Cracking down on misconduct by managing agents

A crackdown on kickbacks in the 1990s forced New York’s residential management industry to clean up its act.

Several recent cases involving managing agents, however, are raising eyebrows about corruption in the industry again. In August, Queens firm Charter Management abruptly went out of business after the district attorney began an investigation into whether the company had improperly commingled and stolen clients’ funds. A few months later, building manager Mark Modano pleaded guilty to charges of stealing over $1.3 million from the operating accounts of six clients. The Manhattan District Attorney, according to published reports, is also investigating Downtown Properties owner Richard Bassik, who has been accused of embezzling nearly $2 million from buildings he managed.

The sudden appearance of these cases isn’t just a coincidence, industry insiders say. While some wrongdoing has always taken place, the real estate bubble and its subsequent burst created conditions ripe for the mismanagement of funds.

A number of small new building management firms — like Bassik’s — appeared during the 2000s, seeking to profit from the thriving market. Instead, they scrambled for survival in a competitive, niche business. Then, as the economy soured after the Lehman Brothers collapse, unscrupulous managers found easy targets with residents in the many new buildings constructed during the boom.

Even the long-entrenched problem of kickbacks may be on the rise in the midst of the recession, industry sources said.

“It had quieted down for a while,” said Mindy Eisenberg Stark, a certified public accountant and certified fraud examiner who has worked with some 80 New York-area co-op and condo boards. She said boards all over the city are now more concerned about fraud: “It’s become a hot topic again.”

Corruption among managing agents — who handle the finances of residential buildings, often collecting fees and paying bills — was long considered an epidemic in New York City. Before the 1990s crackdown, kickbacks from contractors and other vendors were particularly rampant.

Back then, some managing agents “as a matter of course, took 10 percent on everything,” said real estate attorney Steven Wagner, recalling the days when building managers or co-op board members routinely solicited envelopes stuffed with cash.

These days, “the industry has been cleaned up substantially,” Wagner said, adding that most large firms now have “a corporate outlook.”

Still, a few bad apples have come to the forefront recently.

In August 2009, Bassik was ordered by a judge to pay more than $628,201 to Riverbank South, a West 11th Street co-op whose members had accused Bassik of mismanaging funds. A suit filed by another Bassik client, 115 Spring Street, claimed that some $790,000 had disappeared.

Calls for comment to Bassik’s attorney were not returned.

Unlike real estate brokers, managing agents are not required to take a licensing exam, and many co-ops fail to adequately screen or supervise their building managers, Wagner said.

“There are managing agents who gain the trust of boards and virtually handle everything for them,” he said. “Boards get reports and just smile and nod. That’s a risky situation.”

Bassik, who had previously served 14 years of a life sentence for kidnapping, founded Downtown Properties in 2003.

That’s around the time that many new residential management firms appeared, said Steve Greenbaum, director of property management at Mark Greenberg Real Estate, which has offices in Manhattan and Long Island.

“We saw a lot of people starting businesses who have now fallen by the wayside,” Greenbaum said. “It’s a very difficult, niche market.”

When times got even harder after the Lehman Brothers collapse, these new companies — and other managing agents — faced even greater temptation to abuse their positions, said Stark.

“We’re seeing an uptick in fraud in general,” Stark said.

Inexperienced firms are also more likely to engage in a frowned-upon practice called “commingling,” which involves putting funds belonging to multiple buildings into the same bank account. The practice isn’t illegal, but is shunned by accountants and most managing agents because it makes it harder for buildings to keep track of their money.

“I don’t see [commingling] at the large managing agents,” said David Berkey, a partner at Manhattan law firm Gallet, Dreyer & Berkey, which represents about 125 co-ops and condos. “I do see it in smaller buildings, as they go to agents who don’t have the same quality controls in place.”

Some managers commingle accounts because it saves them money on bank fees, but others do it for more nefarious purposes: Mixing funds makes fraud harder to detect, said Greenbaum, who encountered the practice when his company took over as the building manager at the Forest Hills Chateau co-op in Corona, Queens.

The previous agent, Michael Burak of the Burak Organization, was indicted by the Queens DA in 2007 on charges of stealing $163,000 in co-op funds over two years. Burak periodically transferred the co-op’s money into his own bank account, according to the indictment.

Burak pleaded guilty to petty larceny and received a conditional discharge, according to a spokesperson for the DA.

Modano, too, mingled funds belonging to clients — which reportedly include 805 Madison Avenue — in large “master” accounts, then used the money for his own personal expenses, according to the Manhattan DA’s indictment. In December, Modano pleaded guilty to second-degree larceny and scheme to defraud in the first degree, and was sentenced to serve two to seven years in prison, a DA spokesperson said.

Charter Management ceased operations after some $350,000 was found to have gone missing from one of its clients, and the firm was ordered by a court to repay the money, according to published reports. The Queens District Attorney told The Real Deal that it is investigating the case.

Charter’s president, Michael Richter, could not be reached for comment. In July, shortly before the company ceased operations, Richter told Habitat Magazine: “We do not commingle funds. I have no comment about the way I run the finances at my buildings.”

But Stark, who audited the finances of a former Charter building, said the company appeared to operate by depositing money from numerous properties into a single bank account, and moving funds into each building’s account only when a check needed to be cut.

As co-ops and condos look to save money in the down economy, they may hire the cheapest building manager they can find, without looking for warning signs, Greenbaum said.

“In this economy, buildings may look to the bottom line and hire smaller, storefront managing agents who aren’t as sophisticated,” Greenbaum said.

The many new buildings constructed during the boom are especially vulnerable, said Berkey, who saw a case last year in which the managing agent was found to be stealing. “The [managing] agent wasn’t giving proper records to the new board,” he said. “It was a new co-op, so they were unaware of what they should have been looking for.”

Because these new buildings are hiring managers for the first time, they often don’t have the proper safeguards and “haven’t set their procedures in place,” Berkey said.

Even the frequency of kickbacks may be getting a boost from the down economy.

Louis Coletti, the president of the Building Trades Employers’ Association, said more contractors are competing for less work, which may create a greater temptation to offer gifts or bribes to managing agents.

“In an environment where bid lists are greatly expanding because of the down economy, it could lead to that potential activity,” he said.