David Winters: CTO Management Violating Securities Laws
Below is David Winters and his Wintergreen Advisers recent letter to Consolidated-Tomoka Land Co. (CTO). Winters owns 26 percent of the company and sent a letter last month on how to unlock value and capitalize on the company's growing real estate value. Here's the recent letter:
Consolidated-Tomoka Land Co.
c/o William L.
8 Creekview Way
Ormond Beach, FL 32174
Subject: Possible Violations of Federal Securities Laws
On November 13, 2015, Wintergreen Advisers, LLC sent the independent directors of Consolidated-Tomoka Land Co. ("CTO" or the "Company") a letter identifying what we view as specific examples of failure at the senior management level. We would like to reiterate those concerns and to discuss them in the context of relevant federal securities laws. We believe CTO management violated both the letter and the spirit of multiple laws, and in light of this, do not understand how CTO's board of directors ("Board") can stand by and do nothing. At the very least, we would expect the Board to conduct a thorough and independent inquiry into these matters and to publicly report its findings.
Our overall concerns relate to the requirements of the following significant federal securities laws:
1.Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley")
2.Securities Act of 1933 (the "Securities Act")
3.Securities Exchange Act of 1934 (the "Exchange Act")
In total, these laws and the rules promulgated thereunder require ongoing forthright and complete disclosure of material financial and non-financial information. A company's management is primarily responsible for ensuring compliance with these laws. We believe CTO's recent public filings have not met the standards set forth in these federal securities laws and furthermore, we believe that CTO's management, led by John Albright, is actively trying to deceive shareholders with filings, investor presentations and disclosures that obfuscate, confuse and hide what is really going on at CTO.
For example, in our earlier letter to the Board, we detailed the following issues:
CTO's Use of and Disclosure Regarding Leverage
Overall, CTO's long-term debt has increased 44% in 2015 and over 135% since the beginning of 2014. This rapid increase in the use of leverage is extremely alarming to us and we believe it puts the entire Company at risk. In addition, based on CTO's most recent Form 10-Q, it appears that CTO is making long-term commitments with short-term borrowing, which exposes shareholders to interest rate risk. Furthermore, we believe CTO's disclosure with regard to its use of leverage is extremely misleading to shareholders and creates the impression that CTO's low leverage character has not changed. This obfuscation prevents shareholders from fully appreciating what we view as a substantial and radical change to CTO's business and strategy.
We believe this could create serious potential liability under Rule 10b-5 of the Exchange Act and Item 303 of Regulation S-K under the Securities Act. Rule 10b-5 makes it unlawful for any person to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. Here, in investor presentations, publicly-filed reports and statements certified by Mr. Albright, we believe CTO both mischaracterizes the degree of its use of leverage and fails to adequately disclose material details regarding this leverage. Further, Item 303 of Regulation S-K requires that a company disclose a description of any known trends or uncertainties that it reasonably expects will have a material impact on its business. Here, we believe it is clear that CTO's increased use of leverage represents a continuing trend and we question how anyone could take the view that a company which increases its leverage to such a degree would not expect that increase to have a material impact on its business. As such, we wonder why there is not significantly more disclosure in this area. It should be noted that the violation of these rules can result in civil or criminal penalties.
CTO's Calculation of Leverage
In a November presentation, CTO management chose to present leverage ratios against "Total Enterprise Value". To us, this appears to purposefully understate CTO's true use of leverage in order to justify increasing leverage. In our opinion, this is extremely dangerous and has the potential to destroy shareholder value because it prevents shareholders from adequately assessing CTO's risk profile. In fact, if measured against CTO's Equity Market Capitalization from the same presentation, CTO's leverage would be an alarming 48%, which could force CTO to sell off its most valuable assets at a steep discount if it is unable to service its debt. Although Mr. Albright recently stated that "[CTO] measures its net asset value on a regular basis and believe[s] that [CTO's] recent share price is not representative of the net asset value of the Company", we do not think this justifies creating a reference metric that, in our opinion, omits clear disclosure of CTO's dramatically increased leverage when measured against CTO's equity market capitalization.
In addition to Rule 10b-5 and Regulation S-K concerns similar to those discussed above, we believe Mark Patten's e-mail disclosure that CTO is using hypothetical metrics to measure net asset value is also material. If CTO were to include these hypothetical metrics to measure net asset value in its financial reports without certain clarifications, we believe it could violate various provisions of Sarbanes-Oxley, including Regulation G which states that a company that presents a non-GAAP financial measure is required to compare such measure with the most comparable financial measure that is calculated in accordance with GAAP. In our view, failing to provide such a comparison prevents shareholders from accurately assessing CTO's leverage. In addition, under Section 302 of Sarbanes-Oxley, the CEO and CFO of a company are required to certify that submitted reports fairly present the financial condition of the company in all material respects and that such reports do not contain any material untrue statements or material omissions and are not misleading. Further, under Section 902 of Sarbanes-Oxley, persons can be held liable for attempting or conspiring to commit violations of Sarbanes-Oxley. We believe CTO's management, including Mr. Albright, intentionally misled shareholders and hid CTO's true level of leverage by measuring CTO's leverage in such a way that, in our opinion, would not have been permissible under Sarbanes-Oxley if included in CTO's financial statements. Violations of Sarbanes-Oxley and the rules promulgated thereunder can result in fines, imprisonment, the
CTO's Securities and Derivatives Portfolios
CTO has recently dramatically expanded an investment portfolio and initiated a derivatives portfolio, with extremely limited disclosure to shareholders. For example, CTO is trading "put options . . . related to common stock investments" and these investments are priced using Level 2 inputs. These activities raise a number of questions for us, and we would have expected a high level of detail in CTO's reports to shareholders. Additionally, we believe that CTO's management is trading this blind pool with borrowed money. Unfortunately we have found CTO's disclosure around these matters woefully inadequate. According to CTO's Form 10-Q, Messrs. Albright and Patten have determined CTO is in compliance with SEC regulations, but we believe these investment activities require a higher level of disclosure. Under Item 305 of Regulation S-K, a company is required to disclose in its Form 10-Q, material qualitative and quantitative information about the market risk inherent in the financial and derivative instruments that it trades, including the primary market risk exposures and how they have changed in the past year and how they are managed. Here, we believe CTO's dearth of disclosure around these activities could give rise to violations of Item 305 of Regulation S-K, whereby CTO management has failed to disclose material information regarding investment and derivatives portfolios that are becoming a larger and larger part of CTO's business plan. In addition, this same conduct could give rise to a Rule 10b-5 violation whereby CTO and its management could be held liable for omitting to state material facts necessary in order to make the Form 10-Q not misleading
In conclusion, we believe CTO management's pattern of apparent mistruths and misrepresentations must be immediately investigated by the Board. Not only do shareholders deserve an accurate picture of CTO's activities and financial health, the items we have detailed in this letter may represent a massive overhanging liability for CTO and its shareholders and should be addressed without delay. It is the Board's responsibility to look after the interests of its shareholders. It is of paramount importance that the Board takes a more active role in the direction and management of the company. In a recent speech, SEC Commissioner Luis Aguilar remarked "Good corporate governance also helps to remind the company's directors that they work for the company's shareholders, not for themselves, and certainly not for management."1 The focus, front and center, belongs on the maximization of shareholder value. We believe the Directors need to immediately review and address the concerns that we raise in this letter. We are disappointed that the Board has not meaningfully responded to our recent letter and expected better, but we are willing to work with CTO's Board to get to the bottom of what we view as CTO management's recent failures.
David J. Winters CEO