Thursday, November 10, 2016

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