SEC Cites Firm’s Inadequate Books For Delaying Investigation

The SEC took the unusual step of citing the inadequacy of the books and records of the firm for “adversely impacting” its investigation and “causing unreasonably prolonged uncertainty concerning” the company’s historic accounting. The company was a major Florida real estate developer and the records related to the impairment testing of its properties. In the Matter of The St. Joe Company, Adm. Proc. File No. 3-16927 (October 27, 2015).

Respondents, in addition to the firm, are: Wm. Britton Greene, COO; William S. McCalmont, CFO; Janna Connolly, CPA, CAO; J. Brian Salter, CPA, Manager of Finance; and Phillip B. Jones, CPA, Director of Accounting.

St. Joe is a Florida based developer of residential and commercial real estate. The firm also owns rural and timber land and operates resorts. The action here centers largely on the firm’s failure to take the appropriate impairment charges for certain real estate as a result of the actions or inactions of the individual Respondents from January 2009 through March 2011.

Virtually all of the firm’s assets income and revenue was tied to real estate. The applicable accounting principles require that long-lived assets being held and used be tested for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. Here there were such events. Respondents Greene, McCalmont, Connolly, Salter and/or Jones shared responsibility for the testing. In addition, Respondents Greene, McCalmont and Connolly were members of the investment committee which approved all business assumptions and forecasted undiscounted cash flows that were used as part of impairment testing.

First, from the beginning of 2009 through the second quarter of 2010 the firm’s impairment testing failed to include all cash outflows. To the contrary, impairment testing was based on worksheets which were a partial summary of cash flows used in St Joe’s approved economic models. This resulted in not taking impairments on projects of $55 million in Q1 2009, and $19 million in Q4 2009.

Second, with regard to the Victoria Park project and testing for impairment in Q3 2009 the firm failed to consider the likelihood of selling the project in bulk by the end of 2009. Yet the investment committee had approved such a transaction and the impairment testing was done just after one firm withdrew such an offer. Ultimately the property was sold to another firm as a bulk sale. Yet the impairment test was based on the assumption that the property would be fully developed. While the auditors were told that another company was interested, they were not informed of the extensive steps in the purchase process that had been taken. If the proper testing had been done Victoria Park would have been impaired by at least $55 million.

Third, Respondents Greene, McCalmont, Connolly and Slater failed to review, or effectively cause a review, of St. Joe’s accounting for prior periods and identify the errors made. While Mr. Salter recognized there were flaws in prior methods, and Mr. Greene had concerns which were expressed to Respondents McCalmont and Connolly after a short seller presentation claiming the firm’s properties were overvalued, nothing was done and the errors were not corrected. The firm also improperly applied updated assumptions to its models when doing testing for certain periods which caused it to not take about $15 million in impairments.

Fourth, with respect to the Windmark Beach II project, the firm’s largest real estate development in terms of capital expenditures, St. Joe adopted unreasonable values for the property. The project was a major target of the short-seller presentation. Nevertheless, the firm used unreasonable valuations for the property which generated sufficient notional cash flows, rendering it recoverable and avoiding an impairment charge which would have been at least $80 million for Q4 using the proper values.

Although the Order alleges that the inadequate books and records of the firm hindered the staff investigation, it also acknowledges the fact that St Joe changed personnel at the board and management levels. A new business strategy was adopted and the firm recognized aggregate impairment losses of over $374 million associated with its investments in real estate. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and (b) and 13(b)(5).

To resolve the proceedings Respondents St. Joe, Greene, McCalmont, Connolly and Salter consented to the entry of a cease and desist orders based on Sections 17(a)(2) and (3). Respondent Jones consented to a similar order based on Section 17(a)(2). The order as to each Respondent was also based on each Exchange Act Section cited in the Order except Section 13(b)(5) which was only cited in the orders as to the four individual Respondents.

The firm will pay a penalty of $2,750,000. Respondent Greene will pay $400,000 in disgorgement along with prejudgment interest and a penalty of $120,000; Respondent McCalmont will pay disgorgement of $180,000, prejudgment interest and a penalty of $120,000; Respondent Connolly will pay disgorgement of $60,000, prejudgment interest and a penalty of $70,000; and Respondent Salter will pay a civil penalty of $25,000. Respondents McCalmont, Connolly, Slater and Jones are each denied the privilege of appearing and practicing before the Commission with the right to apply for reinstatement after three years except for Respondents Jones and McCalmont who may apply after two years. The SEC considered the cooperation and remedial efforts of Respondents.