When Board Members Go Bad: Theft, Fraud & Embezzlement

There’s an ugly situation playing out at Whitehall Condos in West Palm Beach. A group of condominium owners was caught breaking into their own condo office in order to seize records and hard drives.

According to state condo regulators, former board members of the twenty-building property improperly shifted hundreds of thousands of dollars in reserves to cover budget shortfalls–without obtaining the necessary clearance from owners. Worse, regulators are saying that these board members misspent (stole) over $1 million of association members’ money on themselves.

In most run-of-the-mill HOA board issues, things are hashed out in civil courts. It’s generally board members’ directors & officers insurance that pays out a claim and makes the association whole (minus the deductible and subject to the limit of coverage, of course).

However, these alleged HOA board issues were?egregious that the state Bureau of Compliance wound up referring the case to the Florida Department of Law Enforcement (the state equivalent of the FBI). The Office of Statewide Prosecution may well be bringing criminal charges, not just civil charges, against the board members involved.

So what did the board get caught doing? Here are some of the violations cited by the lead investigator Harry Hague:

Section 718.112(2)(a) of the Florida Statutes requires that all compensation to condominium board members be detailed in property governing documents. Otherwise, condo board members must serve without compensation until the governing documents are formally changed. In this case, there was no compensation authorized in the property governing documents. Nevertheless, between 2010 and 2015, the Board of Directors paid three of their members more than $242,000 in improper cash benefits (two of them as property managers, and one for security services).

The association spent an estimated $357,200 for “expenses unrelated to condominium operations.” Nobody really knows where that money went, because nobody kept records of it. Investigator Hague reported that “association funds were routinely expended for the exclusive personal benefit of a member or members of the board of directors and […] these expenses were insufficiently or inaccurately reported and accounted for, or went unreported.”

There are, however, records of ATM withdrawals from the Association’s account at the Trump Taj Mahal Casino in Atlantic City, NJ, and at Seminole Indian Casino in Coconut Creek, FL.

The association diverted $455,000 from reserves into the operating budget–without approval from the association’s members, and with no plans to refund the money.

The apparent scheme to defraud the association came to an end when a new board was elected and discovered the massive budget discrepancies. The new Board President, Cary Collins, says that the losses may be as much as three or four times what Hague found.

At issue: The condo board has an insurance policy that will compensate it as much as $1 million against insider theft–but the policy won’t pay out unless the state brings criminal charges. Despite the missing money and the evidence that’s been presented, the Florida Office of Statewide Prosecution hasn’t pursued any criminal charges at this point. The Whitehall Condominium Association has no control over what happens.

Meanwhile, residents are taking it on the chin. The new board had to raise monthly fees from $320 to $420 per month–an additional $1200 per year.

What could have been done to prevent these HOA board issues?

The usual deal is, condo owners get the management they deserve. If the facts went down as described, the abuse of trust went on for years before it was discovered.

Here’s another monkey wrench in the case that could complicate prosecution–in fact, it may be the reason that the Florida Attorney General has been slow to file charges, despite the pleas of Whitehall’s current leaders. In Florida, there are next to no statutory provisions against board members awarding contracts to vendors that directly benefit themselves or their own family members. Under Florida Statute 617.0832, a board member could vote him- or herself a contract at the association’s expense; and while he or she would be violating just about any private code of ethics you could find, there’s no statute that says that they can’t… just the expectations of the association members who voted for them.

Consequently, in Florida, protections against even flagrant abuses of trust on the part of board members are only as strong as the association’s willingness and ability to enforce transparency and accounting safeguards.

A group of Florida condo owners is pushing to reform the law in the Sunshine State to give more teeth to laws pertaining to conflicts of interests, both on the part of directors and property management companies. But it hasn’t happened yet.

Furthermore, the Florida Department of Business and Professional Regulation (DPBR) does not have the staff to investigate more than a small fraction of complaints–a state of affairs that is replicated nationwide. For example, in 2007 alone, the DBPR received 2482 complaints about condo and co-op boards–to be handled by just over 50 investigators. A grand jury reported a sense of lack of enforcement on the part of regulators, feeding into a “Wild West of the East” environment in Florida.

For now, the horse has left the barn. If the State of Florida does not criminally prosecute, the board of directors is out the $1 million insurance payout, plus whatever they paid in premiums for a policy that doesn’t pay benefits when they need it.

Stay tuned for some of the best practices we know of to help you to prevent corrupt board members from helping themselves and each other to association members’ money.

Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.