Wintergreen Advisers, LLC (“Wintergreen”) today announced that it
submitted the following letter to the independent directors of
Consolidated-Tomoka Land Company (NYSE:CTO, “CTO”). Wintergreen believes
CTO’s recent public filings have not met the standards set forth in
various federal securities laws. Furthermore, Wintergreen believes 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, including
the trading of a blind pool with borrowed money. Wintergreen believes
that CTO's management violated both the letter and the spirit of
multiple laws, and in light of this, expects CTO's Board of Directors to
conduct a thorough and independent inquiry.
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December 17, 2015
Consolidated-Tomoka Land Co.
c/o William L. Olivari, Audit
Committee Chairman
8 Creekview Way
Ormond Beach, FL 32174
Memorandum to: Consolidated-Tomoka Land Co. Independent Directors
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 claw back
of bonuses and private causes of action under Rule 10b-5.
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.
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Regards,
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David J. Winters, CEO
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Liz Cohernour, COO
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1 Luis A. Aguilar, SEC Commissioner, 4/21/14, Emory
University School of Law.
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About Wintergreen Advisers
Established in 2005, Wintergreen is an independent global money manager
that employs a research-driven value style in managing global
securities. As of September 30, 2015, Wintergreen Advisers had
approximately $1 billion under management on behalf of individuals and
institutions through its mutual fund and other clients, and is based in
Mountain Lakes, New Jersey.
For further information on Wintergreen Advisers, please call
973-263-4500 or visit www.wintergreenadvisers.com.
For information, forms and documents regarding our U.S. mutual fund,
please visit www.wintergreenfund.com.
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