Commingling Your Cash

Pamela DeLorme couldn’t believe it. A principal in Delkap Management, she was being interviewed by the board of a 48-unit cooperative in Nassau County when a question came up about financial statements.

“What would you do if your managing agent didn’t give you financial statements for a year-and-a-half?” one board member asked.

“It wouldn’t take me a year-and-a-half to get financial statements,” she replied.

But that had been their story. They showed her the information they had received from their current agent. She looked at the bank statements they had only just obtained and then looked at the monthly reports prepared by the managing company and immediately noticed a discrepancy. The co-op was apparently missing about $350,000. The monthly financial statements from the manager did not correspond with the monthlies from the bank.

“We had been getting spreadsheets prepared by the agent,” the president of the co-op says now. “We finally asked for the actual bank statements, and it took three or four months to get them – and then we only got ten statements, which were badly copied and unclear to read. Then we found we couldn’t access the accounts unless we went through the management firm.”

There had been a few red flags, recalls the president: “They hadn’t paid our real estate taxes for a year. They said it was a clerical error and that they’d pay all the late charges.”

According to the president and DeLorme, the financial reports didn’t show monthly collections, only how much money the co-op had at the end of the month. At her interview with the co-op, DeLorme asked to see the co-op’s cancelled checks. She found that they were endorsed not by the management firm as agent for this particular co-op, but simply by the management firm, which was unusual.

More unusual still: the bank account numbers on the checks were different from the numbers on the statements. “That indicates the manager is taking your money and putting it in another account,” she told them. “You’re not getting the money put into your account.”

She also pointed out that, only as bills came due would money be deposited in the co-op’s bank account to cover the bills. The evidence seemed to indicate that the company was commingling funds – i.e., taking all the money from a portfolio of buildings and placing it in one account.

The cooperative dismissed the firm, hired Delkap and also brought in a new accountant, Richard Montanye, a principal at Marin & Montanye, to look at its finances, and attorney Michael Cohen, a partner at Cohen & Warren, to take legal action against the company, Charter Management. The case wound up in court, and last summer, the judge ordered Charter to pay $353,000 – which it did, although Charter principal Michael Richter insists he did nothing wrong. “We do not commingle funds,” he says. “I have no comment about the way I run the finances at my buildings.” Nonetheless, two different accounting firms are now finding financial irregularities at two other Charter properties. Both look like commingling operations, say the CPAs examining the cases.

Although it was fairly common at one time, commingling is now a dirty word in the management business. Some say that it was always an anomaly in the co-op.condo world, a holdover from rental days when, for simplicity’s sake, one owner would combine the many different accounts into a single large one. This practice was carried over by sponsors and management firms when many buildings converted to co-ops in the late 1970s and early ’80s.

“The manager would have what is called a master disbursement account,” explains forensic accountant Mindy Eisenberg Stark, a certified fraud examiner. “They would maintain a separate checking account for each of the buildings they had, and all the receipts would go into the individual accounts and they would transfer funds on a monthly basis into the master disbursement account and pay the bills out of the master disbursement account. The idea was that it was easier for them because they could cut one check to Con Edison that would include all of their buildings, and there was only one big account that needed reconciling. It was really for the ease of the management company.”

Stark adds that there was a financial incentive, too: banks were offering a program called “compensating balances,” which meant the larger the amount the manager had at the bank, the greater the rewards.

“At some point,” says Stark, “they could have millions of dollars in the account, and the bank might then reward them by giving two percent back or waiving certain fees. Technically, the account belonged to the manager; it didn’t belong to the co-op, so the manager would get the benefit. It was a preferred banking arrangement. The danger in it is you haven’t really segregated one co-op’s money from the other, so it’s very easy for the co-ops to be borrowing from each other; when one is running short you use the money from one to pay the other’s bills, even on a temporary basis. And since that account doesn’t belong to any individual co-op, the management company will typically deny access to that account to an auditor because it has [many different buildings’] transactions in it.”

“You have no trace of where money comes in or goes out,” adds Steve Greenbaum, director of management at Mark Greenberg Real Estate. “It makes the accountant’s job a nightmare.”

Although some say that commingling is illegal – attorney James Samson, a partner at Samson, Fink & Dubow, points to a law forbidding the practice by brokers (and managers can only collect rent/maintenance if they are licensed as brokers) – others say that it is a grey area with little case law to illuminate it. Bottom line, the legal status of commingling is murky.

Still, everyone agrees that boards should beware of how their money is handled because commingling is apparently still going on. DeLorme took over a building, in Queens, where the CPA discovered evidence of commingling, while Greenbaum notes that his firm started managing another Queens co-op where the practice apparently had taken place, as well.

Recalls Greenbaum: “We came to the [job] interview, and they said, ‘We haven’t gotten a bank financial statement in two months.’ I said, ‘Hold it right there. Don’t let anyone write any more checks unless you know in advance what they are for.’ The guy stole $150,000.”

How do you prevent commingling? Among the steps you should take:

be sure your management contracts forbid it. “My formal standard contract that I prepare for managers clearly requires several separate accounts,” says attorney Steve Wagner, a partner in Wagner Davis.

insist that you see monthly bank statements, not just financial reports prepared by the manager. Don’t settle for excuses like “Our system crashed,” “We got a new bookkeeper,” etc. Says Greenbaum: “If your managing agent can’t give you an almost-instant snapshot account of where you are, then you’ve got troubles. That’s a real big flag.”

review cancelled checks to be certain that bank statements and bank reports are from the same account. Also, look to see if vendors who you’ve never heard of are being paid from your account. That’s a sign that accounts are being mixed together.

see that your cpa reviews the accounts at least twice a year to note any discrepancies.

have one or two board members as co-signatories. If the funds are commingled and you fire the agent, it could be hard to separate your funds from everyone else’s. Attorney Arthur Weinstein advises boards to have two directors be co-signatories on the building’s account. “It makes it easy for you to transfer the money if you terminate the agent because you have access to the account,” he explains.

In the end, you should trust – but verify. “The bottom line is that the board should be vigilant,” says Greenbaum. “Don’t expect the accountant to catch it. It’s up to you.”