Sunday, October 23, 2016

Where's the HOA's money First Service?

From: John Sellers []
Sent: Sunday, October 23, 2016 9:18 PM
To: Jeremy Ruskin <>
Subject: Whose money is it?
To: Jeremy Ruskin, Chief Financial Officer, FirstService Corporation Toronto
Dear Jeremy
I’m writing to you in response to the failure of FirstService in Scottsdale to provide timely evidence that the information I’m supplying them below is making its way up your compliance chain. If you have one. I believe these financial issues are way beyond their paygrade so you get to hear about it as CFO direct.  A lot of bankers don’t seem to understand them either.
I’m an ex banker currently working with a group of likeminded people and Arizona State Senator Farnsworth to make legislative changes for Arizona Homeowners Associations. One of the things we’re doing is following the money. It’s extremely disturbing already but even more so as we broadly collect basic banking information as to how HOA Management Companies, including yourselves, are running the cash. Here’s the issues which concern me, and I have intimate experience of all of them.
Four aspects manifest themselves, the first historical, plus three current risks
1.      The losses in Arizona in 2008 alone of almost $1 Billion by the FDIC in respect of First National Bank of Arizona (“FNBA”) and Desert Hills Bank (“DHB”). The successor to FNBA is Mutual of Omaha who you currently use for Vintage. FNBA, prior to the 2008 crisis, wholesale harvested, via Management Companies, such as yourselves, over $1bn in deposits over an extremely short period, of which only $75 million went back into HOA’s. This wholesale harvesting continues as evidenced by the broad documentation we’ve collected.
·         Are you aware of this?
·         Why do you think FNBA uninsured depositors had to be bailed out as well?
·         What was FirstServices's involvement in harvesting these deposits?
·         What happened to the other $925 million?
2.      The lack of basic “know your customer” banking procedures exposing the failure of proper anti-money laundering vetting as required by the Patriot Act. A fundamental tenet of anti-money laundering is the point of entry into the banking system. Know your customer. With your firm’s active participation, these principles are being ignored. You are acting as the client – not the HOA which owns the cash. Your system actively encourages HOA Board Members to be totally unaware of who they bank with. In almost all cases, the bank has no knowledge of who the account holders are. Only you have signing authorities over those bank accounts. HOA’s can be shuffled in and out of your package of banking authorities and you have total control over the cash. See attached HERE supplied by your local people.
·         Are you aware of this?
·         Your credit agreements with a group of banks place anti-money laundering controls on you as borrower under the Patriot Act. Why would you not practice those principles in your basic business of managing $Billions of HOA’s moneys?
·         Over $7billion flows through your company annually according to your own latest stock analyst presentation. How do you know that money is clean?
3.      The lack of controls over direct debit authorities you collect from homeowners for assessments and the risks this could pose to the ACH system overall by malicious intrusion. Management Companies are not banks. In fact, their basic job as totally unlicensed entities is to take care of landscaping and other mundane aspects. Management Companies however are receiving powers in their name from homeowners to debit their bank accounts. That's a depositary institutions role. In addition, I’m extremely and painfully familiar with double debit issues with the ACH, which is still batch based to my knowledge.
·         Even the 1 double debit via the ACH referenced below by your people is a bad sign. How many ACH double debits have you experienced amongst your totally unlicensed 15,000 employees?
·         Fraud is rampant in HOA’s. See recent examples we're familiar with ourselves HERE and HERE Very close to home for us.
·         Why are your people not even bonded?
·         What do you assess as the risk of one malicious ACH batch inserted into the $27 trillion p.a. ACH payment system as part of your $7 billion annually under management?
4.      The mingling of moneys by Management Companies which we already know is prevalent. This exposes HOA’s and their Management Companies to “substantive consolidation in bankruptcy”. The potential result - supposedly limited liability HOA nonprofit corporations become general partnerships where the General Partner is you, the Management Company. With a $1.4 Billion market capitalization, you as a company have a negative tangible net worth. See attached HERE extracts from your accounts. Even including goodwill, representing the intellectual value of your employees acquired through acquisitions, your totally secured debt still exceeds your net worth. HOA Management Companies are effectively running every aspect of HOA’s, acting as sole signatories on bank accounts, paying themselves as both signing payor and payee, indemnified for almost everything, named on the HOA’s insurance policy, and exercising total control over $Billions of cash. Management Companies are indistinguishable from their supposed clients who were often inherited from the developer by an HOA Board. Basic corporate governance rules relying on arms-length dealings built up over centuries of corporate law are being ignored. You have a mere $45 million of cash on your balance sheet, all of which originates from the gross $7 Billion of assessments you are collecting annually. You would certainly not be the first large company to discover the perils of cash mingling from the management of supposedly arms-length relationships. Ask Enron! In addition, you, by your own numbers and Zillow, are managing 1.5% of the nation’s housing stock amounting to $350 Billion. You and other Management Companies are acting as if you were depositary institutions, AND fiduciaries, completely unlicensed or supervised. Some Management Companies have amazingly written that they have no idea why we’re asking about bank accounts. And in some cases denied us them on the grounds they’re not Association records. Currently the Arizona Department of Real Estate has been assigned a monitoring role but:
·         Why should you not be licensed as financial institutions?
·         How many of your 15,000 employees would understand the importance of this – or even of debits and credits?
·         US Bank is the only member of your banking syndicate which to our knowledge does local HOA Banking, including for Vintage. Would you allow your own corporate cash accounts to be managed as loosely as this by third parties you did not even know?
·         Running an “asset light” business to leverage stock market returns as you are obviously marketing is far from new and fraught with failures. Your Management Agreement attached is by no means arms-length, albeit standard in the industry. I read that contract to say – the Management Company owns it all. So the question is - are you also liability light? The question of how much of the $350 Billion of assets you manage that you actually own will not be decided by you, stock market analysts, accountants, or even attorneys. It could be decided very soon by a bankruptcy judge. We are currently dealing with that with AMCOR Property Management and another property we own in a subdivision in in Prescott. This is hovering within days of bankruptcy. See Amcor has no idea what they have done. We plan to ensure they find out!
·         Do you understand this?
Our onion peeling as part of supporting the Farnsworth initiative continues. We actually have some HOA Management Companies refusing to disclose bank account signature cards on HOA Bank accounts, arguing they are the Management Company’s records, not the Association. Much of the above, apart from the bankruptcy aspects, is not rocket science. It's Banking 101. And Wells Fargo has learnt all about the risk of not managing bank account openings. Your banking syndicate and note holders are secured over all your assets. So, a couple of simple final questions:
·         Who actually owns title to all that cash you manage?
·         How big is your balance sheet really?
·         If FSV had an accident, who would control all that cash – the HOMEOWNERS or YOUR BANKS?
·         Subprime happened because financiers were too busy packaging risk, rather than understanding it at the individual level. Is this a repeat?

For legal reasons, this is being copied broadly and published on our blog at www.arizonahoa.blogspot as this may contain information not broadly disseminated to the markets. We’d welcome your comments as part of our efforts to rein in your industry with new legislation.

FSV Stock Analysts
FSV Revolving Credit Lender
See attached HERE
Senator Farnsworth, Chairman of the Arizona State Senate Financial Institutions Oversight Committee
Stephen Briggs Arizona Department of Financial Institutions
Senators Elizabeth Warren, John McCain, Jeff Flake
Office of Comptroller of the Currency Houston
Dennis May, AMCOR by fax

John Sellers
Cave Creek
Arizona 85331
Tel: 928 310 8220
From: []
Sent: Wednesday, October 19, 2016 10:08 PM
To:; Kelley Wood <>; Debborah Sellers <>
Subject: Money

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.
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.
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.
John Sellers
928 310 8220
From: Karl Gehring <>
Sent: Wednesday, October 19, 2016 04:28 PM
Subject: FW: Re : Vintage at Grayhawk Records Request
CC: Kelley Wood <>
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 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,
Regional Director                                                                                                   
9000 E. Pima Center Parkway Suite 300 Scottsdale, AZ 85258
Direct 480-551-4202 | Fax 480-551-6021
From: John Sellers []
Sent: Thursday, October 06, 2016 8:59 AM
To: Kelley Wood <>
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