Deterring Financial Fraud:


Do Court-Appointed Receivers Need Closer Monitoring?

Tom Messana

With two high-profile former receivers now behind bars, South Florida professionals are looking for ways to deter financial fraud and rebuild trust in the system.

“One thing is clear — you can’t legislate honesty,” says Thomas M. Messana, partner, Messana, P.A., Fort Lauderdale and co-chair of the Florida Bar receivership study group. “But there are accounting safeguards that could be put into place, and other best practices that might help the situation.”

Currently, state court judges appoint receivers to take over failed businesses, assist individuals, liquidate real estate assets and maximize returns to creditors. In bankruptcy cases, a trustee is appointed by the Office of the United States Trustee, an arm of the Justice Department, after a federal judge orders an appointment.

Trustees and receivers can be attorneys, accountants, business executives or other professionals with the knowledge and skills to handle certain matters. They are required to file regular reports with the court, and account for the funds they manage.

However, two professionals abused that trust in a spectacular manner. In July, Marika Tolz pleaded guilty to conspiracy to commit wire fraud in a $16 million conspiracy and was sentenced to eight years in prison. She had been a trustee in numerous Chapter 7 bankruptcy cases from 2003 to 2010. Last year, forensic accountant Lewis Freeman pleaded guilty to wire fraud conspiracy after prosecutors charged him with defrauding up to 250 clients of approximately $2.6 million over an extended period. Freeman is now serving a 10-year prison sentence.

“Except in a few instances, the fiduciary professionals are doing the right thing,” says Daniel J. Stermer, consultant, Development Specialists, Inc., Miami, and an experienced receiver. “Everyone needs to take a deep breath. If things need to change, we need to take a good look at what changes are best.”

Forming a new forum

To examine the issue of fiduciary responsibilities, a group of judges, attorneys and accountants — including several South Florida Legal Guide Top Lawyers and Top Financial Professionals — recently formed the Florida Fiduciary Forum.  An update of the Florida Receivers Forum, the new group has held several bimonthly meetings with upwards of 100 professionals in attendance.

 “The forum represents an effort by hard-working, good people to correct perceptions caused by the missteps of a handful of fiduciaries,” says John H. Genovese, partner, Genovese Joblove & Battista, P.A., Miami. “The goal is to help define what the courts and interested parties should expect of fiduciaries, standardize practices and create transparency. These steps should help immensely in creating confidence.”

Miami Civil Division Administrative Judge Jennifer D. Bailey has played an active role in launching the tri-county forum, whose participants include other judges as well. It’s important to the judiciary because state courts are handling high case loads and lack the resources to provide thorough oversight of every receivership.

Messana estimates there are thousands of receiverships in Florida, ranging from large commercial real estate developments to single-family homes.  There are operating businesses connected with divorces and dissolution statutes and receiverships brought by state regulators under a number of statutes, he adds.

“One size does not fit all,” Messana says. “The beauty of the receivership system is that the court can fashion a solution that fits the facts of a particular case.

What’s needed now?

To date, the Florida Fiduciary Forum has surveyed receivers about what steps they felt might be needed. Other subcommittees are looking at the possible need for new legislation, development of a model receivership order or a better system of monitoring finances.

“The best way to upgrade and make our occupation better is to upgrade the people who do receiverships,” says Ken Welt, owner, Kenneth A. Welt, P.A., Plantation, and one of the earliest proponents of the forum.  “We want to do away with the perception that this is a ‘good old boy’ network.”

Barry Mukamal, partner, Advisory Services, Marcum LLP, Miami, agrees that greater diversity is needed when judges turn to the pool of potential receivers before making an appointment. That might require more education and training for receivers, as well as guidelines for handling funds. “It’s almost impossible to provide assurance that nothing will go wrong,” he says. “But you can put in an oversight system.”

For instance, fiduciaries might be subject to background checks or random audits from time to time. “It would be good to have a set of accounting guidelines, procedures and policies, as well,” Mukamal says. For instance, two signatures might be needed on checks written from a receiver’s funds or a separate bank account might be required solely for the receivership, rather than co-mingling those funds with other accounts. Disbursements should be supported by court orders or the original receivership order, he adds, and fees paid to other professionals should be properly reviewed.

Like other South Florida attorneys and accountants, Messana says the system is not broken. “If that were the case, you’d have lots of little cases in the papers every week,” he says. “Instead there are some basic things we can do to help the good people who do this important work, and restore the public’s trust.”