ASSOCIATION TIMES
July 2009

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This past week an Orange County judge sentenced Newport Beach resident Peter Kontos to two years in prison and ordered him to pay hundreds of thousands in restitution to a local condominium association that he had been stealing from when he was the Association’s board president.

Kontos, 36, had pleaded guilty to grand theft, 39 counts of forgery and 64 counts of money laundering.

Since March 2003, Kontos as President of the Villa Point Condominium Association, an upscale condo project in Newport Beach, stole $538,653 from the association by forging the signature of the treasurer on 39 association checks, which he wrote to various contractors under the pretense that they were doing work for the condominium complex.

Those contractors who received the checks cashed them and turned the majority of the money to Kontos in the form of cash, frequently delivering the money to Kontos’ parents’ home in Downey. During their sworn testimony in a civil trial against Kontos, the contractors stated that they had done little or no work for the payment and had cashed the checks in hopes of receiving future work at Villa Point Condominiums.

As in many HOA-related crime losses, board complacency and inattentiveness was partially to blame. Kontos recruited busy homeowners to sit on the Board of Directors with him, knowing they would not be able to attend meetings. In addition to the theft of association funds, Kontos caused thousands of dollars in damage to the association’s property by personally undertaking unauthorized property improvements, which later had to be fixed by the Association.

The court ordered Kontos to pay $337,000 in restitution, and more than $200,000 of that is going back to the Association. The Association, however, is out $538,653, so one naturally asks, “Who will be responsible for the $338,653 shortfall?"

The stolen money, of course, has already been spent by the perpetrator, and obtaining a judgment against a defendant who likely has little in terms of assets and will be spending the next two years in jail is probably an exercise in futility. Hopefully the Association had sufficient crime coverage in force to protect them against this type of loss. Crime Insurance (often referred to as Fidelity Insurance or a Fidelity Bond) protects against these types of losses: those due to fraudulent acts, including the losses that this dishonest board member caused his Association to incur by forging the treasurer’s signature to pull off the crime.

The Board is required by the California Civil Code (Civil Code §1365(f),) to disclose to the Association whether they have purchased crime insurance and at what limit, the California legislature stopped short of requiring a specific amount of coverage. Unless the CC&R’s require a higher limit, it’s up to the Board’s discretion. Most homeowners association boards choose to maintain crime insurance with limits equal to:

1). 125% of the annual operating expenses; or

2). Three months operating expenses plus the Association’s current Reserve Balance.

In either event, the best protection (to supplement crime insurance) is making certain that financial controls are in effect.

Financial Controls – How To Avoid A Potential Crime Loss?:
  • Maintain separate operating and Reserve accounts.
  • Require countersignatures on all checks.

  • Verify that the management agent can deposit to, but has no authority to withdraw from the reserve account.
  • Keep original copies of the bank statements going both to the management agent AND to a member of the Board.

  • Allow bank accounts to be reconciled by someone who is not authorized to either deposit or withdraw.
  • Careful handling of signature cards.

 

This letter contains only a general description of coverage and is not a statement of contract. For a more detailed description of the policy conditions and exclusions, please consult the policy itself.
© 2009 – TIMOTHY CLINE INSURANCE AGENCY, INC. – ALL RIGHTS RESERVED
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