Liability of Bad Investments
“The City of Purple Police Officer Association (CPPOA) has saved a large amount of money, $500,000, over the past four years. The board of directors came up with a plan for each of the 100 members to pay an extra $100 per month for four years. This would allow them to place $500,000 into savings and have it be used for political aspirations, morale and welfare of members, emergency situations and board-directed projects. The members voted to move forward with the plan, and after four years, they were all excited to have accomplished their goal.
Two months after finishing the plan, the CPPOA treasurer decided they should invest 50% of the money. The investment would be able to expand on what they have accomplished and grow their funds. The treasurer started to read The Wall Street Journal and numerous blogs on the internet about investing. After his one week of investment knowledge, he thought he found a perfect investment. There was a new type of investing that was not governed by rules, and you did not need to pay a broker. He was going to be able to just handle everything himself. Plus, people were making quick money and had returns of 10–40%. The treasurer presented the plan to the board of directors, and they all were excited about the plan, except for the newest member, Jim. Jim wanted the board to consult with a broker or go through a financial firm. The treasurer advised the board that there was no stipulation on what they did with the money per the bylaws. The board voted to move forward with the treasurer’s plan.
After three months of investing, the treasurer had gained 15%. He was ecstatic and planned on preparing a report to the board for their next meeting once he got off work at 4 p.m. The treasurer arrived at home and logged on to the account, and his stomach sank to his feet. He thought, ‘What the f***.’ That morning he checked the investments, and they were up by 15%, but now the investments were negative 120%.”
Obviously, the above story is not true, and probably not the fictitious story you have read this year or ever. The purpose was to give an example of what can happen if a police union board of directors does not have a clear policy on how they invest the association financials. I am sure most police unions have a statement in their bylaws about fiduciary responsibility for the funds of the association. This might not be enough to stop a board from investing in high-risk markets or cryptocurrency.
Why are high-risk markets or cryptocurrencies not fiduciary responsible? Because it’s not the board’s money is the simple answer. The board of directors has the responsibility to ensure the association can meet its obligations of negotiating for pay, benefits and working conditions. If you lose your money by making bad financial decisions, then you are not being responsible.
Recently, an association in California decided to invest in Bitcoin despite it being a “highly volatile asset.”1 At the time of investment, Bitcoin was at approximately $50,000 and is now at just over $38,000. The association also requested cryptocurrency donations from the public, as well as Elon Musk, Jeff Bezos, Mark Cuban and Jack Dorsey.2 The board of directors said they “took careful consideration” to invest in “a very aggressive investment.” At the time of the decision, Bitcoin was approximately $63,000, but the president said, “We were lucky that a market correction occurred, and we were able to buy Bitcoin at a lower price. I like to say at a discount!” One month later, I wonder if they still feel lucky about the correction.
On May 19, UBS editorial wrote that the China government would prohibit financial institutions from providing services related to crypto transactions. The official statement added that speculative activity in cryptos was “seriously infringing on the safety of people’s property and disrupting the normal economic and financial order.” The basic function of modern currency is to store value and act as a medium of exchange. The high volatility of cryptos makes them unreliable when it comes to storing value.
This takes me back to the point of the CPPOA story. As board of directors, it is your responsibility to be fiduciarily responsible for the financials of the association. You should never be making risky decisions with association money because it is not yours. Therefore, it is important to have a bylaws rule to stop the association and board of directors from making this type of mistake. Try to remember, we are not billionaires and don’t have $1 million to lose or even $1,000. Contact a financial advisor and allow them to make the investments based on your goals.