St. Joe Company, a real estate development and operating company, agreed to settle the charges filed by the Securities and Exchange Commission (SEC). The company’s former top executives and two former accounting department directors also agreed to settle the charges against them.
The company was accused of practicing improper accounting for the declining value of its residential estate developments during the financial crisis.
ValueWalk's Raul Panganiban interviews Joseph Cioffi, Author of Credit Chronometer and Partner at Davis + Gilbert where he is Chair of the Insolvency, Creditor’s Rights & Financial Products Practice Group. In the interview, we discuss the findings of the 3rd Annual report. Q2 2021 hedge fund letters, conferences and more The following is a computer Read More
Einhorn shorted St. Joe Company in 2010
In 2010, David Einhorn of Greenlight Capital shorted the shares of St. Joe Company. The hedge fund manager said the company is similar to a “moonscape” rather than a luxury development. He noted that the company overvalued its real estate holdings.
The following year, the SEC launched an investigation against the company. St. Joe Company announced that its Board of Directors decided to explore financial and strategic alternatives to boost shareholder value. The company hired Morgan Stanley to help in its comprehensive and thorough review of alternatives.
At the time, Bruce Berkowitz, the portfolio manager of Fairholme Fund, was the largest shareholder of St. Joe Company. He defended St. Joe Company against the attacks of Einhorn.
Berkowitz’ Fairholme Capital Management owns 32.3% of St. Joe Company based on its 13D filing earlier this month.
St. Joe Company violations
According to the SEC, St. Joe Company overstated its earnings and assets in 2009 and 2010. The findings of the Commission proved that Einhorn was right.
St. Joe Company failed to include all the necessary costs in impairment testing including all cash outflows in 2009 until the second quarter of 2010.
The company failed to consider alternative courses of action related to its Victoria Park Project. The Commission found that the company considered only one single course of action—fully developing the property until 2029. If the company considered that likelihood of a potential sale of the property by the end of 2009, it would have been required to impair Victoria Park by at least $55 million in its 3Q 2009 filing, which is a significant amount.
The SEC also found that the company’s, COO Britton Greene, CFO William McCalmont, CAO Janna Connolly, Manager of Finance Brian Salter, andAccounting Director Phillip Jones failed to identify or correct any errors in St. Joe Company’s financial before 2010, when it was accused of overvaluing its real estate development assets and failing to take material impairment charges.
The Commission found that Salter used assumptions generated in conducting the impairment testing after the quarter ended September 30, 2010.
St. Joe Company’s executives failed to review or effectively cause a review of its accounting for its previous financial statements and correct the errors. They also failed to use existing approved assumptions for the Q3 2010 impairment testings.
They applied unreasonably high beachfront pricing for impairment purposes and failed to disclose a significant change in strategy. Furthermore, St. Joe Company failed to maintain adequate books-and-records concerning its impairment testing of real estate developments.
St. Joe Company deprived investors of critical information
In a statement, Andrew Ceresney, Director, SEC Enforcement Division emphasized that it is important for those responsible for the accounting and financial reporting of a company to be familiar with the specialized accounting rules and properly apply it.
According to him, “St. Joe and its senior executives failed to do” their obligations, and “deprived investors of critical information with which to make informed investment decisions.”
On the other hand, Stephen L. Cohen, associate director, SEC Enforcement Division said, “St. Joe’s financial statements repeatedly failed to accurately reflect the declining value of its most important assets during the financial crisis.”
St. Joe Company agreed to pay a civil penalty of $2.75 million to settle the charges of the SEC.
Mr. Greened agreed to pay a $120,000 fine and disgorge ill-gotten gains of $400,000 plus prejudgment interest. Mr. McCalmont agreed to pay a $120,000 penalty and disgorge $180,000 plus prejudgment interest. Connolly agreed to pay a $70,000 penalty and disgorge $60,000 plus prejudgment interest. Mr. Salter agreed to pay a $25,000 fine.
The three executives also agreed to be suspended from appearing or practicing before the SEC as an accountant. They have the right to apply for reinstatement after two years (in the case of McCalmont and Jones), and after three years (in the case of Connolly and Salter).
Furthermore, they agreed to cease and desist from committing or causing any future violations of the provisions for which each was charged.