Corruption Concerns

It can’t happen here? Don’t bet on it, as boards once again confront questions about the integrity of their managers and the effectiveness of their safeguards.

On August 3, a few days after he was quoted in Habitat stating that his company, Charter Management, did not illegally commingle its clients’ money in joint accounts, Michael Richter abruptly announced that he was dissolving the firm. At the time, the Queens district attorney’s office was looking into claims that Charter had not only commingled clients’ money in joint accounts, but that some of that money had gone missing.

Shortly before that stunning development, two Manhattan co-ops filed lawsuits in New York State Supreme Court, claiming that Downtown Properties, a Manhattan-based residential management firm, misappropriated funds and failed to account for rent receipts, common charges, and other payments. The disputed funds total at least $1.2 million. A third lawsuit claimed that Downtown and its president, Richard Bassik, siphoned off $212,000 from a commercial condo and a residential co-op for his personal use.

Suddenly, telephones were ringing and co-op and condo boards were scrambling to make sure their money was safe. And people were asking a chilling question: have we gone back to the bad old days of 1990s-style management scandals?

The answer won’t be known for a while. There have not been any indictments against Charter, Downtown, or other management companies. But what these recent developments have made clear is that many co-op and condo boards are asleep at the wheel when it comes to understanding how their property manager and other professionals operate. And that sort of blissful ignorance can be the kiss of death.

The Smell Test

The first thing that smelled wrong to Leon Manoucheri was the bounced checks. He had gone to work for Charter Management in 2006 and was managing eight properties when he started getting notices from the bank that checks were bouncing at one of his co-ops in Forest Hills, Queens. “When I approached Michael [Richter], he told me he forgot to transfer money into their operating account,” says Manoucheri, who accepted the explanation and went about his business.

But soon other problems arose. Payroll checks were bouncing, bills and real estate taxes were not getting paid. “I was getting frustrated,” says Manoucheri. “The back office was strictly Michael Richter. The way it worked was, I would get the bill from the vendor. Accounts Payable would then process the invoice and come to me for approval. Once I approved it, I would give the bill back to Accounts Payable and they would cut the check. The check would then go to Michael Richter, who was the signator for the building’s operating account. When vendors started complaining that they were not getting paid for several months, some members of the staff found that the checks were cut and sitting in [Richter’s] office. I don’t know if that was negligent or criminal.”

In the summer of 2008, Manoucheri resigned from Charter. “I got frustrated with all the complaints I was getting from my boards – checks bouncing, invoices not being paid,” he says. “I had a feeling something was coming down. I have a family to support, and I didn’t want to find out the company was going out of business.” (Today, Manoucheri is a property manager with a different New York management firm.)

James Shields, another former Charter property manager, shared Manoucheri’s frustrations. At the half-dozen properties he managed, Shields says he saw bounced payroll checks, unpaid vendors’ bills, and monthly financial statements that differed from the bank’s statements in “ridiculous” and “blatant” ways. When a check bounced at one property even though it had $350,000 in its account, Shields realized something was seriously wrong. But, he says, he couldn’t get straight answers from Richter. Shields kept wondering: where is the money going?

“I saw [Richter] buy a new house,” he says. “He said he couldn’t afford to give me a raise – and the next week he bought a scooter for $14,000.”

Yet Charter kept doing brisk business, thanks to its good reputation and co-op boards that didn’t ask tough questions. “If the management company’s reputation is good and the numbers add up at the end of the year, boards are happy,” says Shields. “I’m pretty sure the accountants didn’t know how bad it was. From an accounting perspective, we looked normal.”

In February, after two years with the company, Shields’ frustrations pushed him to resign. He is currently unemployed and living with his wife and infant daughter in his in-laws’ apartment in Far Rockaway, Queens. (Michael Richter did not respond to a request to be interviewed.)

A Charter Course in Confusion

Manoucheri and shields were not the only ones to find out that something was rotten inside Charter Management. Last year, Pamela DeLorme, president of Delkap Management, was hired to replace Charter as managing agent of Anchors Edge, a 48-unit co-op in Nassau County.

When DeLorme went to the Charter offices to collect the co-op’s files, she learned, as Manoucheri and Shields knew so well, that there was no system in place for anyone to process clients’ monthly financial statements other than Michael Richter.

DeLorme also learned that Charter was depositing money from numerous properties into a single “bulk” account, rather than depositing each property’s money into its own operating account as it was collected every month. “Only as payments were needed would he take money from the bulk account and deposit it in the co-op’s account so checks could be cut,” says DeLorme.

It was a textbook case of “commingling,” according to DeLorme, and it led to predictable problems. Checks for utilities and mortgage payments started bouncing. Further digging revealed that Charter’s monthly financial statements did not match monthly statements from the bank – and more than $350,000 was missing. Working with a new attorney and accountant, DeLorme won a court order for Charter to repay the co-op $353,000.

On July 23, after reading about that court-ordered settlement in Habitat, Sarah Robinson picked up her telephone and called the attorney James Samson of Samson, Fink & Dubow. Robinson is president of the co-op board at the Forester in Forest Hills, Queens, a property that was then managed by Charter, and she was distraught to learn that accountants were finding fresh evidence that Charter was still commingling funds.

“When I heard from her,” Samson recalls, “I told her the first thing she needs to do is fire [Charter] and hire a new management company. Then tell shareholders to stop paying their maintenance to Charter – and send out new August maintenance bills.”

The Forester’s board promptly fired Charter and hired Mark Greenberg Real Estate to manage the property. The board also hired Samson to begin untangling its affairs.

The attorney soon learned that the co-op’s mortgage lender, National Cooperative Bank, had received so many bad checks from Charter that it had begun insisting on wire transfers. No mortgage payment had been received for July. Water and sewer bills and real estate and payroll taxes were also unpaid.

“Everyone’s scrambling right now,” Samson says. “Lots of people are finding their taxes and mortgages didn’t get paid. This is not incompetence. This is a scheme.”

As he continues digging into the Forester’s finances, Samson offers some advice for other boards. “If your managing agent is bouncing checks, if you’re not getting monthly financial statements with a bank statement, paid bills, unpaid bills – then get the hell out of there because there’s something wrong,” he says. “If you’re getting excuses instead of straight answers, get the hell out of there. As soon as checks start bouncing, bells and whistles should start going off.”

The difficulty, as Samson sees it, is twofold: myopia and chumminess. “The problem is that too many board people are closing their eyes,” Samson says. “So are the professionals. I would like to know how many accountants alert their boards that the managing agent is commingling funds.”

Which brings us to the issue of chumminess. Since many accountants are recommended to boards, or hired outright, by property managers, there is little incentive for those accountants to bite the hand that feeds them. This is a case where, in Samson’s opinion, a little animosity might not be such a bad thing.

“You want your professionals to have a healthy skepticism and not be too friendly,” he says. “Loyalties get skewed. Good friends let friends do bad things. Ideally, you want an accountant who hates your managing agent. He’s your watchdog. If he’s not barking, something’s wrong.”

Others disagree. DeLorme, the Delkap Management president, doesn’t think the problem is that the relationships between professionals sometimes get too cozy. Rather, as she sees it, the problem is that some professionals don’t do their jobs.

“It’s up to the accounting firm to tell the board what condition the monthly financial statement is in,” DeLorme says. “When the accountant doesn’t do this, that’s what creates problems. I think it’s wrong for the accountant not to do his job. He’s got a license to protect.”

Yet DeLorme agrees that board nonchalance, myopia, and timidity can lead to trouble. “Unfortunately boards are, first, very naive about what can happen with their funds,” she says. “And second, they’re afraid to ask for basic things. If they do ask, they’re willing to take a half-assed answer. When it comes to money, they should be able to get answers on the spot, and documents within 48 hours.”

Mindy Eisenberg Stark, a CPA who is also a certified fraud examiner, agrees. “I think boards need to understand that they have a responsibility not just to manage day-to-day functions, but also to be aware how finances are being handled,” she says. “Very often, a management company’s monthly packages given to boards don’t contain copies of bank statements and reconciliations. That’s one of the most important things that’s often missing. That shows you that what’s in the management report is real. The managing agent should also give you paid bills, cancelled checks, checks paid. If they get all that, boards will have a much better handle on what’s going on.”

Even after doing that, a board’s work is not done. “Then,” Stark adds, “someone on the board needs to look it over every month – and then ask questions and get answers. If you’re not comfortable with the answers, keep asking questions.”

Don’t Ask, Don’t Tell

The recent avalanche of bad news about Charter and other management companies has been unsettling even to co-op and condo boards who believe their money’s safe. Jeff Glasser, a CPA, has spent 17 years on the board at the Normandy, a 128-unit co-op in Forest Hills, Queens, that was managed by Michael Richter for a quarter of a century.

“Michael called and told me he was closing his doors,” Glasser says. “He didn’t say why and I didn’t ask. I was surprised. We had a good relationship, a long relationship. Our maintenance was mailed directly to Charter’s offices, and those funds were then deposited directly into our building’s own segregated bank account.”

Despite this seemingly fail-safe arrangement, Glasser says the board is taking no chances. “As far as I know, we’re not missing any money,” he says. “But we’re making a complete analysis of our funds back to January 1, when we had our last audited financial statement.”

Under the circumstances, says CPA Marvin Schwartz, the Normandy board’s close scrutiny of its accounts is not overkill. It’s a must, a matter of survival. “The extent of your expenditures can never be fully evaluated until you examine every disbursement, every transfer your property manager made,” says Schwartz. “You have to increase the scope of your auditing procedures to make sure there has been no misappropriation.”

Without even realizing it, Glasser may have put his finger on the source of the vexing and potentially disastrous problems that can plague a board’s relationship with its property manager and other professionals. During that farewell phone call to Glasser, Michael Richter didn’t say why he was shutting down Charter Management, and after so many satisfactory years of doing business with him, Glasser didn’t even think to ask. But “don’t ask, don’t tell” is a policy that cannot work, and blissful ignorance should not be a preferred choice for those entrusted with fiduciary duties. There comes a time when boards have to ask tough, unpleasant questions. That time is now – and always.

Back to the Bad Old Days?

It was a turbulent summer for the city’s co-op and condo management industry. One company closed amid allegations that it had commingled – and possibly stolen – clients’ funds. Another was hit with three lawsuits in New York Supreme Court claiming it had misappropriated and siphoned off more than $1 million of its clients’ money. Suddenly, co-op and condo boards were abuzz with an unnerving question: were they heading back to the bad old days of the 1990s?

For those who don’t remember those dark times, here are some of the high – or low – lights from the last round of management scandals.

On June 15, 1994, Manhattan District Attorney Robert Morgenthau announced the indictment of 82 managing agents and four firms in a kickback investigation. “It isn’t even the end of the beginning,” Morgenthau promised.

True to his word, the D.A. announced the indictment of another 59 individuals and 21 companies in various kickback and payoff schemes five years later. The indicted included managing agents, management companies, building superintendents, architects, engineers, waterproofing contractors – and co-op board members.

In other words, we’ve still got a long way to go before we’re back to the bad old days of management scandals, 1990s-style.

PREVENTIVE MEASURES:
CORRUPTION RX

Several accountants, property managers, lawyers, and board members have come up with a checklist all co-op and condo boards should follow to make sure that their funds are being handled properly. Among their suggestions:

✔ When offering a contract to a management company, expressly forbid commingling of your building’s funds with funds from other buildings.

✔ Compare your management company’s monthly financial report with the prior month’s report and with the report from the same month a year ago. Be on the lookout for abnormal fluctuations.

✔ Make sure your management company provides the monthly bank statement and bank reconciliation, including your building’s name, along with the monthly financial report. Make sure they jibe. Examine cancelled checks and copies of paid bills. And make sure you get a statement for every one of your accounts – not only checking, but escrow, reserve fund, money market, investments, and any others.

✔ Insist on seeing a maintenance roll, including maintenance charged per apartment, other charges, maintenance collected per apartment, and other income collected. Make note of any arrears, and make sure the managing agent is taking appropriate collection action.

✔ Designate a director as co-signatory on checks with the managing agent. Do not allow the managing agent access to the reserve fund, and limit the amount the managing agent can spend without a second signature on the check. $5,000 is a common cap.

✔ Have your accountant review your accounts at least annually.

✔ Make sure the management company is bonded for at least the amount your building has in all of its accounts.

✔ Make sure you carry an up-to-date and adequate fidelity bond, a type of insurance also known as a “crime policy” or “employee dishonesty policy.” That way you’re protected in the event your safeguards fail to prevent the management company from stealing money.