Association president challenges former property manager

TARA — Cypress Strand resident Charlie Lowe simply can’t let the issue die.

Although it’s been months since Lowe, president of the Cypress Strand Condominium Association, first became suspicious the company previously managing his association may be unlawfully using the association’s assets, the notion now is being heard by the Department of Business and Professional Regulation.

With the department’s formal investigation complete, the complaint lodged against William Sutton, chief executive officer of Progressive Community Management, now is being reviewed by the DBPR’s Office of General Counsel.

“I’m just trying to do my little part,” Lowe said of why he filed the complaint. “This country needs to get back to accountability and morality.”

Lowe is alleging Sutton and his firm used two certificates of deposit owned by Cypress Strand to create a line of credit in PCM’s name and to withdraw funds by that line of credit for private purposes. Lowe said this was done concurrently with 36 other associations managed by PCM, allowing it to withdraw $1.4 million against roughly $2.4 million in reserves.

Sutton, whose company manages about 170 associations in Manatee and Sarasota counties, however, said it has been his company’s cornerstone to follow federal guidelines and demonstrate high standards and ethics.

“We have never been a subject of any licensing complaint at any time,” Sutton said, noting the PCM has been in business for more than a decade. “This is a first for us. We’re very confident and comfortable we have complied with all the state and local laws and conducted ourselves appropriately.”

BACKGROUND
Lowe joined the Cypress Strand Board of Directors in April 2010, and in September, the board voted to invest about $200,000 in reserves in two certificate of deposits with Morgan Stanley Smith Barney.

With three board members seeking to improve efficiency, the board in November 2010 voted to re-bid all its contracts, including its contract with PCM. In total, the new contracts saved the association more than $35,000 annually.

Former Cypress Strand President Bill West resigned from his post around that time, and Lowe stepped into his new role.

In the spring, an auditor’s report completed by Sarasota CPA Tom Menchinger found something unusual in the association’s financial statements — forms indicating that PCM may be using the association’s line of credit, using the CDs as collateral. The documents also indicated, the two Cypress Strand CDs were added to 36 other association reserve accounts, which Morgan Stanley titled “Reserved Client Consolidation.” The consolidation of these CDs was under the control of PCM and had a value of more than $2.4 million.

Menchiner said he found “irregularities” during the audit but declined further comment.

Sutton said PCM always acted under the direction of Cypress Strand’s board of directors and the board always was in control of their assets.

“The Smith Barney product was approved at a board meeting,” Sutton said. “At no time did we do anything out of the norm. They approved everything.”

Sutton said PCM has had a longstanding line of credit, and he did not know how the CPA interpreted financial data.

“We used the line of credit appropriately and legally, and at no time were their funds lost or in jeopardy,” Sutton said.

In a response submitted to the state, Sutton’s attorney Marielle Westerman wrote Cypress Strand’s application to the Smith Barney product showed the association intended for Cypress Strand to transfer money into the product and that the entity did not choose to opt out of participating in the line of credit.

In the DPBR’s investigative report, investigator Gene Kelley wrote that in a telephone interview, Westerman further explained the Smith Barney product allowed all product participants, including PCM, to use a line of credit up to 30% of the value of the product and many associations, like PCM, borrowed money. All associations, including PCM, repaid the money, as well.

Sutton also noted that PCM shut down the participation in the program for all its participating associations and closed a line of credit when it began receiving complaints about it in the fall.

ON EDGE
If the DBPR’s legal counsel finds evidence Sutton improperly used Cypress Strand’s assets, penalties would be imposed, because the department is an administrative agency that can take action against professional licenses, Frady said.

“The attorney will review the information from the investigation in the file to determine if there is evidence to support violation of Florida Statutes,” Frady said. “If there is probable cause, discipline against the CAM’s license such as fines, suspension or revocation could occur.”

Frady could not estimate when the department’s Office of General Council would render a decision.

Contact Pam Eubanks at [email protected].

Exerpts:
Sept. 20 from Client Correspondence Dept of Morgan Stanley Smith Barney (Bernd Suess):
“Dear Mr. Lowe:
This is written in response to your telephone conversation with Complex Risk Office Keith Thomas on September 1, 2011. In that conversation, you expressed dissatisfaction with the purchases of two Certificates of Deposits (CDs) in account XX-XX77A in November 2010. You also requested information regarding the pledge of the assets in that account as collateral for an Express Credit Line in the name of Progressive Community Management, Inc., another condo association. Additionally, we received a written inquiry from attorney Daniel J. Lobeck regarding the assets pledge. The appropriate parties have reviewed these matters and I have presented their conclusions in this letter, a copy of which is being provide to Mr. Lobeck. Thank you for your patience in awaiting our response.

On November 1, 2010, two $100,000 CDs were purchased in the above-referenced account. The GE Money Bank CD at a rate of 0.45% matures on November 4, 2011, and the Ally Bank CD with a rate of 0.85% matures on November 5, 2012. Both CD purchases were approved by the authorized individual on the Corporate Resolution Form. In the event you determine to sell the CDs, please note that their current value may be significantly below their face value.

While we acknowledge that the assets in the above-referenced account we pledged as collateral to secure and Express Credit for Progressive Community Management, Inc., we confirm that the pledge was removed in July 2011. The assets in the above-referenced account are now unencumbered and owned free and clear by Cypress Strand Condo Association. We confirm that at no time were funds withdrawn from that account for the benefit of any other account.”

July 27, 2011
In letter from Keith N. Thomas, Compliance Risk Officer, for Morgan Stanley Smith Barney, to Cypress Strand Condominium Association:

2. As per, our Express Credit line agreement, William Sutton authorized the collateralization of the Cypress Strand Condominium Association, Inc.

4. Morgan Stanley Smith Barney accepted the collateralization due to the fact that William Sutton signed the Express Credit Line Guaranty of Account form (enclosed). Please note William Sutton is listed as assistant treasurer for Cypress Strand Condo Association on MSSB’s corporate resolution form (enclosed)

5. Date of termination March 18, 2011.

6. Currently, Cypress Strand Condominium Association, Inc. is no longer collateral for any line of credit of other obligations of Cypress Strand Condominium Association or any other entity or party.

718.111 (14)
(14) COMMINGLING.—All funds collected by an association shall be maintained separately in the association’s name. For investment purposes only, reserve funds may be commingled with operating funds of the association. Commingled operating and reserve funds shall be accounted for separately, and a commingled account shall not, at any time, be less than the amount identified as reserve funds. This subsection does not prohibit a multicondominium association from commingling the operating funds of separate condominiums or the reserve funds of separate condominiums. Furthermore, for investment purposes only, a multicondominium association may commingle the operating funds of separate condominiums with the reserve funds of separate condominiums. A manager or business entity required to be licensed or registered under s. 468.432, or an agent, employee, officer, or director of an association, shall not commingle any association funds with his or her funds or with the funds of any other condominium association or the funds of a community association as defined in s. 468.431.

20)  “Multicondominium” means a real estate development containing two or more condominiums, all of which are operated by the same association. 

718.112.(2)(f)3
3. Reserve funds and any interest accruing thereon shall remain in the reserve account or accounts, and shall be used only for authorized reserve expenditures unless their use for other purposes is approved in advance by a majority vote at a duly called meeting of the association. Prior to turnover of control of an association by a developer to unit owners other than the developer pursuant to s. 718.301, the developer-controlled association shall not vote to use reserves for purposes other than that for which they were intended without the approval of a majority of all nondeveloper voting interests, voting in person or by limited proxy at a duly called meeting of the association.