Kevin Davis: 0:00

When they eventually went to the police, and the police came in, two things happened. They still never gave records, and they had a system to make sure that records weren't given out. Number one, they would charge significant amounts of money for any record that needed to be produced. They would say they could not find any records. You didn't have the authority to get any records. I mean, it got to the point it was so bad that one time when they had to subpoena the records, they came back to the judge and said, "We don't trust the state of Florida with these records, so we're not going to relinquish them. So they did everything in their power to stop from getting those records. They hid the records, you could not get access to those records at all.

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Kevin Davis: 1:02

I'm Kevin Davis, the President of Kevin Davis Insurance Services, and this is HOA Insights, where we promote common sense for common areas. Welcome to episode 163 I have a very special episode for you today, and I'm going to share this because I believe it's such an important topic that I'm doing it by myself, and I think this might be the first time somebody did one of these podcasts as a loan, but it's about a $2 million fraud claim against a homeowner association in Florida, and when I read about it, I said I had to make sure that people who listen to our podcast every single week, this never happens to them again. So, like always, please, if you would like our podcast, please subscribe to it. Visit our website at www dot HOA insights.org We have a merch store. Here's my mug, official mug that you can get inside there if you have any questions or concern, or if you have any questions about this particular podcast, let us know, because this is important. This is one of the things that I don't want to see happen to any of the community associations that are listening to this podcast at all. Okay, so what happened? What's this about? You have a board of directors of the Hammocks Homeowner Association. The president of the association, she was elected president in 2017 Now, before she was elected president, she was a treasurer of the community association, and when she was a treasurer, becoming president, she already is under investigation for stealing$60,000 from the association, now in that $60,000 What she did was use it to buy regular stuff. She goes shopping, food shopping, grocery shopping. She did buy lunches. She spent like$1,000 $10,000 at Little Caesar, and spent a lot of money on Panera Bread, but she also used the money to do investigating all her enemies, so started that way, so the enemies of her, she called enemies of association, meaning people who were going after her. She had an investigation, she used funds from the association back then, but when she became president association in 2017 she started this fraudulent scheme that is bigger than anything I've received. It involved the President herself, association, her husband, and the cousin, three other board members, vendors, and the accountant of the association. Now, when something like that happens, you're talking about a total collapse of the system. I mean, it is hard to really do anything, get anything confident association where that much fraud is being done to the point we're talking about of $2 million now. How did it happen? They developed shell companies, the president itself hired, told the husband, the president's husband, to set up these shell companies, and all the money was siphoned through four or five different shell companies to the point of just that one that the husband started $1.4 million went through that shell company alone. There's other shell companies that money siphoned through there also, and what happened was, you had three other board members, who said they're going to do the same thing and siphon money through those shell companies. Also, now, what I mean, siphon that money, meaning that they would get invoices from the shell companies, and they would send the money directly to the shell company. Now, one shell company they had, they would keep 10% and give the remaining money back to the association, or back to the fraudulent people in the association. Everybody, and as all people involved in that fraud knew what they can do, to the point of $1.4 million went through one shell company alone, the one by the president's husband. The fraud went through from 2017 to 2022 Eventually, the people who lived there got so upset because the fees started increasing to continue to increase, but they never saw any results of anything. They never saw any results of the shell companies doing any work. When I talk about shell companies, I'm talking about, you know, maybe like the landscape, pretend to be the landscape company, or just general contractors, maintenance people. Money would go in there, but nothing would ever get done, and the unit owners, all they ever saw was increase in expenses, and the reserve shrinking, getting lower and lower and lower. Eventually they went and contacted the police, but it was really, really challenging for the association. The association was really, really smart. They did three things that really delayed and stopped a lot of them from getting caught. The first thing they did, first thing they did, was to commingle all the funds, they took control of all the money. Normally, you're talking about a separate account for operating income and a separate account for reserve account. When they commingle the law, they have total control of all the association's assets, all the funds, and instead of having certain systems in place to make sure that you have counter signatures of checks, they sign all the checks that one person signed all the checks to the fictitious companies, the fraudulent vendors out there. Something simple as oversight was holy miss on that co-mingling of the money. Once that money is commingled, there, right there, is no oversight over that. That was a problem. Nobody reviewed the checks, nobody reviewed the vendors, nobody reviewed any of that information. So, once that money was combined, and you talked about the president, three other board members, and the accountant, that money was gone. So that was number one. The second thing was records. They would not share any of the records. They hid all the records. Whenever people would question about why the expenses were going up, why he had no documentation for these invoices that went out. No matter what they were saying, there was no records to back it up. Now, when they eventually went to the police, and the police came in,

two things happened: 7:32

they still never gave records, and they had a system to make sure that records weren't given out. Number one, they would charge significant amounts of money for any record that needed to be produced. They would say they could not find any records. You didn't have the authority to get any records. I mean, it got to the point it was so bad that one time when they had a subpoena, the records they came back to the judge and said, we don't trust the state of Florida with these records, so we're not going to relinquish them. So they did everything in their power to stop from getting those records. They hid the records, you could not get access to those records at all. And then the third thing they did, really, the third thing they did, really important to, is they election fraud, I mean, talking about serious election fraud. They tried to recall that board of directors, right? The first time they tried it, they lost two thirds of all the ballots. The second time they did it, they had an emergency situation, and guess what happened? They called in a fake bomb scare, stopped the whole election in this place, and in the meantime, while that was going on, the President's Association still had this fund set aside to harass all the enemies, they have lawsuits against them, they got to the point where they filed a lawsuit against the lead detective who was handling the fraud case, they said a person had no right to access any of the information that they needed. I mean, it was such a bad thing that was going on in association that they, they, this unit noticed they could not do anything to protect themselves. And what we're going to do is talk about what they can do in a minute. So, how was this resolved? Well, eventually the police came in and arrested. It was April. In April, they were convicted. The president of association was convicted. She served seven years in jail, seven years probation. She also was banned from soliciting or working in the hammocks, and so, oh, not only way back she was banned from soliciting and doing any work and setting one foot in the Hammock Association and also banned from managing any homeowner association in Florida, the president's husband had a seven year probation and. End, he cannot solicit or work in that association anymore, but he also was fined $50,000 and had to give his what, five acre land, which was worth $1.2 million to the association. Now, the other board members, one served one year and 12 years probation, one person was 80 years old. Okay, he, I think, had time served or something, and everybody else kind of had probation and things. Now, once this was over, the board members were relieved because they finally got rid of that regime, that regime that really just systematic breakdown, the entire thing couldn't have been any worse than it was, and now they're trying to rebuild. The problem is they have no money, no reserve money, and now you have the people who live in an association really got to figure out how we move forward in a situation like this. So, again, we're looking at a system right there, which total breakdown, and I think the total breakdown really came from a lack of oversight in that association, because no matter how many people are involved in this fraudulent scheme, they still have to have some kind of oversight. I mean, there are policies and procedures that outlined in by the association documents, you got state law, even Fannie Mae and Freddie Mac, and all the lenders said that this is what's required in order for you to have lending in our association, so there have to be something there that the association should have done to make sure that things don't happen, and now what we're going to do is take a quick break for one of our sponsors. We'll come back and talk about the things that association can do to make sure that this never happens to them. Hi, I'm Kevin Davis, the president of Kevin Davis Insurance Services. Our experienced team of underwriters will help you when you get that declination. We provide the voice of reason, someone who will stand by you. Our underwriters bring years of knowledge to our clients that can't be automated by technology or driven by price. As a proud and wins company, we bring true value to your community association clients. We are your community association insurance experts. Okay, and now we're back. And now I want to talk about the things that you can do in your association to make sure it doesn't happen again. This is systemic breakdown. We have systemic breakdown policies, procedures are ignored, okay, overwritten or just not effective, so we got to make sure that we're doing is that we have these policies and procedures, these systems in place. We got to make sure that people are using them. Now, first thing that we got to have to make sure of is that you have an insurance policy that covers theft, that covers situations like this. So, the first thing you're gonna do is please talk to your insurance provider and say, do we have crime insurance that picks up theft by employees and the board members, because right now, okay, you're looking at these board members in collusion with others committed a theft of $2 million so you make sure your crime insurance policy picks up board members and in collusion with others. Many policies do not. Second thing you need to do in that insurance policy to make sure it is an adequate limit, now if you look at what the lenders are saying, your documents are saying the standard in the industry, the limit of your crime policy should be three months assessments plus the reserves, because people figure if you're going to steal money, the reserves are important, and how much? Three months, because you rotate the money, you spend the money. Now, what happened? The situation here, the fraud was so large that your limit probably wasn't even going to be enough. You don't have $2 million limits on a crime policy. If you ever made a call and said, I need a $2 million crime policy. They want to see a lot more information. So, number one, make sure you have a crime policy within adequate limit. The second thing is, make sure you have a director's officer liability policy, because guess what's going to happen to those board members who were found guilty? They are going to be sued, and they need Dino protection for the ones that were found not guilty, but they were board members, so we know three board members in the present were found guilty, but we're assuming there were at least one other board member, three other board members who were involved in situation, but I suspect that new board in there. There, who are now looking at all the situation, all this money, they cannot fund the reserves anymore, or pay the monthly bills. They're going after that old board, there, the ones that were found, you know, innocent of any crime, and hold them responsible, because guess what, it's their responsibility. See, those board members have a breach, they have to do your responsibility to act in the best interest of the association without any conflict of interest. Right now, they did not do their jobs, so I suspect that new board will go after the old board and say we're going to hold you responsible and we're going to sue you to make sure that we try to get some money back from what you've done to our association, so make sure you have DNO, is direct us and office liability insurance, because guess what, you'd be one of those boards who get stuck on one of those boards, and guess what, you're gonna live there, you may come down to this Florida place for just for the winter time, and all of a sudden this stuff is happening, and you're faced with a lawsuit, so make sure you have direct us and officer liability protects you from lawsuits serving on a not-for-profit board, a community association board of directors. So, number one is insurance, number two is training. Board training, I said before, you have a fiduciary responsibility to make sure you act in the best interest of the association without conflict of interest, whenever you don't do that, you are not doing your job properly, and so you have to be trained for that, and once you train for that, you understand that none of the other fiduciary responsibility as a board member to protect the assets of the association, but you also got to make sure that you're enforcing the rules that you are collecting assessments and monitoring assessments, along with maintaining the association, but you have to understand what those rules are. So, training is such an important thing, because when you're sitting now and you're looking at your responsibility and knowing that you can be held personally liable, and you allow$2 million to disappear from your association, they're going to come after you. So, make sure you are trained. CAI is the community association institute, which has all types of training out there. So, please, if you want training, go to the Community Association Institute, CAI, and you can get all the training you need to be able to make sure that you understand your role, your responsibility serving on a not-for-profit community association board, because again, a lot of times people who serve on boards don't understand if you have 100 unit complex, and for $100,000 you have a $10 million corporation you are running. Understand that is your responsibility. It's not your responsibility to find out what is the number one Netflix show of the week, or the month, or whenever your board meeting is to oversee the running of that community association. So, training is important. The next thing is having a fraud prevention policy. A fraud prevention policy makes a difference in the world. Why is that? Because a fraud potential prevention policy keeps honest people honest. That's your first step, because what happens is there's no way in the world, no matter what I'm saying right now, it can be difficult to stop that group from stealing money. Okay, but if there's enough oversight, we can catch it earlier, and maybe just give them a little thought that maybe we shouldn't do this right now, because there is a financial fraud plan there, you know, just to make sure there is fraudulent activity happening there, you know that you have oversight, and what the difference between a financial fraud plan and a regular fraud plan, or a regular business plan, when you're talking about counter signature checks, that makes you have an annual audit. A financial fraud plan is the word independent in front of it. So now you're talking about independent financial audit, independent vendor analysis, or independent vendor backup. Or right now there's no oversight over vendors. Make sure the word independent is in there, not just the board of directors are oversleened vendor payments. This independent, independent verification of vendors, make sure you have independent verification of checks going out, receipts going out. The word independent should be in there when you talk about your financial fraud prevention. Don't know that financial fraud prevention, you're going to have to use that word independent, because if they were to use that word independent in the Hammocks Association, they would have caught a lot of that fraudulent act a lot earlier. So, again, we have insurance, number one, training, number two, and fraudulent fraud prevention. And prevention number three. The next one is transparency. You have to accept the fact that if you are transparent and the board knows you're transparent and the unit owners know you're transparent, guess what? Things are more challenging to get caught. Transparency means open and honest communication. It means that you have to have open and honest communication. You have to be able to look at situations, you have to look at the paperwork, look at the finances, look at the vendors, look and see what's going on in there to make sure you know that we are communicating with each other, that we're fully transparent in terms of what we are doing, especially from financial point of view, but from all point of view, even your board meetings, let everybody know ahead of time we're having a board meeting in this state, we have open communication and you're transparent, you don't get to situation where you see something that you're not comfortable with, but instead of saying, wait a minute, I'm not comfortable, how this was paid out, you take a step back and you be quiet. We talk about open communication and transparency, that means trust but verify, always trust but verify. The problem is a lot of associations, they don't verify, they make an assumption because they live next door to you that they're going to do the best job possible, and it doesn't work that way, because we talk about all the fraudulent activity that happened in community association, it's usually from the next door neighbor, it's usually from the person you never thought would do it, or what's even worse, if you thought it was the person you did, that means you would allow that to happen. You knew they, you felt they were dishonest, but instead of saying, I want to examine this a little bit further, you took a step back, a, you did nothing at all. And the last thing is, and to me, all the things are important, is avoid conflict of interest. Conflict of interest happen in community association because somebody always knows somebody that they can get a better deal from. Oh, I have a roofing contractor. Guess what, I know somebody. Oh, you need to make this work. Oh, guess what, I know somebody. And what happens when you know somebody, the likelihood of you being accused of violating the business judgment rule, because you acted not in the best interest association, there's a conflict there. I'm not saying you can't do it all. I'm saying is that you have to outline the fact that, guess what, I have recommended this roofer right here, because he did work for me before, and guess what, he is related to me, but I have nothing to do with it, because I understand I have a fiduciary responsibility to act in the best interest association. So avoid conflict of interest, there can be conflicts there, but just be transparent and open about it. If they did not, if people who live in that community association just looked at the conflicts that were there, they could have avoided a lot of this problem and cause it caused the situation to not be as large as it is, and again, today that association has no money and they have to start from all over again, so conflict of interest to avoid conflict of interest, so those are the things I think right now can help that community association move forward and continue to get the job done. It should get done. So, my advice to people listen to this community, listen to this podcast, and live in the community association, beware. These things can happen. You can look to your reserve account one day and find zero there, nothing there, but if you have oversight, if you have understanding of your role and responsibility as a community association board member, is that going to happen as likely? Remember, all your policies, procedures, and oversight does

one thing: 24:02

it keeps the honest person from being dishonest. If a dishonest person is going to be dishonest, all you can do is make sure you have the education to stop them from stealing as much as they can. So, thanks a lot. I appreciate it. Hope you enjoyed this podcast. I look forward to coming back to you sometime in the future. All right, take care, and see you soon.

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You've been listening to HOA Insights: Common Sense for Common Areas. You can listen to the show on our podcast website, HOA insights.org or subscribe on any of the most popular podcast platforms. You can also watch the show on our YouTube channel. Check the show notes for helpful links. If you like the show and want to support the work we do, you can do so in a number of ways the most important thing you can do is engage in the conversation. Leave a question in the comment section on our YouTube video. You can also email your questions or voice memos to podcast at HOA insights.org or leave us a voicemail at 805-203-3130 If you gain any insights from the show, please do us a huge favor by sharing the show with other board members, you know. You can also support us by supporting the brands that sponsor this program. Please remember that the views and opinions expressed by the podcast do not constitute legal advice. You'll want to consult your own legal counsel before making any important decisions. Finally, this podcast was expertly mixed and mastered by Stoke Light video and marketing with Stoke Light on your team, you'll reach more customers with marketing expertise that inspires action. See the show notes to connect with Stoke Light.