, as follows:
• Garrett W. Daskine is represented by James Corwin Merritt of Merritt & Dunleavy LLP, Miami, FL.
• Nicole Prescott is represented by Candace O'Brien Langford of Langford Pace LLP, Tallahassee, FL.
• Ryan Mateo Serrano is represented by Marco A. Ruiz of Coletti & Ruiz PA, Tampa, FL.
Each subject's personal counsel will be notified in advance of all scheduled interviews of his or her respective client and will be invited to attend. Subject counsel may attend interviews of their respective clients, observe the proceedings, consult privately with their clients during breaks, and raise objections or concerns regarding the propriety of specific questions. However, the following ground rules will apply:
1. Subject counsel may not attend interviews of other witnesses. Each attorney's attendance is limited to interviews of his or her own client.
2. Subject counsel may not direct or instruct the witness not to answer questions posed by the investigation team, except to the extent that the witness invokes a personal constitutional privilege, such as the Fifth Amendment privilege against self-incrimination. If a witness invokes the Fifth Amendment, the invocation will be noted on the record and reported to the Audit Committee.
3. Subject counsel may not engage in coaching, prompting, or otherwise directing the witness's testimony during the interview. Subject counsel may request breaks for the purpose of private consultation with their client, and such requests will be accommodated within reason.
4. Subject counsel will be expected to adhere to the confidentiality protocols described in Section XI of this memorandum, including the obligation not to disclose the substance of the interview to other subjects or their counsel.
Calderwood & Harkness will establish these ground rules with each subject's personal counsel in writing prior to the first interview of each subject. If any dispute arises regarding the ground rules, the matter will be referred to the Audit Committee for resolution.
D. Order of Interviews
The investigation team will conduct interviews in a deliberate sequence designed to maximize the effectiveness of the Investigation. As a general matter, interviews will proceed from the periphery inward — that is, non-subject witnesses and witnesses with contextual or background knowledge will be interviewed first, followed by management witnesses, and finally by the subjects themselves. This sequencing allows the investigation team to develop a thorough factual foundation before conducting the most consequential interviews.
The preliminary interview schedule is as follows:
August 2023:
• William Gentry, CPA, lead engagement partner, HSA (informational interview; no Upjohn warnings)
• Thomas Rhett Griffith, CFO, VHG (full Upjohn warnings)
• Margaret Calder, CEO, VHG (full Upjohn warnings)
• Select VCR operational and finance employees, including individuals involved in timeshare-interest sales processing, revenue recognition, and accounts payable at the Coral Dune and Palmetto Bluff properties (full Upjohn warnings)
• Select VHG corporate finance and accounting personnel (full Upjohn warnings)
September – October 2023:
• Ryan Mateo Serrano, Controller, VCR (full Upjohn warnings; personal counsel Marco A. Ruiz invited)
• Garrett W. Daskine, Division President, VCR (full Upjohn warnings; personal counsel James Corwin Merritt invited)
• Nicole Prescott, VP of Finance, VCR (full Upjohn warnings; personal counsel Candace O'Brien Langford invited)
• Additional VCR employees as needed based on information developed during the August interviews
October 2023 and Beyond:
• Follow-up interviews of previously interviewed witnesses as warranted by evolving evidence
• Additional witnesses identified through document review and forensic accounting analysis
The investigation team reserves the right to adjust the interview schedule as the Investigation progresses. Factors that may necessitate changes include the pace of document review, the results of Crestline's forensic accounting analysis, the availability of witnesses and their counsel, and any developments with HSA's audit work or potential regulatory inquiries.
E. Memoranda of Interview
A detailed memorandum of interview will be prepared for each witness interview. The memorandum will be drafted by Liam Donahue (for interviews he attends) or Steven Hollander (for interviews he conducts independently), and will be completed within forty-eight (48) hours of the conclusion of the interview. All memoranda of interview will be reviewed by Howard Quinn before finalization.
Each memorandum of interview will bear the legend: "PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT."
Each memorandum of interview will include the following information:
• The date, time, and location of the interview;
• The identity of all attendees, including the interviewers, the witness, and any personal counsel present;
• A confirmation that Upjohn warnings were administered (for employee witnesses) or that appropriate disclaimers were provided (for third-party witnesses), including whether the witness acknowledged understanding;
• A narrative summary of the questions posed and the witness's responses, organized chronologically or by topic as appropriate;
• A list of all documents shown to the witness during the interview, identified by document number or Bates range;
• Interviewer observations regarding the witness's demeanor, responsiveness, and credibility; and
• Any follow-up items or areas requiring further investigation.
Memoranda of interview will not be shared with the interviewee, the interviewee's personal counsel, or any third party. Memoranda will be provided to the Audit Committee upon request and will be maintained in Calderwood & Harkness's privileged investigation files.
F. Voluntary vs. Compulsory Participation
As current employees of VHG and VCR, all VHG and VCR personnel are expected to cooperate fully with the Investigation as a condition of their continued employment. This expectation of cooperation is consistent with VHG's Code of Business Conduct and Ethics, which requires employees to cooperate with internal investigations, and with VHG's Employee Handbook, which provides that failure to cooperate with lawful internal investigations may constitute grounds for disciplinary action, up to and including termination of employment.
If any subject of the Investigation refuses to participate in an interview, asserts the Fifth Amendment privilege against self-incrimination, or otherwise declines to answer questions, the following steps will be taken:
1. The refusal or invocation will be documented in the memorandum of interview and reported promptly to the Audit Committee.
2. In the context of the Investigation's internal findings and recommendations, adverse inferences may be drawn from a subject's refusal to cooperate or invocation of the Fifth Amendment. The investigation team notes, however, that such adverse inferences are appropriate only in the internal corporate context and may not be drawn in any subsequent government proceeding.
3. The Audit Committee will be consulted regarding any personnel actions that may be appropriate in response to non-cooperation.
If a subject is placed on administrative leave or terminated during the course of the Investigation, the investigation team will assess the extent to which cooperation obligations survive the termination of employment. To the extent that the subject's employment agreement, separation agreement, or other contractual arrangement imposes continuing cooperation obligations, the investigation team will work with VHG's General Counsel to enforce those obligations.
VI. Interactions with Subjects' Individual Counsel
A. Communications Protocol
All communications with the subjects of the Investigation regarding the substance of the Investigation will be conducted exclusively through their respective personal counsel:
• Communications regarding Garrett W. Daskine will be directed to James Corwin Merritt, Merritt & Dunleavy LLP, Miami, FL.
• Communications regarding Nicole Prescott will be directed to Candace O'Brien Langford, Langford Pace LLP, Tallahassee, FL.
• Communications regarding Ryan Mateo Serrano will be directed to Marco A. Ruiz, Coletti & Ruiz PA, Tampa, FL.
Calderwood & Harkness attorneys and staff will not communicate directly with any subject regarding the substance of the Investigation without the knowledge and consent of the subject's personal counsel. This protocol applies to all substantive communications, including interview scheduling, document requests, and any communications regarding the subject's status or potential personnel actions. Routine administrative communications that do not touch upon the substance of the Investigation (e.g., logistics regarding administrative leave) may be handled through VHG's General Counsel and Human Resources, but Calderwood & Harkness will provide guidance on the scope of permissible administrative communications to avoid any inadvertent substantive contact.
B. Document Requests to Subjects
To the extent the investigation team determines that documents or electronically stored information ("ESI") in the personal possession, custody, or control of any subject may be relevant to the Investigation — including personal devices (mobile phones, tablets, laptops), personal email accounts, text messages, or cloud storage — requests for such materials will be directed to the subject's personal counsel. The investigation team will work with each subject's counsel to negotiate the scope and logistics of any such production.
Subjects' personal counsel may assert the attorney-client privilege over communications between counsel and their respective clients. Calderwood & Harkness will not seek to compel production of materials that are legitimately protected by the subject's personal attorney-client privilege. However, the investigation team reserves VHG's right to draw appropriate inferences from a subject's refusal to produce non-privileged materials in the subject's personal possession, and any such refusal will be documented and reported to the Audit Committee.
C. Joint Defense / Common Interest
No joint defense agreement or common-interest agreement exists between VHG and any individual subject of the Investigation, and no such agreement should be entered into. The interests of VHG, as represented by the Audit Committee, and the interests of the individual subjects are potentially adverse, and the entry into a joint defense or common-interest arrangement would be inappropriate and could compromise the integrity of the Investigation.
Calderwood & Harkness will not share investigation findings, work product, privileged communications, or any other materials generated in connection with the Investigation with any subject's personal counsel, absent explicit written authorization from the Audit Committee. Similarly, Calderwood & Harkness will not participate in joint defense meetings, shared document reviews, or coordinated legal strategy sessions with any subject's personal counsel.
VII. Coordination with VHG General Counsel
A. Role of Patricia Navarro
Patricia Navarro serves as the General Counsel of VHG. Ms. Navarro is not a subject of the Investigation and is not believed to have any personal involvement in the matters under review. However, as the chief legal officer of VHG, Ms. Navarro occupies a unique position that requires careful delineation of her role in relation to the Investigation.
Ms. Navarro may assist with the facilitation of the Investigation in the following respects:
• Coordinating the collection of documents and ESI from VHG and VCR information systems;
• Communicating document-preservation obligations to VHG and VCR personnel;
• Facilitating logistical arrangements for witness interviews at VHG and VCR offices;
• Providing background information regarding VHG's corporate structure, governance, policies, and procedures; and
• Serving as a point of contact for administrative matters, including the implementation of personnel actions and the communication of administrative leave decisions.
Critically, Ms. Navarro will not direct, control, or supervise the Investigation. The Investigation is being conducted at the direction of the Audit Committee and under the independent management of Calderwood & Harkness. Ms. Navarro does not have authority to determine the scope of the Investigation, the order or content of witness interviews, or the substance of the Investigation's findings or recommendations.
Calderwood & Harkness will keep Ms. Navarro informed of the Investigation's progress at a high level, as appropriate and as authorized by the Audit Committee. High-level updates may include general information regarding the status of document collection, the general timeline for upcoming interviews, and logistical coordination matters. However, detailed findings, interim conclusions, legal analyses, and privileged work product will be reported exclusively to the Audit Committee unless the Audit Committee specifically authorizes broader dissemination to Ms. Navarro or other members of management.
B. Separation of Functions
The Audit Committee has engaged Calderwood & Harkness independently of VHG management. This independence is a cornerstone of the Investigation's credibility and is consistent with the Audit Committee's obligations under the Sarbanes-Oxley Act and applicable SEC rules, which require audit committees of listed companies to have the authority and resources to engage independent counsel.
Ms. Navarro's role in the Investigation is limited to facilitation, as described above. She does not serve as a gatekeeper for investigation activities, and her approval is not required for any investigation decision. If at any point a conflict arises between VHG management's interests and the Investigation's needs — for example, if management seeks to limit the scope of the Investigation, delay witness interviews, or restrict access to documents — the Audit Committee's directives will control, and Calderwood & Harkness will proceed in accordance with the Audit Committee's instructions.
The investigation team will promptly notify the Audit Committee of any situation in which management interference, obstruction, or non-cooperation materially impedes the Investigation.
VIII. Coordination with Independent Auditor — Hargrove, Steen & Aldrich LLP
A. Background. Hargrove, Steen & Aldrich LLP ("HSA") serves as the independent registered public accounting firm for VHG. HSA's lead engagement partner for the VHG audit is William "Bill" Gentry, CPA, and HSA's office responsible for the engagement is located at 101 East Kennedy Boulevard, Suite 3200, Tampa, FL 33602.
As described in Section II above, HSA identified the potential material weakness in VCR's internal controls over financial reporting during its interim review of VHG's financial statements for the quarter ended March 31, 2023. HSA communicated this finding to VHG's CFO and Audit Committee Chair on June 19, 2023, and that communication served as the catalyst for the Investigation.
HSA's audit work and Calderwood & Harkness's Investigation serve different but related purposes. HSA is engaged to audit VHG's financial statements in accordance with the standards of the Public Company Accounting Oversight Board ("PCAOB") and to report on the effectiveness of VHG's internal controls over financial reporting. Calderwood & Harkness is engaged to conduct a legal investigation into potential misconduct and to advise the Audit Committee on legal exposure, remediation, and related matters. While these functions are distinct, they share a common factual foundation, and coordination between the two workstreams is necessary to avoid duplication of effort, ensure efficiency, and maintain the integrity of both processes.
B. Information Sharing with HSA
Calderwood & Harkness will issue a formal coordination letter to HSA (the "Coordination Letter"), targeted for delivery in early August 2023, establishing protocols for information sharing between the investigation team and HSA during the pendency of the Investigation.
The following principles will govern information sharing with HSA:
1. Factual Information. Factual information — such as transaction data, financial records, journal entries, supporting documentation, and similar non-privileged materials — may be shared with HSA in furtherance of HSA's audit responsibilities, provided that such sharing does not result in the waiver of the Audit Committee's attorney-client privilege or attorney work-product protection. The investigation team will review any factual information proposed for sharing with HSA to confirm that it does not contain or embed privileged communications or work-product material.
2. Legal Conclusions and Work Product. Calderwood & Harkness's legal conclusions, mental impressions, analytical memoranda, and attorney work product will not be shared with HSA. HSA is a third party for privilege purposes, and the disclosure of privileged materials to HSA could result in waiver of the attorney-client privilege and/or the work-product protection, particularly in light of the SEC's position that voluntary disclosure of privileged materials to the SEC's independent auditor may constitute a waiver.
3. HSA Work Papers and Findings. HSA may be asked to share its audit work papers, interim review findings, and other materials relevant to the revenue-recognition issues and internal-controls assessment with the investigation team. Calderwood & Harkness will coordinate such requests through HSA's engagement partner, William Gentry, and will comply with PCAOB rules governing access to audit work papers.
C. Interview of HSA Personnel
The investigation team plans to interview William Gentry, CPA, HSA's lead engagement partner, on an informational basis. Because Mr. Gentry is not an employee of VHG or VCR, Upjohn warnings will not be administered; however, appropriate disclaimers will be provided at the outset of the interview, as described in Section IV.C above.
The interview of Mr. Gentry will cover, among other topics: (a) HSA's Q1 2023 interim review findings regarding VCR's revenue recognition of timeshare-interest deposits; (b) the basis for HSA's communication of a potential material weakness in VCR's internal controls over financial reporting; (c) HSA's observations regarding VCR's accounting policies and practices; (d) HSA's interactions with VCR finance personnel, including Prescott and Serrano, during the interim review; and (e) any additional concerns or observations that HSA may have regarding VCR's financial reporting.
IX. Coordination with Outside Securities Counsel — Westlake Burris & Holt LLP
A. Role of Westlake Burris
Westlake Burris & Holt LLP ("Westlake Burris") serves as VHG's regular outside securities counsel. The lead partner on the VHG relationship is Irene Castellanos, and Westlake Burris's offices are located at 600 Brickell Avenue, Suite 3100, Miami, FL 33131. Westlake Burris advises VHG on its ongoing SEC disclosure obligations, including the preparation and filing of periodic reports on Forms 10-K, 10-Q, and 8-K, as well as proxy statements and other SEC filings. Westlake Burris also advises VHG on corporate governance matters, securities law compliance, and capital markets transactions.
In the context of the Investigation, Westlake Burris's role is to advise VHG on the SEC disclosure implications of the Investigation's findings, including potential obligations to file a Form 8-K, potential restatement of previously filed financial statements, and any related disclosure matters. Westlake Burris does not direct or control the Investigation and does not serve as investigation counsel.
B. Coordination Protocol
Calderwood & Harkness and Westlake Burris will coordinate closely regarding the timing and content of any public disclosures that may be necessitated by the Investigation's findings. This coordination is essential to ensure that VHG meets its obligations under the federal securities laws while preserving the integrity of the Investigation and the Audit Committee's privilege.
Specifically, the following coordination protocol will apply:
1. Form 8-K Filings. If the Investigation determines that VHG's previously filed financial statements contain material misstatements and cannot be relied upon, VHG may be required to file a Form 8-K under Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review). Calderwood & Harkness will provide Westlake Burris with the factual findings necessary for Westlake Burris to assess VHG's disclosure obligations and to prepare any required filings, subject to the Audit Committee's prior approval of the scope of information to be shared. Calderwood & Harkness will review any proposed disclosure language in coordination with Westlake Burris to ensure accuracy and consistency with the Investigation's findings.
2. Periodic Reports. To the extent that the Investigation's findings affect VHG's ongoing periodic reporting obligations — including the accuracy of financial statements included in Forms 10-K and 10-Q, the adequacy of disclosure controls and procedures, and the effectiveness of internal controls over financial reporting — Calderwood & Harkness will coordinate with Westlake Burris to ensure that VHG's disclosures are accurate and complete.
3. Restatement Considerations. If a restatement of previously filed financial statements is determined to be necessary, Calderwood & Harkness and Westlake Burris will coordinate on the scope and timing of the restatement, the content of the related disclosures, and the notification of HSA and the SEC as required by applicable rules.
Calderwood & Harkness and Westlake Burris will maintain a common-interest relationship to the extent that both firms represent VHG — Calderwood & Harkness through the Audit Committee, and Westlake Burris through the company — with respect to overlapping subject matter related to the Investigation and its disclosure implications. This common-interest relationship provides a basis for the protection of communications between the two firms under the common-interest doctrine, so that the sharing of information and legal analysis between Calderwood & Harkness and Westlake Burris does not result in a waiver of the attorney-client privilege or work-product protection. The common-interest relationship will be documented in a common-interest agreement to be executed by both firms.
C. SEC Inquiry Considerations
If the SEC Division of Enforcement opens a preliminary inquiry or formal investigation into the matters under review, Calderwood & Harkness will coordinate with Westlake Burris on VHG's response strategy. Key considerations include: