CO-OP / CONDO FRAUD BACK, P.2

Rather than hoping to recoup your money, you should get ready to go to court. At this point, your co-op or condo board must decide if you want to pursue the matter in civil or criminal court. A lawyer with fraud experience should be able to advise you about which course is suited to your situation, but there are a few things to keep in mind.

In civil court, your lawyer works for you at your expense. You make the decisions, while your lawyer collects evidence and talks to the defendant. If you win, you will receive a money judgment.

In criminal court, a prosecutor works the case without charging legal fees. The investigation of claims and the gathering of evidence typically precede an arrest. You make no decisions, and the defendant may refuse to talk. If guilt is established beyond a reasonable doubt, the defendant will receive a sentence and you will probably receive a monetary judgment. Whether or not you ever receive any money is another matter.

"Remember, prosecutors have limitless work and a lot of what they do is triage — who can I help and who can't I help?" Citarella says. "They have to decide where to spend their resources. A fraud-experienced attorney can help you present the type of evidence that's likely to attract a prosecutor's attention. You need a large dollar value, a sympathetic victim, a really bad guy — something that's going to bubble up and attract a prosecutor's attention."

The Bible: Your Monthly Management Report

"This is the most basic thing: Having a good management report that someone on the board looks at on a monthly basis," says Eisenberg-Stark. "Basically, it shows you the cash flow, but more importantly it gives you the bank statement and the bank reconciliation. That will tell you if the rest of the management report is fictitious. Someone needs to read the report and trace the elements back to the bank statement."

She advises boards to be on the lookout for some classic red flags. They include:

• Deposits that are delayed in hitting the bank.

• Debits on the bank statement that are not in the manager's monthly report.

• Large withdrawals with no justification. Even if the money is replaced, it usually means the manager is borrowing money short-term, which can lead to serious problems.

• Deposits not going directly into the operating account, or deposits that come from other unrelated bank accounts. This is usually a sign that the manager is commingling funds from other properties, a once-common but now discredited practice.

• A discrepancy in payees. If the management report says a check was paid to one person but the cancelled check has a different payee, it's possible the original payee is fictitious.

• Payroll checks to fictitious employees, or large amounts of paid overtime. The monthly report should contain an up-to-date list of all employees.

Additionally, she advises, make sure all employees work for the corporation and not the management company. Check that at least one board member is a signatory on all of the corporation's bank accounts. And always remember who's boss.

"Boards need to realize that the management company works for them; they don't work for the management company," says Eisenberg-Stark. "Boards have to take responsibility for the money. At the end of the day, if there's malfeasance or fraud, it's going to come back to the board."

Again: The Monthly Management Report

Ultimately, it all revolves around the monthly management report. Boards need to demand that it's accurate and thorough and that it arrives no later than the 20th day of the following month. If there's any balking on the part of the property manager, steps need to be taken.

"If boards are not getting that information on a timely basis, they need to demand it," says Eisenberg-Stark. "Or speak to their lawyer. Or hire a new management company."

Citarella agrees. "That management report is the monitoring device you must have to check their performance," he says, adding that it is not optional. "If they object to that, then move on to a new management company."

Of course, the cancer of fraud sometimes spreads inside the board itself. But there are ways to help ensure that your fellow co-op/condo board members aren't crossing the line.

"You should never let any one person have too much control," Eisenberg-Stark says. "No one person should be making decisions on capital improvements, hiring contractors, or having access to the reserve fund. This usually happens in buildings where one person has been on the board a long time and everyone sits back and lets him do what he wants to do."

You need checks and balances within the board itself, she says, which includes having majority board approval for major projects.

In other words, boards need to act like boards. That's the best way to prevent fraud.

Adapted from Habitat February 2010. For the complete article and more, join our Archive >>