Owners of a Waianae condominium recently learned that more than $300,000 had been embezzled from their condo association, perhaps the largest incident of its kind known to have occurred in Hawaii.

The theft was disclosed in a Sept. 19 letter to owners of apartments in the Makaha Surfside condominium from their board of directors.

The 454-unit Makaha Surfside, built in the 1970s, is composed of several low-rise oceanfront buildings along Farrington Highway, located between Waianae High School and Mauna Lahilahi Beach Park.

The scheme involved unauthorized payments to vendors based on fraudulent invoices for work that had not been performed, related to projects that may have been planned but remained “unexecuted,” according to the board’s letter.

The theft apparently went on over at least a couple of years, according to two people with knowledge of the situation.

An initial discrepancy was discovered in March “during a routine financial audit,” according to the letter, a copy of which was obtained by Civil Beat.

This “discrepancy” was described as a $32,041.87 payment “that had been invoiced and distributed as an unauthorized payment for an unexecuted project.”

“This initial discovery prompted further investigation by the board, revealing an additional paid invoice for $43,455.48,” the board’s letter stated.

Although the board attributed its discovery to a routine audit, the losses had not been uncovered during previous annual audits required by state law. Instead, the theft was discovered only after a few individual owners raised questions about what they believed were management and financial irregularities, according to several people familiar with the situation, including current and former owners.

They say questions raised were initially resisted by the board, and it was only through repeated and persistent questioning that the board finally agreed to undertake the audit that found one unauthorized payment, then another.

The sensitive political problem facing condominium boards is that those owners who persist in asking uncomfortable questions are all too easily dismissed as disruptive, and their efforts seen as unproductive. But sometimes, as in this case, those who are considered nuisances for continuing to badger the board turn out to have identified very real and unexpected issues.

After the initial discoveries, the board raised the matter directly with the president of Hawaiian Properties, the Makaha Surfside’s managing agent, which conducted its own financial investigation, and retained an independent forensic auditor selected by the board, and paid for by Hawaiian Properties.

The total loss has been pegged at $339,364.83, which appears to make it the largest loss of its kind uncovered in Hawaii.

Hawaiian Properties has now reimbursed the full amount stolen, along with legal fees incurred by the condominium association, the letter reported.

“The association has been made whole,” a board member confirmed, although he was not authorized to discuss the situation.

Hawaiian Properties has identified suspects believed to have carried out the theft, and filed a criminal complaint with city prosectors but requested that details remain confidential, according to the board’s letter.

“Consequently, we are unable to disclose the names of the suspected parties or vendors at this time,” the letter stated.

The board has scheduled a Zoom meeting for owners on Tuesday evening to discuss the missing funds and the full reimbursement by Hawaiian Properties.

Hawaiian Properties’ website describes the firm as “Hawaii’s oldest and most experienced property management company.” It has been ranked for several years as the second-largest condo management company in the state.

In the wake of the Makaha Surfside theft, and despite stepping up to cover all of the condominium’s losses, the company has provided a 60-day notice that it will cease providing property management services to the project at the end of November.

Pamela Briece, president of the Association of Apartment Owners of Makaha Surfside, reached by phone over the weekend, said she was unable to comment on the situation “on the advice of counsel.” She referred questions to the board’s attorney, Milton Motooka, a veteran Honolulu attorney who is senior partner in a firm that has long specialized in condominium and community association law.

Motooka, reached by phone on Monday, confirmed the Sept. 19 letter to owners, but said he could not provide additional details at this time due to the ongoing investigation and potential litigation.

Vulnerable To Fraud

Motooka said annual audits required of condominium associations are not typically the kind needed to catch a sophisticated scheme of this kind, especially in large projects such as Makaha Surfside that have substantial annual budgets and process numerous monthly invoices for goods and services. 

Although the suspects in this case have not been publicly identified, Motooka said that, in a large project, it would not be difficult for a property manager or someone on their staff to slip phony invoices into the system for payment to a dummy company, or perhaps the company of a friend or relative.

Over the past several years, Makaha Surfside has undertaken significant repairs funded from its reserve account, which had a balance of $4.1 million at the beginning of this year. Two recent studies of the Surfside’s long-term maintenance and repair needs projected expenditures of nearly $3 million during 2022 and 2023.

The condominium’s active maintenance program and sizable reserve fund, coupled with the low proportion of owner occupants, may have made it a tempting target for insider theft.

All but five of the apartments are small, 412 square feet or less, with many owners living out of state, real estate records show. Only 19% of Makaha Surfside’s units are owner-occupied, according to its most recent biennial registration filed with the state’s Department of Commerce and Consumer Affairs.

The board’s letter goes on to assure Makaha Surfside owners that “rigorous checks and balances have been promptly implemented, closely aligned with the recommendations of our independent forensic auditor.”

As a result, the letter said, “our association’s financial stability is now reinforced by comprehensive safeguards and new operational protocols.”

Prior Cases

An online search of prior news stories found only a couple of previous incidents of embezzlement involving condominiums.

In 2018, a former vice chairman of the state Real Estate Commission pleaded no contest to felony theft charges for stealing from a private trust, and from a small, 20-unit Hilo condominium he had managed.  As part of his plea agreement, he agreed to pay $120,000 restitution to the Kawili Regency Condominium, and was sentenced to six months imprisonment and 10 years probation.

In an earlier case that made headlines, the CEO of a large property management company was fired in 2012 after she was found to have stolen over $134,000 from three townhouse projects that were among those she personally managed. News reports at the time said the money had been taken over a period of at least two years.

She pleaded no contest in 2014 to multiple counts of felony theft for stealing a total of $134,474  which she used to pay a variety of personal expenses. She was sentenced to a year in prison, and four years probation.