Thursday, December 22, 2016

Recent posting on our sister blog - The Crossings at Willow Creek

As part of the work I’m involved with to effect HOA legislative change in Arizona, one of our team members is blessed with some amazing insights into the Pontius Pilate attitudes of local government who benefited greatly by tax burden shifting when HOA’s were created. The believe they have no responsibility at all.
To some extent that’s true because municipalities under the City Council/Town Manager system, which bifurcates policy and operational decisions, benefit from sovereign immunity when acting in a public body with respect to policy decisions.
The recent Riley vs The City of Prescott case, even though sadly lost, reaffirmed there was no sovereign immunity for the Mayor. The City’s appeal was dumb because that ended up being reaffirmed in the 9th Circuit of Appeals, down one only from the US Supreme Court.
The lesson - when elected officials usurp the role of the City Manager by meddling, in smoke filled rooms or not, then there is liability for operational decisions. This should not happen if elected officials felt comfortable delegating day to day stuff to staff. But there is little trust and doing a “good ole boy” a zoning favor becomes highly tempting – but dangerous.
In the case of the Crossings, backroom dealings changed a plat approved in City Council with no road going through it. That’s because when the plat was recorded, a deal had been done with the developer to reroute a major highway from his adjacent business subdivision through his, and eventually our, residential one – without going back to Council for approval publicly.  Their logic - ordinary folk don’t count, and if they object, retribution will follow.

So as the Crossings unfolds, we may have a lesson in teaching a City who needs something red hot stuck up its rear end a lesson which has been a long time coming. As the Crossings HOA now is in legal name only, instead of us being the lone holdout of 79 lots, we are now 1 of 1 with the power to enforce via a derivative suit to force compliance with easements carrying all the City’s water.  

Happy Holidays

Saturday, December 10, 2016

Senator - What's in your wallet?

The letter below was sent to Arizona State Senate President Yarbrough with regards to HOA legislative proposals in the upcoming legislative session. There's also a link to a radio interview aired today on the whole issue of money in HOA's - and where is it? Click HERE to listen to it.
What it tries to do is reduce the complexity of HOA finance down to a simple question - why would an HOA and the Management Company refuse to give out read only user names and passwords to the bank accounts so members can see their money at work on their iPhone? 
And if they are being refused - WHY?
Especially in the light of the fact that CAI Central Arizona has that simple ability on its own bank accounts as can be seen by clicking HERE


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To: Arizona State Senator Yarbrough - December 10,2016 
Dear Senator Yarbrough
I'm part of a talented diverse citizens group working with Senator Farnsworth on legislation to transform the Arizona HOA industry, the fourth and lowest level of government after Federal, State and Municipal.  This country has the world's best military and private sectors but one of the world’s worst public sectors. Based on the weeks since November 8, I’m convinced government at all levels has no idea of the true “shock and awe” to come. Our group represents a new model of public-private partnership which Tony Blair once described as the third way, and which can help manage some of this.
My 30 yrs. on Wall Street, 10 yrs. of working with local governments across the Mountain States, and wrestling with HOA issues, convince me that, unless action is taken, we face a potential perfect storm with aspects of Enron, subprime and the near meltdown of the money payment system in 2008. This emanates from the $75Billion of payments annually and the $50Billion of cash reserves in the HOA system, part of a fundamentally flawed national housing system. I’m convinced this will be transformed with the new Washington Team. Fannie and Freddie are already being primed for what should have happened 30 yrs. ago. Arizona, much like the Veterans scandal, can be the engine of national HOA industry change as part of that.
Your staff can review the documented facts on my blog at www.arizonahoa.blogspot.com In my business, he/she who connects the most dots wins and there’s no place for anecdotal evidence. Just the facts. Just the facts.
One fact we know is that in Arizona alone in 2008, $1Billion of taxpayer’s money was lost with two banks enabled by HOA Management Companies. But even this pales in comparison to the potential I see for terrorist incursion due to failed enforcement of Patriot Act anti-Money Laundering procedures, risks to the ACH payment system, and a financial meltdown of FirstService, the largest HOA Management Company nationally. This could result, in a worst case, in millions of homeowners being current on their mortgages, yet faced with foreclosure.
I believe the current federal and state banking regulations, with or without Frank Dodd, are sufficient to bring certain bad actors to heel, including banks such as US Bank, Mutual of Omaha and Western Alliance. And this will not be the first time I have played a part in that. But all we are doing is exposing the problem, without providing the solution, which only smart legislation and regulation can bring.  I implore you therefore to make this a high priority. I should add one other thing:
I worked in suicide prevention in the UK. With 50,000 hits now on my blog, the feedback I can never disclose, makes me feel I’m back there. These are not isolated examples but acts of legal terrorism as I’ve previously testified. Hence my favored legislative fix, if I had to pick one, and having defeated a SLAPP suit myself, is to extend Arizona’s anti-SLAPP protections to the “right to petition” HOA Board Members. 
But there are other essential fixes. HOA Management Companies for instance are running a shadow banking system with people hardly equipped to deal with landscaping issues. And Realtors are effectively underwriting faulty HOA disclosure by those same Management Companies, none of whom are licensed by anybody.
Achieving public awareness on financial issues is not easy, until 2008 happens. So, we are conducting an experiment. We’d ask every legislator to participate by asking their HOA and Management Company, to provide user names and passwords on a read only basis to access your HOA bank account online. You may be shocked by their refusal.
I’d be happy to meet. Thank you for your service.
Respectfully
                                        
John Sellers


Copies:
Governor Ducey
All Arizona Senators
All Arizona State Representatives
Trump Transition Team
Dennis Charlton, Arizona Department of Financial Institutions
Martin J. Gruenberg, FDIC Chairman,
Thomas J. Curry, U.S Comptroller of the Currency
Richard Cordray, Director, Consumer Financial Protection Bureau
John C. Williams, President and CEO, Federal Reserve Bank of San Francisco
Senator Farnsworth Working Group
Various industry participants

Sunday, December 4, 2016

Records Request to the Southern Arizona Chapter of CAI

From: John Sellers [mailto:jasellers123@gmail.com]
Sent: Sunday, December 4, 2016 10:17 AM
To: director@soazcai.org
Cc: support@azreservestudy.com; pbj@azhoalaw.net; carolyn@gshoalaw.com ; bob@batespaving.com; carlaya@arcadia-landscape.com; ralph@azentrysystems.com; tracey.everett@dunnedwards.com; km@cactusasphalt.com; g.catalan@hoa-capital.com; info@titanrestore.com; carolinereilly@tierraantigua.com; daryl.villas-west@qwestoffice.net; fede214@msn.com; jason.smith@carpenterhazlewood.com; Jena.Carpenter@associa.us; kthygersen@cadden.com; Smclaughlin@mahoneygroup.com; +14808937775@myfax.com

Subject: Records request pursuant to ARS 10-11602

To: Kathy Thygerson, President Southern Arizona Chapter of CAI 
Dear Ms. Thygerson
As the authorized representative of Debborah Sellers, a CAI member for 6 months as of yesterday, can you please supply the following pursuant to ARS 10-11602:
  1. Copies of the Annual Statements of the Chapter
  2. Copies of all Board Minutes and minutes of all committees including the legislative Action Committee for the last three years

Pursuant to ARS 10- 11602.C., the request, as a CAI CAZ Member for longer than 6 months, is in good faith and for a proper purpose, and describes the records we desire to inspect. We seek them to determine if the conduct of the Legislative Action Committee, with its commonality with AACM, a for-profit corporation, is consistent with preserving the non-profit status of the Chapter
Regards
John Sellers
Cc: James Christensen as Statutory Agent by fax to +14808937775@myfax.com


Wednesday, November 30, 2016

Records request of CAI Central Arizona

See email below to the CAI Central Arizona Board
*****************************************
From: John Sellers [mailto:jasellers123@gmail.com]
Sent: Wednesday, November 30, 2016 12:13 PM
To:  suzanne@paramountroofingaz.com; ashaw@shawlines.com; grandbails@cox.net; Josh Bolen - Carpenter Hazlewood, Delgado & Bolen, PLC <+14804272801@myfax.com>; jperkins@ccmcnet.com; Linda VanGelder - ALPHA Community Management <+16235616408@myfax.com>; Mark Wade - Leisure World Community Association <mwswade@yahoo.com>; rebeccah@dlcresources.com; suzanne@restorationarizona.com  <suzanne@restorationarizona.com >; toni.rudolph@firstcitizens.com
Cc: 'Kayte Comes' <kayte@cai-az.org>; llobianco@fclaw.com; tskiba@caionline.org
Subject: Records Request

To: Mark Wade CAI - CAZ President

Mark
I had a very productive meeting yesterday with Kayte who provided me with everything she had. It’s good to know matters are in such good hands. She also gave me your email, as I believe you’re in-between jobs.
My initial purpose was to see how compliant CAI CAZ was with the basic provisions of ARS 10, the fundamental laws of corporate governance. Mainly because a number of CAI member attorneys are fond of citing ARS 10 as a means of challenging the primacy of ARS 33 over transparency issues. I am one of two people who won cases quashing that conflict at the OAH. I also wanted to see the minutes of the Board Meeting at which the Board decided whether to comply with ARS 10-11620 in regards to the supply of Annual Statements which is not subject to a 6 months’ membership test. See attached excerpts from ARS 10 HERE. Although not previously supplied, Kayte satisfied that request yesterday. The minutes however, especially of the meeting referred to above conducted in Executive Session were not supplied, because apparently, Board Members keep them.
I also learnt of the Legislative Action Committee.
I am at a loss to understand why a decision to comply with a simple statute was conducted in Executive Session. None of the applicable exceptions in 10-11602 F apply. There was no discussion of personal matters, pending or contemplated litigation or matters relating to enforcement of the corporation's documents or rules. The exception for communications was quite clear – “Communications between an attorney for the corporation and the corporation”. Although two attorneys were present, Mr. Bolen and Shaw, they are not attorneys for the corporation and consideration is being given to hiring Fennemore Craig. They were also not present at the meeting.
Consequently, I’d like to request to both inspect, or preferably just receive, copies of all the last three years of minutes of both the Board and the Legislative Action Committee.
Might I suggest that if some of the august members of the Bar who populate your Board from time to time objected, that would not be unusual. In which case a refusal to satisfy my request would lead to further action
I have a much simpler and cheaper solution though. Just simply ask Fennemore Craig, who I strongly recommend for basic corporate governance issues. If they deny my request in writing, you’ll hear no more about the matter. I’m not an attorney, but quite happy to rely in this instance on a quality firm.
I also might add that the one of the current Board attorney members has demonstrated a remarkable appreciation of the law previously. I commend you to read the attached  HERE from Mr. Bolen who I don’t think has any appreciation of bankruptcy law. In particular advertising payments seemingly “out of the ordinary course of business” within 90 days of bankruptcy. And he’s a partner, according to the Reverend Ekmark, in the largest HOA law firm on the planet. See attached HERE
Pursuant to ARS 10- 11602 C, my request, as a CAI CAZ Member for longer than 6 months, is in good faith and for a proper purpose, and describes the records I desire to inspect. I seek them to determine if the conduct of the Legislative Action Committee, with its commonality with AACM, a for-profit corporation, is consistent with preserving the non-profit status of CAI CAZ.
Regards

Copy

Sunday, November 27, 2016

Letter to Arizona Bankers Association Lobbyists - how about a cup of tea?

Wendy Briggs/Paul Hickman/Steven Killian
Lady &Gentlemen
As lobbyists for the Arizona Bankers Association, we’d like to introduce you to some topics with serious banking implications coming out of volunteer work I’m doing as part of Arizona HOA Legislative Reform. For some reason, I’m told by Senator Farnsworth’s office that you did not want to meet. Whilst we may not be suggesting new state legislation, we may wish to propose new Federal changes. And without question insist upon the enforcement of current banking law and prudential principles many bank tellers would understand. Absent the bankruptcy aspects, this is banking 101.
In addition, you may not be serving your constituents well. Based on what I’ve seen there is a tremendous business opportunity here for technology based financial institutions to better serve the 62 million homeowners paying $75Billion annually into their HOA’s topping up $50billion of cash. But to do it transparently.
The concerns I’ve already registered break down into five area, one historical, four current and future. Some of this involves serious bad actors in my view. Some of it not. As an experienced banker, I try not to just groan and say – oh not again. But a considerable number of highly seasoned retired banking friends, including ex regulators, have reacted with shock to what the onion peeling has thrown up. And it’s not finished yet. Consequently, I’d welcome feedback. Please also check out our blog where this will be posted at www.arizonahoa.blogspot.com The banking business also operates under he golden principle of "two eyes". Would you and/or any of your members like to prove us wrong - because I would like to be? 
Here are the issues
Historical losses.  
First National Bank of Arizona and Desert Hills Bank engaged in wholesale harvesting of deposits via the HOA Management Companies resulting in a rare instance where UNINSURED depositors with deposits far in excess of the $100,000 FDIC limit had to be bailed out. This occurred in the shadow of IndyMac in 2008 with no accountability or even awareness generally of what happened. In the case of FNBA, explosive growth in their deposits from HOA’s in the community banking division (“CAB”) blossomed to $1Billion with only $75mm invested back. Where did the $925mm go? The President of CAB had as qualifications CAI membership and running Las Vegas nightclubs and remains a figurehead with Western Alliance Bank. Click HERE
In the case of DHB, click HERE for details of their relationship with HOAMCO in Prescott, where deposits gathered by them in excess of FDIC limits were routed back to them as property loans.
HOW WAS THIS ALLOWED TO HAPPEN?
Anti-Money Laundering.
Many of the so called “HOA banks” such as Mutual of Omaha, Western Alliance Bank, and US Bank surprisingly, looking to garner deposits cheaply, have no idea who their customers, the HOA’s, actually are. They have never met them and consider the unlicensed Management Companies to be the real clients. This flies in the face of the Patriot Act anti-Money Laundering procedures which rely on two things:
controlling the point of entry of new accounts into the banking system and;
the old fashioned “know your customer” principle.
HOW DO THEY KNOW THE ULTIMATE DEPOSITOR IS NOT ISIS OR A DRUG LORD?
Our records searches so far cover we believe almost 1,000 Arizona HOA's including account opening documentation from US Bank, Mutual of Omaha, Alliance Association Bank and others. Standard practice is a Master Agreement between the bank and the Management Company with little or no mention of the underlying account holder. Click HERE  Under these arrangements, the signing authority is given exclusively to Management Company employees. And the name of the Association as the beneficiary of the funds appears nowhere. Furthermore, user names and passwords for bank accounts on a view only basis are being denied. This adds to the evidence that bank accounts are being co-mingled.  With the recent exposure of the Wells Fargo account opening scam, should we be surprised at loose banking practices at smaller banks operating in the shadows and with no relationship at all between the depositary institution and the account holder? BUT US BANK?
HOW IS THIS ALLOWED TO HAPPEN?
Risks to the Money Transfer System via The Automated Clearing House (“ACH”).
The lack of controls on vast numbers of ACH direct debit banking authorities given by HOA members - TO THE MANAGEMENT COMPANIES - not a depositary institution, poses staggering worst case risks to the ACH money transfer system. With an annual volume now at $27 trillion per annum, this system is the backbone of local and retail commerce nationally. One polluted entry into this “batch” driven system might pose catastrophic risks to a payment system at the heart of every Americans’ daily lives. These authorities to debit bank accounts, the fundamental role of a depositary institution, are being issued by HOA members to totally unlicensed Management Companies who typically have difficulty managing landscapers and who would not know a debit or credit from a pretzel. See a collection of those authorities issued to MANAGEMENT COMPANIES – NOT BANKS HERE
WHY ARE THESE MANAGEMENT COMPANIES ALLOWED TO OPERATE AS SHADOW BANKS AND/OR FIDUCIARIES?
Substantive Consolidation in Bankruptcy.
This core principle of bankruptcy only becomes apparent when it’s too late. Most of the so-called HOA attorneys operate in a twilight zone with the goal to dip into the pot of money and confuse transparency laws. How can they possibly assess the bankruptcy risks which is federal law anyway? This they will discover if the Arizona HOA industry ever must move from the relatively simple provisions of ARS 33, creating a cottage industry of so called “HOA Attorneys”, into the federal bankruptcy field.  Substantive consolidation in bankruptcy is not even controversial. It’s just not well known to the community of CAI attorneys who market themselves as HOA Attorneys when no such specialty exists. Corporate bankruptcy is not state law and much more complex than personal bankruptcy.
Substantive consolidation depends on tracking cash flows and the lack of arm's-length dealings. As even Enron discovered, you can’t be arm’s length if you are both writing a check to an LLC, but also the depositing officer for the recipient.  Using this “duck” principle, the mingling of cash by HOA Management Companies, with the cooperation (collusion) of certain banks means they have become the general partners of essentially general partnerships. Depending on further evidence, some banks also may suffer the same fate akin to the “lender liability” known to any banker with corporate bankruptcy experience. These principles are in common with many other fundamental dealings between economic entities.  These include, constitutional fair value dealings under state gift clauses, transfer pricing across borders, using the corporate veil to protect business owner’s personal assets from business creditors, and the whole concept of fair value arm’s length transactions between supposed independent entities. The collective faces of HOA industry participants, be they management Companies, HOA Boards, attorneys and financial institutions will go white when they face this. This will sort the Men/Women from the boys/girls. Unfortunately, this is a double-edged sword.
Failure to respect old fashioned governance procedures
There has been a complete failure in Arizona HOAs to respect extremely long standing corporate and banking procedures relying on merely “clever”, as opposed to “smart” moves. Consequently, little or none of the standard protections to insulate members and individual HOA’s from bad actors remains. One HOA bankruptcy could spill over and affect every HOA managed by the same Management Company.  It’s tantamount in a worse case to “Financial Ebola”. And the “duck” principle will be applied by any federal bankruptcy judge. If the cash looks mingled, acts mingled, smells mingled - it's all mingled - you’re all in the bankruptcy together, including municipalities and banks and other financial actors who will probably be the last to discover this.  
Co-mingling on moneys is not supposed to happen. This poses enormous risks wherein Management Companies are acting as fiduciaries but posing as agents. This presents risks as to the real availability of FDIC insurance for every deposit. See the difference HERE
FirstService is the publicly quoted parent of FirstService Residential, the country’s largest HOA Management Company. This is a company with a 20% annual revenue growth since 1998 by acquisitions. Click HERE
Unfortunately, its financial statements raise enormous flags. Click HERE  This is an HOA Management Company with few hard assets. Yet its debt of $197 million exceeds its net worth of $167 million. Three other factors are highly relevant
The goodwill on its balance sheet of $207 million exceeds the $167 million of net worth. That goodwill is the value of the customer lists and employees acquired. Its tangible net worth is therefore NEGATIVE $40 million.
The debt comprising $197 million is secured over all the company's assets including its own cash. Plus, controls over leverage.
Not only does it not pay taxes, it appears to be getting refunds
To me it evokes ENRON
So:
WHAT HAPPENS IF ONE HOA GOES BANKRUPT?
HOW WOULD YOUR MEMBERS DEAL WITH PUD RIDERS IF A MANAGEMENT COMPANY SUCH AS FIRST SERVICE FOLDED? See DeMenna PUD Rider for a typical rider.
Super liens in favor of banks’ lending to HOA's
Banks specializing in lending to HOA’s find this attractive for reasons I find irrational. First, they seem to like lending into a structure where the revenue(assessments) are part of an enforced structure. Well that’s not so smart in my view because of the “you can’t make a dead horse drink” banking theory. A voluntary arrangement is much better. Also, the ability to foreclose on a HOA members home because of a modest late payment makes no sense. They also view this as attractive under their “super lien” approach. Click HERE
WHY WOULD ANY MORTGAGE LENDER ALLOW THIS TO HAPPEN?
WHY WOULD THEY NOT SUPPORT AMENDING LEGISLATION?
Your thoughts and those of your members are appreciated
Regards
John Sellers
CC:
Senator Farnsworth
Steven Briggs, ADFI
BCC
Arizona Bankers Association Members, Staff and Sponsors
Arizona Mortgage Lenders Association
Arizona HOA Blog

Saturday, November 19, 2016

Where is all the HOA money?

In our research to motivate legislative change, part of our strategy is to ensure the legislators know the huge past costs and the future costs of inaction.
Financial issues are difficult sometimes to explain but they got it back in 2008.
For hopefully a clearer explaining of how to connect the dots, click on the YouTube link below for a short video trying to tie it all together. It covers past losses, anti-money laundering failures, unlicensed HOA Mgmt. Co.s dipping into your bank account, and some scarier scenarios as to what happens if your HOA Mgmt. Co. disappears. This includes a question and answer session with FirstService. It will help if you have those questions by clicking HERE
Note, this is all part of a pattern, as FirstService is not unique 
Click on YOUTUBE VIDEO

Thursday, November 10, 2016

Run rabbits run - First Service Residential bolts

Subsequent to this, a Board Meeting was convened at which a CAI attorney also attended, ostensibly to provide education on debt collection issues. The Brown Law Firm has one of the best collection records in the state. Click HERE to see some of their greatest successes. 
I was able to present a list of questions to FirstService, none of which were answered, even down to our own account number. Click HERE for those questions including a letter from FirstService's VP Legal and Risk Management KELLY LEE who it transpires appears not to be an attorney. To hear the audio of those questions and total non answers, click HERE

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First Service Residential, the country’s largest HOA Management Company, represents 80% of First Service Corporation (“FSV”) which is a public company quoted on the NASDAQ.
We presented their Directors charged under Sarbanes Oxley with certain facts and questions related to the notion that they may be operating more as a bank than a landscaping manager. Sarbanes Oxley was corporate legislation passed in the wake of Enron. Just Google it.
These issues cover:
1.  “Round-tripping” by FirstService in conjunction with US Bank whereby as much as $1billion of HOA deposits may end up being lent back to them or others. Who knows?
2.  Failure to follow the Patriot Act anti-Money laundering rules.
3.  Worst case catastrophic risks to the ACH direct debit money transfer system.
4.  Whether they and the HOA’s they supposedly manage would not all be lumped together if FSV or an HOA declared bankruptcy.
5. Homeowners being in default on their mortgages even if current on payments.

Within an hour of presenting these issues to them, First Service resigned from managing an HOA where this was uncovered. See below in a further email to FSV Board members
*******************************************************
Email to FirstService Board Members

Gentlemen
See the most recent communication from First Service arrived a few moments ago. Click below
I’m reliably informed their decision was taken after they were informed by the Board that they wanted:
1.          All communications to go via the portal so that all members could see them.
2.          To change banks.
As they have still refused to obey the Board’s instructions to give up documents now past the 10 day statutory limit, I believe they are guilty of willful and intentional negligence and in breach of their contact…but that’s for the Board to decide.
John Sellers

Is FirstService Corporation really a bank?

Letter to FirstService Corporation:
Bernard I. Ghert, FirstService (“FSV”) Lead Director; Member, Audit Committee; Chair Executive Compensation Committee; Sarbanes Oxley Committee
Brendan Calder, FirstService (“FSV”) Director; Member of the Executive Compensation Committee; Chair, Nominating and Corporate Governance Committee
Bill McFarland, CEO and Senior Partner, Price WaterhouseCoopers  By fax
Gentlemen
I am part of a group with Arizona State Senator Farnsworth trying to bring sensible new legislation to the Arizona Homeowners Industry and regulate the activities of certain members of the Community Associations Institute (“CAI”). The latter presents itself as representing homeowners but is in reality a trade group. As a seasoned banker (click HERE), I tend to focus on financial issues, even though my involvement started with a stupid HOA violation notice. I’m writing to you as overseer of the finances of FSV.
As part of our legislative efforts, I believe much of the smoke and mirrors in HOA’s, and the attendant misery, is really driven by the large pools of money swirling around in a totally unregulated industry. Where HOA Management Companies, with landscaping management skill sets, if that, are acting as “quasi or shadow banks” attracted by the estimated $75 Billion of annual HOA revenues, and maybe as much as $50Bn of cash reserves – the “money honeypot” as I call it. Click HERE to hear about that on the Arizona Homeowners Forum blog.
I’m writing to you because the onion peeling has extended to FSV who are the largest player in the industry. We own properties in 3 HOA’s and FSV manages one of them, Vintage at Grayhawk in Scottsdale. My wife was President, and is still on an excellent Board who I have complete confidence in as they attempt to "manage" FSV.
My records request below, as one of many we’re accumulating as evidence to convince legislators, has not been satisfied, with the resistance coming from FSV, not the Board, who are refusing to cave to pressure from Richard Orduno at FSV to hire Carpenter Hazlewood. The latter are CAI attorneys in Arizona and the masterminds of the imminent bankruptcy of The Crossings. See LETTER FROM CARPENTER HAZLEWOOD on a separate blog at http://www.thecrossingsatwillowcreek.blogspot.com  dealing with another property we own.
Vintage at Grayhawk and FSV
I presented FSV’s local people and FSV upper management with issues below and received smoke and mirrors back from an attorney in Laguna Beach. See attached HERE which is to say the least – “unresponsive”.  As a banker, I listen to legal advice but attorneys don’t get to take banking decisions.
Armed with a sizeable library of basic banking documents collected by our group, I believe these “shadow banks” (HOA Management Companies such as FSV) are involved in the following highly dangerous practices. Even if they were legal, which I do not believe they are, they are not “prudential” which for bankers, is a higher test. This is how:
1.       The Patriot Act. HOA Management Companies, together with certain banks, including US Bank, are circumscribing the Patriot Act anti-Money Laundering provisions. They do this by taking total control of the HOA’s deposits via Master Agreements between themselves and the Bank. Click HERE for FSV’s agreement with US Bank. Not only are HOA Board members totally unaware of who they bank with, the bank also has no idea who the ultimate account beneficiary is. Consequently, they are ignoring basic banking 101 “Know Your Client” principles, one of the centerpieces of the “point of entry” control within the Patriot Act - ACCOUNT OPENING. Click HERE to access the Arizona Homeowners Forum blog dealing with anti-Money Laundering. The banks are, in effect, ceding their fundamental role as depositary institutions to unlicensed Management Companies whose primary skill sets are landscaping management. The recent Wells Fargo account opening saga was bad enough, but at least, to my knowledge, they were adding accounts to clients they already knew. US Bank has no idea who many of their real HOA accounts holders are and don’t seem to care.
a.    A simple test that funds are not being co-mingled, and actually belong to the owner, would be read only user names and passwords being made available for bank accounts to members to monitor their money. So far, these have not been forthcoming.
2.       Roundtripping. We have detected a pattern of round-tripping whereby HOA monies are “harvested” by Management Companies and then used to finance them, or their business partners.
a.    This was first spotted with HOAMCO in Prescott. See HOAMCO
b.    We believe it happened with First National Bank of Arizona which cost federal taxpayers $862mm in a 2008 FDIC bailout. See HERE
c.    Then we have US Bank's lending and deposit relationship with FSV where we estimate US Bank may have as much as $50-75mm from FSV managed HOA’s in Arizona alone. My wife’s own Board just realized moneys were being held in excess of the FDIC limit with US Bank with no apparent justification provided. Yet FSV does not disclose to HOA’s its substantial borrowing relationship with USBank in its supplier disclosure HERE  This is via its $200mm Revolving Credit. See HERE To our knowledge, USBank is the only member of FSV’s syndicate targeting HOA’s and, if HOA moneys are being steered by FSV towards US Bank, HOA Boards should be advised of it.
d.    This even extends to personal banking for CAI’s lobbyist, Kevin DeMenna here in Arizona. See Kevin DeMenna & US Bank
3.       How much FDIC Insurance is there really? FDIC insurance is terribly complicated. But one thing appears clear. FSV’s arrangements with the banks and its management agreement purport to be “agency” contracts. Yet they are functioning as fiduciaries. See Agents vs Fiduciaries
a.    This is not so much a legal issue as a banking matter
b.    As the effective party handling nationally what may be as high as $1Bn+, does FSV, and its banks, especially US Bank, have the necessary assurances from the FDIC that each $250,000 FDIC limit flows through to EVERY single deposit?
c.    If so, can we see those assurances?
d.    I believe these structures were developed to manhandle HOA moneys. But in so doing, these moneys must not compromise the deposit insurance to satisfy Management Company goals.
e.    FSV is not TOO BIG TO FAIL. But are they simply assuming US Bank is? An assumption which after this election may prove invalid.
4.       ACH Direct Debit Authority Risks. There is a practice of some Management Companies being given directly, in their names, ACH direct debit authorities which should be given to banks. See HERE Having been involved in the early ACH days at Chase, I believe these loose procedures, in a worst case, could involve a serious security risk to the $27trillion ACH payment system upon which most Americans depend. Worst case – terrorist intrusion from within a totally unregulated industry feeding transactions to the ACH
5.       “Substantive consolidation in bankruptcy”.  I am not an attorney but highly seasoned in the art of imminent bankruptcy or near bankruptcy of some clients, some publicly known, others not.  I have given up expecting the average CAI attorney to understand even the basics of corporate governance which is state law anyway. Let alone, corporate bankruptcy which is federal and specialized. HOA’s, as non-profit corporations, are unique animals. First, other corporations don't normally get to force their shareholders (members) to contribute potentially unlimited additional capital (assessments). Second, to sell your shares, you must also sell your house. Third, the Management Companies sign all the checks, to themselves, and manage the moneys, even though they disclaim they do not. Their Management Contracts are anything but arms-length essential to maintain the corporate veil separating them from their clients.  See FSV’s contract HERE Using the "duck" theory a la Enron, and others I can’t disclose, I believe before a bankruptcy judge, that HOA’s will prove to be General Partnerships with the Management Companies as General Partners. However, as any good banker knows, this only gets tested before a Federal Bankruptcy Court. What does this mean?
a.    If FSV had an “accident” that could spread. Intelligent creditors of the Crossings HOA for instance might simply attach the assets of Amcor in the case of Prescott, and its other general partnerships – other innocent HOA’s.
b.    We’ve yet to find an involuntary bankruptcy petition against an HOA with substantial liabilities, so can find no precedent for this. This may be the test case.
c.    Is FSV confident that their HOA business management model is “bankruptcy proof” – in both directions?
d.    If not, PUD Riders in most homeowner’s mortgages might trigger default by homeowners perfectly current on their mortgages as the Management Company disappeared given all their assets are intangible.
e.    If FSV, with its negative tangible net worth, boosted only by goodwill, had an “accident”, how many US homeowners nationally might be in default?
6.       FSV Management Controls in the context of Sarbanes Oxley - ICFR  FSV is pursuing an aggressive growth strategy using the “asset light approach”. This is not new. The real question is - are you also “liability light”. Particularly contingent liability light?
a.    Extrapolating, I would not be a bit surprised to find FSV is effectively managing $2-3Bn+ or more in HOA cash nationally. You don’t disclose that as far as I know. That compares with a modest $47mm amount of your own cash
b.    The management of these HOA moneys is being given to employees of FSV who are not bonded, without banking experience, and often it seems, sole signatories with no apparent limits.
c.    Would FSV allow such liberal signing authorities over its own $47mm?
d.    Does FSV have internal controls in place to manage these vast sums?
e.    If not, why not?
f.        If YES – do you not increase the risk of substantive consolidation?
Finally, as the largest player in the industry, what might FSV’s contribution to our legislative effort be?
Sincerely
John Sellers
Copy:
Securities Exchange Commission
Keith F. Higgins, Division of Corporation Finance
Andrew Ceresney Division of Enforcement, Director
c/o Trevor Perkins
Office of Comptroller of the Currency, Minneapolis
Assistant Deputy Comptrollers, Benjamin Rudolph, Jay Branger, Douglas Boser
FDIC
Division of Depositor and Consumer Protection
Mark Pearce, Director
Lee Price, Chief Risk Officer
US Bank
P.W. "Bill" Parker, Chief Risk Office, Vice Chairman by fax
Jennifer Thompson, Senior Vice President, Investor Relations
James Chosy, Executive Vice President, General Counsel by fax
Kimberley Piscione
Wells Fargo
Timothy J. Sloan, Chief Executive Officer and President c/o investor relations
First Service
Jeremy Rushkin, First Service CFO
Kelley Wood
Karl Gehring
Kelly Lee
FSV Stock Analysts
US Bank Stock Analysts
$200mm Revolving Credit Syndicate
Senator David Farnsworth
Stephen Briggs, Arizona Department of Financial Institutions
Louis Dettorre, Assistant Commissioner, Arizona Dept. of Real Estate
CNBC
Arizona Homeowners Forum – www.arizonahoa.blogspot.com
Regards
John Sellers


********************************************************
From: jasellers123@gmail.com [mailto:jasellers123@gmail.com]
Sent: Wednesday, November 9, 2016 12:10 PM
To: Kelly Lee <Kelly.Lee@fsresidential.com>
Cc: Kelley Wood <kelley.wood@fsresidential.com>; Karl Gehring <Karl.Gehring@fsresidential.com>; Richard.Orduno@fsresidential.com; Jeremy Ruskin <+14169605333@myfax.com>
Subject: Money
Ms. Lee
There's a lot can happen in 24 hrs but was has not happened is:
1. First Service was instructed by the Board in the October meeting, and agreed with Senior Management present, to suply me with electronic access to the General Ledger.
2. I cannot even get a copy of my account number for electronic access to my account.
You are in wilful default. And when I say you, I do not mean the Board.
Kindly satisfy the terms of your contract
Sincerely
John Sellers
928 310 8220
******************************************
From: John Sellers [mailto:jasellers123@gmail.com]
Sent: Tuesday, November 8, 2016 11:35 AM
To: 'Kelly Lee' <Kelly.Lee@fsresidential.com>
Cc: 'Kelley Wood' <Kelley.Wood@fsresidential.com>; 'Karl Gehring' <Karl.Gehring@fsresidential.com>; 'Jeremy Rakusin'; Richard.Orduno@fsresidential.com
Subject: FW: Money
Importance: High
Ms. Lee
I refer to your letter below where you state that the matter of Association records has been “passed along to the Board of Directors for further action to the Board”.
As you know instructions were given by the Board in the last October meeting you refereed to, which I also attended, to release documents.
I’m told no such further referral to the Board for supplementary records has been made. If it has, please supply copies of all communications evidencing that plus any other communications and email by your company with the Board since the October meeting
Even though you are an attorney, there is no client attorney privilege between you and the Board of course preventing that.
Instead, without knowing all the facts, I believe the primary response of your local people may have been to (unsuccessfully) pressure the Board to hire Carpenter Hazlewood. That’s the Board decision as my purpose is research into patterns of behavior by Management Companies and their banks, not meddling in individual Board matters.
The statutory period for records supply is 10 days as you know, and looming.
Any such failure would be that of FirstService, not the Board.
Given the circumstances, I personally, and without speaking for the Board of course, might construe that as gross or willful negligence under Clause 9.2 of the Management Agreement. Which by the way appears to me, as it is a document was obviously drafted by First Service, appears woefully inequitable  
Kindly advise forthwith
Regard
John Sellers
*****************************************
From: John Sellers [mailto:jasellers123@gmail.com]
Sent: Sunday, November 6, 2016 9:05 PM
To: kelley.wood@fsresidential.com
Cc: Jeremy Rakusin <IMCEAEX-_o=ExchangeLabs_ou=Exchange+20Administrative+20Group+20+28FYDIBOHF23SPDLT+29_cn=Recipients_cn=846388c40bc445d9980632e362a2e959-Jeremy+20Raku@namprd05.prod.outlook.com>; Vintage Board
Subject: Vintage at Grayhawk
Kelley
I forgot something.
Clause 4.11.2 of your MANAGEMENT Contract empowers only the Board to make investment decisions. Please supply any and all records pertinent to:
1.    The investment of Association reserves over and above the applicable FDIC insurance limit of $100,000 until 2008
2.    Similar records relevant to the decision to exceed the current FDIC limit of $250,000
Thanks/Regards
John Sellers
********************************************
From: John Sellers [mailto:jasellers123@gmail.com]
Sent: Monday, November 7, 2016 11:47 AM
To: kelley.wood@fsresidential.com
Cc: Karl.Gehring@fsresidential.com; james.cooper@usbank.com ; john.rehob@usbank.com; 'Jeremy Ruskin' <Douzounis@firstservice.com>; jen.thompson@usbank.com; +16123030782@myfax.com; kimberly.piscione@usbank.com
Subject: Money
Kelley
I’ll be responding shortly to the letter I received. But the records request below relates to materials only you have. Kindly respond
See highlighted areas.
Regards
*********************************************
Kelley
See below on which I await a response.
  1. Do you have a good electronic copy of your Mgmt. Agreement please?
  2. Do you have a copy of the Vintage Board minutes approving the bank account openings?
  3. We pay by check – what is our a/c #?
  4. I’m awaiting the GL in electronic format but have some basic mundane banking question: AS AGREED AT THE BOARD MEETING
    • When the Associations account is credited for monthly assessments, who is SETTLEMENTELBX? Who is the payor in other words?
    • I’d also like read only access to the bank account. Can you supply a user name and password please? AS AGREED AT THE BOARD MEETING
  5. I received a rather threatening phone call from Ms. Piscione of US Bank yesterday. See attached together with my response to her.
  6. We have over $430,000 sitting with US Bank.  Did she realize she was threatening a customer?
  7. But then – how would she know?  Has she ever met anybody on the Vintage Board?
  8. That total is well above the FDIC limit. Who authorized that?
  9. John Kemper of FirstService is statutory Agent for over 250 HOA’s in Arizona alone. See attached. If the others average half what Vintage has, that’s about $50mm in deposits from “one” account. That’s a lot of money by anybody standards.
  10. BUT, in your Management Contract and by regular disclosure, you list subsidiaries as vendors. Yet you never mention to your HOA’s that the same bank you are putting them into has committed to lend over $21mm to your company. See the attached from your credit agreement.
  11. Isn’t that a much bigger issue than landscaping costs?  
*********************************************
From: Kelly Lee [mailto:Kelly.Lee@fsresidential.com]
Sent: Wednesday, November 02, 2016 5:46 PM
To: jasellers123@gmail.com
Cc: Kelley Wood <Kelley.Wood@fsresidential.com>; Karl Gehring <Karl.Gehring@fsresidential.com>; Jeremy Rakusin <IMCEAEX-_o=ExchangeLabs_ou=Exchange+20Administrative+20Group+20+28FYDIBOHF23SPDLT+29_cn=Recipients_cn=846388c40bc445d9980632e362a2e959-Jeremy+20Raku@namprd05.prod.outlook.com>
Subject: Re: Money
Importance: High
Good afternoon, Mr. Sellers.
Your inquiry was forwarded to my attention.
Attached is a letter in response.
Thank you,
Kelly Lee
949-448-6102 (Office)
949-433-1852 (Cell)
********************************************
From: John Sellers [mailto:jasellers123@gmail.com]
Sent: Wednesday, October 26, 2016 2:54 PM
To: Kelley Wood <Kelley.Wood@fsresidential.com>
Cc: Karl Gehring <Karl.Gehring@fsresidential.com>; james.cooper@usbank.com; john.rehob@usbank.com; 'Jeremy Ruskin' <Douzounis@firstservice.com>; jen.thompson@usbank.com; +16123030782@myfax.com; kimberly.piscione@usbank.com
Subject: Money
Kelley
See below on which I await a response.
1.       Do you have a good electronic copy of your Mgmt. Agreement please?
2.       Do you have a copy of the Vintage Board minutes approving the bank account openings?
3.       We pay by check – what is our a/c #?
4.       I’m awaiting the GL in electronic format but have some basic mundane banking question:
·         When the Associations account is credited for monthly assessments, who is SETTLEMENTELBX? Who is the payor in other words?
·         I’d also like read only access to the bank account. Can you supply a user name and password please?
5.       I received a rather threatening phone call from Ms. Piscione of US Bank yesterday. See attached together with my response to her.
6.       We have over $430,000 sitting with US Bank. Did she realize she was threatening a customer?
7.       But then – how would she know? Has she ever met anybody on the Vintage Board?
8.       That total is well above the FDIC limit. Who authorized that?
9.       John Kemper of FirstService is statutory Agent for over 250 HOA’s in Arizona alone. See attached. If the others average half what Vintage has, that’s about $50mm in deposits from “one” account. That’s a lot of money by anybody standards.
10.   BUT, in your Management Contract and by regular disclosure, you list subsidiaries as vendors. Yet you never mention to your HOA’s that the same bank you are putting them into has committed to lend over $21mm to your company. See the attached from your credit agreement.
11.   Isn’t that a much bigger issue than landscaping costs?
Regards
John Sellers
James L. Chosy, Executive Vice President and General Counsel of U.S. Bancorp by fax to 612-303-0782
Jennifer Thompson, CFA Senior Vice President, Investor Relations U.S. Bancorp
Jeremy Ruskin, CFO FirstService Corporation
US Bank Syndicate lenders
Bcc Vintage at Grayhawk Board
********************************************
From: jasellers123@gmail.com [mailto:jasellers123@gmail.com]
Sent: Wednesday, October 19, 2016 10:08 PM
To: Karl.Gehring@fsresidential.com; Kelley Wood <kelley.wood@fsresidential.com>; Debborah Sellers <
Subject: Money
Karl
Thank you for the Vintage at Grayhawk records. Kelley promised them at the Board meeting today where, as you know, my wife is President. I appreciate the timely response. I will study them.
My understanding from my wife is that the underlying lease with American Leasing has been solved with regards to the 3 yrs of overpayments. That's great. We appreciate your contribution.
In the interests of full disclosure, I helped set up the ACH system when at Chase in the 80's. The whole ACH system has now grown to $27 trillion and is a fundamental plank of every americans daily lives.
One of the biggest problems we had setting up the system originally was double debits. I thought we had fixed that problem which is related to the batching process which is a fundamental part of the ACH system.
I understand that one of the monthly payments to American Leasing was debited twice.
However trivial that may seem, I consider that potentially a very serious issue which I've already flagged to regulators. For many reasons.
FirstService is a public company which derives the bulk of its revenues from payments made by HOA members via the ACH.
So:
1. I would ask FirstService to pursue a thorough investigation of why this ONE double debit occurred.You should be extremely concerned about that. In your place, I would refer it to your compliance officer at corporate headquarters.
2. Should you not do so, I will, unless you provide prompt confirmation you have done so, refer it to them. Kindly confirm that referral and their contact details. See letter to CFO Ruskin
3. I would like to know the results of that. Because one double debit is one too many. Books have to balance.
4. Is this the only time this has happened with any HOA you manage?
5. Please supply me with all the records you have related to the why, when, and how this single payment was double debited. Including communications with the bank on the HOA's behalf inquiring on this matter.
6. Can we have a conference call with the bank officer who might understand and be able to explain what might be an innocent oversight?
7. You as a company pursuant to SEC filings and the revolving credit your company has with a syndicate of banks led by my previous employer, have made certain representation with regards to the Patriot Act and the relevant anti-Money laundering provisions, which, having written such procedures, I'm extremely familiar with.
8. Are you as a company prepared to represent that the banks you are depositing our funds with are compliant with those same anti-money laundering provisions? See Article 16.9 USA Patriot Act Notice and your corporate credit agreement attached
9. If so, please provide that rationale because it escapes me at the moment.
Thanks again for your prompt response.
Regards
John Sellers
928 310 8220
********************************************
From: Karl Gehring <Karl.Gehring@fsresidential.com>
Sent: Wednesday, October 19, 2016 04:28 PM
To: jasellers123@gmail.com
Subject: FW: Re : Vintage at Grayhawk Records Request
CC: Kelley Wood <Kelley.Wood@fsresidential.com>
Hello Mr. Sellers –
Thank you for your request for Vintage at Grayhawk’s records received by FirstService Residential on Thursday, October 6, 2016. We have attached all the records you requested electronically via this email:
1. A copy of all the Association’s bank account opening documentation including the names of the account signatories and signature cards – Please see the two attached documents named #1a and #1b.
2. Any and all account documentation including indemnities related to the handling of payments by members electronically, ACH credit card or other means - Please see the attached document named #2
3. A copy of the authorization we are supposed to give to you should we wish to pay by direct debit means via the Automated Clearing House(ACH) - FirstService Residential Arizona currently provides a direct debit payment option called Surepay and handled internally. To enroll in this option, the homeowner must fill out our Online form located on our website at https://fsresidential.com/arizona/home. Once this form is submitted by the homeowner will receive a confirmation #.
4. A copy of the HOA’s current insurance certificate – Please see the attached document named #4.
5. A copy of your insurance certificate – Please see the attached document named #5.
6. Copies of any bonding arrangements for any of your employees who have signing authority over the Associations moneys. - There are no bonding arrangements. FirstService Residential Arizona, LLC maintains crime insurance coverage.
Please let me know if you have any questions,
KARL GEHRING, CMCA®
Regional Director
9000 E. Pima Center Parkway Suite 300 Scottsdale, AZ 85258
Direct 480-551-4202 | Fax 480-551-6021
Email karl.gehring@fsresidential.com
*********************************************
From: John Sellers [mailto:jasellers123@gmail.com]
Sent: Thursday, October 06, 2016 8:59 AM
To: Kelley Wood <Kelley.Wood@fsresidential.com>
Cc: Debborah Sellers
Subject: Re : Vintage at Grayhawk Records Request
Dear Ms Wood
This is a records request as a member of Vintage at Grayhawk pursuant to Arizona Revised Statute 33-1805 which must be satisfied within 10 business days:
Please provide, preferably electronically, the following:
1. A copy of all the Association’s bank account opening documentation including the names of the account signatories and signature cards
2. Any and all account documentation including indemnities related to the handling of payments by members electronically, ACH credit card or other means
3. A copy of the authorization we are supposed to give to you should we wish to pay by direct debit means via the Automated Clearing House(ACH)
4. A copy of the HOA’s current insurance certificate
5. A copy of your insurance certificate
6. Copies of any bonding arrangements for any of your employees who have signing authority over the Associations moneys.
7. For your convenience a copy of ARS 33-1805 is below which exceptions to disclosure B1 through B5 obviously do not apply
Thank you/Sincerely
John Sellers