DRE Hot Seat: Designated officer assumes responsibility over mismanaged brokerage

This article is part of an ongoing series covering violations of real estate law. Here, the Department of Real Estate (DRE) restricted the California real estate license of a broker who failed to properly supervise and maintain trust funds and trust fund records as the designated officer of a property management company.

In January 2022, the California Department of Real Estate (DRE) decided by order hearing to restrict the license of Giuseppi Cusumano, a broker since 1999 operating out of Riverside, California. The decision became effective April 2022.

Cusumano was designated officer (DO) of Wright Realty Group, Inc. (WRGI) from October 2018 through May 2019. WRGI was a property management company owned by Robert and Kathryn Wright until May 2018, when Robert Wright died and Kathryn, a non-licensee, became sole owner. The company improperly operated without having a DO from January 2018 until October 2018, when Cusumano became WRGI’s broker of record.

The DRE conducted an audit of WRGI’s books and records. The audit period spanned from January 2018 through December 2018. The audit revealed WRGI and Cusumano committed numerous real estate law violations, including:

mishandling trust funds [Calif. Business and Professions Code §10145; DRE Regulations §2832.1];
failing to maintain trust fund control records [Bus & P C §10145; DRE Regs. §2831];
failing to maintain separate records for each beneficiary and transaction [Bus & P C §10145; DRE Regs. §2831.1];
failing to maintain monthly balance statements [Bus & P C §10145; DRE Regs. §2831.2];
failing to designate bank accounts used for handling and disbursing trust funds as trust accounts [Bus & P C §10145; DRE Regs. §2832];
using a non-licensed employee (Kathryn Wright) as a signer on accounts used for handling trust funds without her having fidelity bonds or insurance coverage [Bus & P C §10145; DRE Regs. §2834];
commingling trust funds with the company’s general funds [Bus & P C §§10145 and 10176(e); DRE Regs. §2832]
using unlicensed fictitious business names [Bus & P C §10159.5; DRE Regs. §2731]; and
Cusumano failing to properly supervise as DO. [Bus & P C §§10159.2 and 10177(h); DRE Regs. §2725]

Cusumano deflected responsibility for WRGI’s violations of real estate law onto Robert and Kathryn Wright. He argued the audit violations existed prior to his tenure as DO and were created by the Wrights, so it’s improper to discipline his license based on their wrongdoing.

Cusumano knew since October 2018 that WRGI’s financial records, bank accounts, property management agreements and tenant deposit records were in disarray and that WRGI used unlicensed fictitious business names. He also knew of WRGI’s absence of a DO before he assumed the position.

Cusumano maintained he only continued as DO of WRGI out of an altruistic motive to protect WRGI’s landlords and tenants. He also claimed he gained no compensation from attempting to help the business. According to Cusumano, Kathryn Wright had misrepresented the condition of the business and, had he known the true state of WRGI’s disordered records, he would have refused the offer.

However, the DRE was not persuaded by these arguments.

First, Cusumano provided no reasonable explanation as to why he did not immediately report the financial irregularities and compliance issues to the DRE once he became DO.

Second, although Cusumano wasn’t compensated for his work at WRGI, he still received financial gains in other ways. Specifically, when WRGI closed following the DRE’s audit, approximately one-third to one-half of WRGI’s clients became clients of Cusumano’s own business, Pro-Open Investments. These new clients brought Cusumano rental income business of about $150,000 per year.

Finally, the DRE also called into question Cusumano’s ignorance of the state of the company before he assumed responsibility over it. Cusumano signed an agreement in August 2018 with Kathryn Wright to become DO, two months before he began working at WRGI. This allowed him two months to do his due diligence on the company in advance of accepting the position.

Ultimately, the DRE concluded that in order to best protect the public, they will not allow Cusumano to maintain an unrestricted license. However, they found factors which worked in Cusumano’s favor, including his attempts to correct WRGI’s improprieties, as well as his professional good standing, industry veteran status and lack of prior disciplinary action against his license.

For these reasons, the DRE determined the public interest is adequately protected by issuing Cusumano a probation period which includes a professional ethics course to ensure Cusumano has sufficient knowledge of the legal duties and responsibilities of a DO position.

A restricted license will be issued to Cusumano when he repays the enforcement costs of $3,715 incurred by the DRE and satisfies his continuing education requirements for his real estate license renewal.

Office management and supervision

Brokers are in a distinctly different category from sales agents. Brokers are authorized to deal with members of the public to offer, contract for and render brokerage services for compensation, called licensed activities. Sales agents are not. [Bus & P C §10131]

As a result, brokers are responsible for all the activities their agents and employees carry out within the course and scope of their employment. [See RPI e-book Office Management and Supervision, Chapter 1]

Business and licensed activities which the broker needs to adequately supervise include the following categories:

administrative rules, covering a description of the general business operations of the brokerage office, such as office routines, phone and e-mail management, sign usage, budgetary allocations for agent-support activities (advertising, FARMing, etc.), agent interviews, goal setting and daily work schedules;
procedural rules, encompassing how agents use means and methods to obtain measurable results (listings, sales, leases, mortgages, etc.);
practical rules, focusing on the documentation needed when producing listings, negotiating sales, leases or mortgages and fulfilling the duties owed by the broker to clientele and others;
compliance checks, consisting of the agent’s preparing of periodic and event-driven reports, and the broker’s, office manager’s or transaction coordinator’s review of files and performance schedules; and
supervisory oversight, an ongoing and continuous process of training agents and managing their activities which fall within the course and scope of their employment.

Related Video: Business and Licensed Activities

Click here to learn more about a broker’s business model.

When a licensed real estate broker assumes the role of designated officer of a real estate corporation, the broker retains responsibility over the licensed activities and business operations of that corporation — including the activities of the corporation’s salespersons and unlicensed employees (owners included).

Thus, it’s prudent for a broker who undertakes such a position to do their due diligence first on the corporation to ensure their status as employing broker is not put in jeopardy through representing a mismanaged, disordered and noncompliant office.

A broker who becomes aware of deficiencies after assuming the position to manage, inspect, oversee and review the real estate corporation’s operations and licensed activities needs to be proactive and rectify the issues upon discovery.

In a case like this, where the broker promptly knew trust fund reports and balances were messy beyond repair, the DRE recommends a broker to report the issues to them, rather than trying to right another’s wrongs.

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