Monday, May 02, 2011

Hammering around Laguna Woods Village - Curtis, Feldstein et al vindicated

 Posted by CotoBlogzz

Laguna Woods Village, CA  – we are going to make the case that the April 16, 2011 United Mutual Press release supports the argument that  Laguna Woods Village governance continues to hammer around the community, that HOA Hero Mike Curtis has been vindicated and that Stanley Feldstein,  the Ely’s and other community activists have been right all along

While we give the United Mutual an A for effort for pro-actively looking into theThird Laguna Woods Mutual  lawsuit against PCM, Milt John,  and PCM’s Financial Services and Finance and Administration Director Janet Price, we give it a F for its hammer approach:  “If the only tool I have is a hammer, I tend to see everything as a nail” – Maslow.  Let me explain:

The United Press Release acknowledges that the Third complaint alleged “serious and profound fraud and abuse” arising out of a “Pay for Results” incentive compensation plan originated by and utilized by PCM between 1996 and 2007,” and  “because of the seriousness of the allegations in the Third Mutual lawsuit, United retained David F. Feingold, Esq. and the law firm of Ragghianti Freitas LLP as Special Independent Counsel to investigate the Incentive Plan on behalf of  United. The board’s mandate to Mr. Feingold: Complete a comprehensive investigation of Third’s allegations and provide an unbiased report as to whether United should/must take action against PCM, Johns and Price, and/or any and all of them.” 

Feingold’s own website states that he  “ ,,,,,has been in practice since 1986. The majority of his practice is devoted to representing community associations and homeowners in construction and real estate related issues.”  This is akin to LA Dodger’s owner Frank McCourt hiring an attorney specializing in intellectual property to advice him on how to proceed with his messy marriage, for instance.

Community activist Paul Loughery has been trying to educate the community that in order to dismiss  and or prove fraud, a forensics expert is required.  As to the compensation issue, that is why there are so many competent compensation experts.  Skeptics can argue that either the Third board is really dumb, or it is simply availed itself of an insurance policy, by being exonerated by a non-expert in the field.  However, what happens to that insurance policy  if the IRS, HUD  the DOJ and or other government agencies find merit on the multiple whistle-blowing incidents?

Nore Damning however is that Mr. Finegold’s own findings do not reveal anything new bu are more like a subset of what has been documented in the Red Book.

For instance, the United Press Release states that some of Mr. Finegold’s findings include:

 “The United Board of Directors “knew” of the Incentive Plan when the relevant management contracts between United and PCM were executed. Corporations are held to knowledge that their directors or officers, acting as agents for the corporation, receive relating to material factual issues."

 Noteknew” is legalize for “we provide you with misleading information, it is up to you to discern whether you understand it or not, if you don’t, don’t sue us”  This is exactly the Enron defense and what the Sarbanes-Oxely Act intended to avoid:  1)  Have management sign reports certifying  it “knows.”  2)  Have management certify it “knows” to be correct and 3)  certify it knows, it is correct and a process is in place to avoid problems in the future.

The reported findings also state that “ The relevant management agreement included language that was broad enough to permit a pass-through of all PCM compensation-related expenses, including Incentive Plan payments.  The 2007-2011 agreement expressly allowed a pass through of Incentive Plan payments. That agreement was approved by United’s then legal counsel.

Note:  In this case the operative statement is “broad language” and approved by “then United’s legal counsel.”  So, who’s on first?  Who’s on Thrid?

But wait, there is more findings:  “ Although not transparent, nor easy to understand, the Incentive Plan was developed in 1996 with the involvement of a professional consultant and in consultation with the Presidents of the corporations. The Incentive Plan was utilized by PCM on a company-wide basis, with every Division participating, and a large percentage of eligible PCM employees receiving Incentive Plan payments.  While the justification for some of the almost 1,000 Incentive Plan payments made between 1996 and 2007 may be subject to question, the Plan provided a process by which Plan payments were approved and evaluated, including an analysis as to whether financial savings or service."

The message is clear:  HOA need to be independently competent and tell service providers what they want, not the other way around.

The Vindication of Mike Curtis and Stanley Feldstein

Part of Mr. Feingold’s criticism is that  “during the years that the Incentive Plan was in effect, PCM did not disclose to the Presidents or the Boards of Directors the actual payments made under the Incentive Plan, even in an aggregate or general manner. With the typical turnover of Board members, this resulted in many Directors being unaware of the Plan’s existence, let alone Plan payments. The lack of transparency can be explained in part by the unique history of the community and its “pass-through” management cost structure. However, a general disclosure of Plan payments to the Boards on an annual basis could have been made without adverse legal consequences."

Do you recall what Stanley Feldstein, a former  member of the Third Mutual Board said about the lawsuit?  “Maybe even worse than the actual fraud they committed, the defendants counted on mental confusion, memory lapses, and foreshortened life spans of Board members to count in their favor.  They relied on the fact that there would be no one who could connect the dots over the years to find out about the hidden plan, and how much money they awarded themselves.”  And by the way, this artifact is common to a HOA/CID environment and not unique to Laguna Woods.

Other criticism contained in the press release includes: 1. PCM did not provide information to the Boards of Directors regarding consistent Incentive Plan payments to certain employees when reporting on PCM salary levels and 2)  Independent Counsel did have criticism of the manner in which PCM responded to questions and provided information regarding the Plan when it became controversial in late 2006.  The intense controversy over the Incentive Plan was and is real, he did find that PCM failed to ensure that the Plan was administered in a transparent manner and that meaningful disclosures were made to the Boards as to Plan payments.

The shared management for the Laguna Woods Village communities and the unique “pass through” of all management expenses has existed since the inception of the community almost fifty years ago. It was developed as a way to take advantage of the large economies of scale and has certain advantages. This system also requires meaningful financial oversight by the Boards of Directors, who are the stewards of the communities’ trust. The Boards necessarily rely on management to provide all relevant information so that they can provide that oversight. In regards to the Incentive Plan.

So what is the board going to do?  “  In the future, the United Board of Directors will be taking a more active role in annually receiving and reviewing information regarding management staff compensation, including salaries, benefits, and any and all incentive or bonus programs. A requirement that management provide this information so that the Board can carry out a meaningful review, without any adverse legal consequences, will be included in any future management agreements.”  Akin to wallowing in the never never nebulosities of open ended possibilities.

The fundamental question is, what specifically is local governance going to do to repair a broken system, when all it seems to have is a hammer?  What happens when it encounters "broad language approved by legal counsel," for example?

Editor's Note:  We have contacted representatives from the boards of  all of the Laguna Woods Village's Mutuals - we have yet to hear from them.

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