Financial Firestorms Fallout from Embezzling is More than Economic

Financial Firestorms

Embezzling occurs so rarely among New England condominium associations, that when a well-respected manager, trustee or contractor is caught pocketing a community’s funds, everyone affected is likely to be ill-prepared for the consequences. And as if missing revenue isn’t bad enough for any association, these internal types of crime have all kinds of unexpected repercussions that go far beyond whatever losses an insurance policy can fix—assuming there is insurance.

People who commit fraud within an organization are often hiding in plain sight—cashing in on the fact that they have built a trusting relationship with their victims. Perpetrators are not confined to any one group and may be a contractor, a manager or a trustee/board member.

One recent example is a major embezzlement case that started in the fall of 2012 and is still unfolding in the resort community of Waterville Valley, New Hampshire. Because it’s still under investigation, officials are not talking, but the facts gleaned from local news media state that funds from at least 17 condominium reserve accounts were misappropriated and that Stone Property Management (SPM) is under police investigation. The firm managed 27 condo associations in the Waterville Valley area. Losses that have been reported are ranging from $29,000 at one association to well over $100,000 at another.

The condo associations that were victimized initially went to the local police after Stone Property Management shut down. The police promptly turned the investigation over to the Attorney General and the Federal Bureau of Investigation, and the state Department of Labor and the Internal Revenue Service are also involved.

Challenges to the affected associations are complicated and keep compounding, as directors and trustees struggle to normalize operations and calm unit owners. They’re trying everything they can to gain recourse. For instance, in 2013, three associations filed a bankruptcy motion against SPM, to go after more than $200,000 that went to the Internal Revenue Service to pay off a tax lien in October of 2012 by William J. Stone, president of the firm, and his son Sean, who also works for the company.

Unit owners have taken their fears online, warning that condo reserves and operating budgets totaling over $2 million were wiped out; association bank accounts have been closed and new bank accounts needed to open. They expressed fears about where to find funding to pay bills and hire new maintenance companies. They’re worried about “reputational injury to Waterville” and the impact their associations’ financial losses will have on unit sales and mortgage refinancing.

Trustees are scrambling for funds. One of the associations is asking every member to pay a quarterly payment in advance, that comes to just under $1,000 apiece. Other condo associations are making mandatory special assessments to cover the costs.

The lack of official information is especially frustrating—to everyone involved. Since local police turned the case over to the U.S. Attorney’s Office in the N.H. District and the FBI—mum’s the word. Asst. U.S. Attorney Bill Morse says he cannot comment. As of spring 2014, he states, “It’s actively under investigation [with] no arrests yet… but should be resolved within months.”

Could this have been avoided with better oversight? Board members have reported that they had a system of checks and balances until 2012, when money was moved to another bank that provided SPM the means to operate electronically. Prior to that, associations had direct bank access, either online or by looking at official bank statements in person. And the principals in SPM had a long history of excellent work and had been well-respected by dozens of association boards—so what’s not to trust?

Smaller Communities, Greater Risk?

Foster Cooperstein, an attorney in Newton Centre, Massachusetts, points out that in this region, “More typical [than embezzlement] is favoritism… where contract work goes to someone [connected to a trustee] and not out to bid. When funds are stolen from condo accounts, more often than not, it’s involving a small management company.” He notes that individual states may have statutes requiring fiduciary bonds that cover stolen funds, or bonding may be required by the “condo docs,” above and beyond the directors and officers (D&O) insurance, which only protects trustees or board members from claims.

“Most condo associations aren’t that large,” he says, and don’t consider fiduciary bonding, “But it’s more good management practice than trust [to consider bonding]… It’s only when you’re asleep at the wheel that this stuff can go on, and it can go on for some time. Small associations may have a one-person shop, and that person might not have good systems in place, or may develop money problems. I had a condo client with a manager… and they had let him be the only signatory on payables. Then, after a loss was discovered, they realized they were too small [an association] to prosecute, and anyway, they couldn’t find him!”

Cooperstein advises victims of embezzlement to get their insurance company involved immediately, “since they will take action right away. An insurance company will want to investigate and may find out how the theft went on for so long.”

Attorney Frank Flynn, a principal in Flynn Law Group in Boston, agrees that trustees need to stay actively engaged and observant with their management companies, especially smaller ones that have fewer formal systems of checks and balances. “We had a case where a new management company took over at an association and discovered a shady situation—they became suspicious when they had a hard time getting to the [financial] books.” Plus, in a similar situation at another community, something was amiss, but without hard evidence, “They never filed anything,” he adds.

“Directors must make sure they maintain checks and balances, such as requiring two signatures for any check over a certain amount,” Flynn advises, and especially, “Never let one trustee have all the power.”

Bonding Becomes a Deterrent

Bernie Gitlin, executive vice president of Risk Strategies Co., in Needham, Massachusetts, outlines how fidelity coverage evolved as a requirement in the Massachusetts condo statute. “About 20-plus years ago, there was a management company with a principal owner who managed about 30 associations… and he was discovered stealing from all of them. Back then, associations didn’t carry their own fidelity insurance. Well, there was a big clamor for legislators to do something about this, as everyone, including unit owners, was complaining.”

The big problem in this case was that the management company had insurance, but the owner wasn’t personally covered, notes Gitlin, “and the associations didn’t have their own [fidelity] insurance, so no one had any recourse. Plus, he never stole a large amount from any one community, and it’s awfully hard to prove how much was stolen” in cases like this.

Gitlin describes how “a group of us got together” with condo attorneys and insurance professionals weighing in with lawmakers, and “made amendments to the condo law in Massachusetts. Now, any association with more than 10 units is required to buy fiduciary insurance… enough to cover three months of the operating budget.” He says, “It’s basically designed [to insure against theft and embezzlement] by employees or volunteers, and includes management companies.”

One side effect of the Massachusetts condo law is the fact that insurance companies step in to protect their assets, and that may discourage perpetrators. “The fidelity bond companies,” states Gitlin, “are relentless in chasing down the perpetrators” of these crimes. He contends that, “people who know how to embezzle are pretty smart and figure out how to do it.” In spite of that, insurance companies do their investigations, he adds, and in the end, “most perpetrators confess… after they’re discovered.”

Attorney Stephen Marcus, a principal in the Braintree, Massachusetts-based law firm of Marcus, Errico, Emmer & Brooks, P.C. was involved in the creation of that Massachusetts condo law amendment. He says that “under the [state] statute the fidelity bond that associations must now carry specifically covers actions of a manager or management [staff]. In that embezzling case from 1990 [that spurred the legislation] any insurance the management company had wouldn’t cover anything if the principals [in the company] are the ones doing the actual stealing.” He adds, “I haven’t seen any crimes like this in Massachusetts since the statute was adopted in 1991.”

Look Out for ‘Exclusions’

Because embezzlers are often well-entrenched in the community that they’re stealing from, roles can become blurred. Gary Daddario, a partner at the law firm of Perkins & Anctil, P.C. in Westford, Massachusetts, relates a case where “there was a property manager for an association… who was also a unit owner. He had been making off with funds and collecting payment for work that wasn’t done. The trustees concluded that he owed the association money. So they charged his unit account a fee for the money owed, the reasoning was for ‘misconduct.’ The court pointed out the flaw in that approach, stating that the issue was with a property manager and not a unit owner… the unit ownership was a different matter from the trustees’ claim of misconduct. This should have been handled as a tort claim and not a condo law issue.” He notes that only if the board is treating the defendant as a unit owner can they assess the unit’s account.

Then there are the after effects. Daddario relates, “Some years ago, one association had to take drastic action to remedy an embezzlement that had reached six figures. The board had to assess every homeowner… and they resented having to pay because the money got stolen under the board’s watch. In this case, there were charges brought, but no conviction. It created general animosity among unit owners, board members, property managers … and anyone else involved.”

Daddario advises against blindly accepting that insurance will make everything right. “Some policies have exclusions… understand up front what’s covered and what’s not, and confront this issue before something happens. Even then, there are circumstances where associations suffer a loss and may win a court judgment—but it’s a piece of paper. The perpetrator may file bankruptcy, or walk away from a unit… a contractor may simply disappear. So even if you can prove your case, that’s no guarantee you’ll get paid. Even with insurance, the insurance company needs sufficient proof… Exactly how much money was it? And the insurers can really take their time.”

He stresses the importance of checks and balances in discouraging embezzlement, and agrees with Flynn in saying, “The easiest thing to do is to make sure there are two signatures required on checks, and for board members, to actually review and understand the monthly financials.”    

Marie Auger is a freelance writer and a frequent contributor to New England Condominium.

Related Articles

Hands holding auction paddle with bid

The Bidding Process

Finding the Best People at the Best Price

Arrow with dollar bills pointing up. Concept shot for currency exchange rate going up, inflation, economic boom

As Costs Rise, So Do Carrying Charges

Monthly Fees for Co-ops & Condos Up All Over the U.S.

Businessman attracting money with a horseshoe magnet concept for business success, strategy or greed

The Collections Process

Why It’s Critical to Community Health