"...Our management company's accountant is a close blood-relative of our managing agent. Recently, the management company attempted to form a trust in the name of our agent's deceased grandmother; shareholders were so skeptical, they hired a real estate attorney to probe the matter. At that, the whole trust scheme was immediately dissolved, and the management company has never mentioned it again. Is this management/accounting intersection really ethical?"
It goes without saying that the overwhelming majority of co-op and condo boards are run by honest, ethical people who work hard - often for no pay and little thanks - to make sure their building is not only a pleasant place to live, but a good investment for the people who own shares or units in it. Even when things go awry in a building, it's more often an issue of inexperience or ineptitude on the part of the board than one of bad faith or corruption. That said, questions just like the ones above are regularly submitted to The Cooperator by readers locked in conflict with their board members or managing agents. Sometimes the problem involves the dissemination of information about a building's finances or business practices; sometimes it's a question of graft or kickbacks from contractors. In a co-op or condo, where a board's fiduciary responsibility often entrusts ordinary people with millions of dollars, temptation exists - and while most people wouldn't dream of taking advantage of their position within their building, sometimes one or two leave the high road for murkier paths.
Corruption in New York City is legendary from Boss Tweed to present day - for as long as there's been a city, there have been people in it trying to swindle others. In the summer of 1999, the prevalence of greed surfaced and affected the residential real estate industry with the indictments of some 30 individuals and 10 corporations, who were charged with defrauding co-op shareholders and residents of millions of dollars through kickbacks and bid-rigging schemes. The indicted parties included board members, managing agents, vendors, and even building superintendents, and the 74 buildings they allegedly victimized included both prestigious co-ops and lower- and middle-income Mitchell-Lama and Title 8 buildings.
When money's concerned, the appeal of taking a little for oneself can be irresistible for some people. Even with safeguard protocols in place, your board can still be broadsided by fiscal incompetence and blatantly unethical behavior - but there are a few things you can do now to tighten up your proverbial ship.
The first step is to keep all accounts current and accurate and your building's funds fully accounted for. The more detailed you are in your record keeping, the slimmer the chance that money can slip through the cracks unnoticed.
It's also a good idea to have a policy in place for reimbursements. Your board should mandate that the cost of a particular item or service - be it cleaning products for the housekeeping staff or the quarterly payment to the boiler maintenance company - does not exceed the amount decided upon. Once a board member, maintenance staff worker, or managing agent purchases the article, he or she submits a receipt for reimbursement. Having a preset spending limit and knowing exactly what is to be purchased helps stem the problem of making too many unnecessary reimbursements.
It's also vital that more than one person sees any and all checks being written on the building's behalf; if your president or treasurer is the only person signing off on checks, that's not enough. "It's not a good idea to put all of your trust into one person," says Carmen Lee Shue of Lee Shue Realty, Inc., in Manhattan. Lee Shue, a former board assistant treasurer, says that, "A board needs to protect [itself]. Don't think that just because a person is nice he can't be a crook."
Chances for misappropriating building funds are not limited simply to fudging expenditures and writing questionable checks. Being on the board means interacting with vendors who supply many types of products and services necessary for your building's continuing operation - and therein lies another opportunity for malfeasance: bid-rigging and kickbacks.
Both offenses generally go hand-in-hand; for a percentage of a project's cost, a building's decision-maker strikes a deal with a contractor or service provider that guarantees that provider will get the job in question over any other bidders, regardless of price. The provider then tacks the percentage he paid to the board member or managing agent onto the project's final price. The cost of the board member/agent/super's greed is then billed to the building's shareholders in the form of assessments or maintenance increases. According to an article that appeared on the www.nycooperative.com (a resource for property managers) Web site in 1999, ""¦apartment managers and the [management] companies demanded tens of thousands of dollars in kickbacks from contractors and suppliers in return for work"¦The contractors, in turn, inflated the bills they sent to the co-ops and condominiums by 10 percent, they said. In one case, a manager used money from a co-op account to pay for work on his Long Island home."
It should be pointed out that soliciting or accepting kickbacks from contractors isn't just a problem of ethics; it's called enterprise corruption or bribe receiving, and in the first degree it's a Class B felony punishable by up to 25 years in prison.
Less serious than soliciting kickbacks or manipulating the bidding process is the often-accepted practice of accepting so-called "gifts" and special treatment from vendors and service providers. This can take the form of lavish gift-baskets during the holidays, certificates for dinners out on the town, or anything else that might "sweeten the deal" and encourage a building's decision-makers to go with a certain product or service provider over another. Good marketing and incentives are one thing; just make sure what your board, management, and staff are getting from vendors and providers doesn't fall under the "bribery" label.
Something else that may arouse suspicions is a board member, who also happens to be a real estate broker selling units in the building. In this situation, says Michael Manzi, a lawyer with Balber Pickard Battistoni Maldonado and VanDerTuin, in Manhattan, the board member/broker is presenting the package to board, and he or she certainly stands to benefit upon its approval.
Enacting term limits is one good way to help prevent corruption and stave off the sort of complacency that makes kickbacks and other shady practices attractive. "I don't believe that a board member should be running for the board for 15 to 20 years," says Lee Shue. "Banks move managers from office to office, rotate, and have term limits - the person can serve for "˜x' amount of years." That said, however, it's not really advisable to have an entire board that's wet behind the ears. It's important to have at least two or three people on the board who are intimately familiar with the building and its business and who can help orient and guide new board members.
Discouraging corruption is one tough task; detecting it once it's entrenched is even tougher. "Unfortunately, it's very difficult if you're not on the board - and even if you are on the board - to know if someone is getting a kickback," says Manzi. That goes for other unethical behavior as well. His solution for non-board members? If possible, try to get on the board to get a closer look. It's also a good idea to examine the financials that are prepared every year see if there's anything suspicious there. For instance, is the reserve fund invested properly and conservatively? Are there any reports on the building work being done? If so, who were the vendors? And be sure to keep tabs on the managing agent or agents of the building. And if you're unable to get a seat on the board? "Make sure you attend the annual meeting," says Manzi, "and ask pertinent questions in a non-threatening way."
"Homeowners should pressure the board and keep on top of them if they suspect anything," says Lee Shue. "They should have proof, and must press the issue every time."
The issue of proof is an important one. Without hard evidence, allegations of misbehavior are just that - allegations - and can even be grounds for a slander or defamation of character suit. Says Manzi, "[Residents] don't want to get into the position where they send a memo to everyone in the building that so-and-so is stealing money. That's an action for defamation of character. You need to raise [the issue] in as neutral a manner as possible."
"Say you do get hard evidence and a strong indication that something has gone on. If you're on the board, you're in a good position to question or challenge someone," says Manzi. "Go immediately to the managing agent and to the legal counsel for [your] co-op." Going to legal counsel can present problems of its own, since the law firm represents the corporation as a whole. But, says Manzi, "If your counsel is aware that board members are doing something wrong, it needs to do something about it."
Your board's legal counsel should then follow up with the managing agent to make sure that any disciplinary or punitive measures have been handled appropriately. (Check your bylaws for the specifics on removing a board member). If enough proof exists, the board member should resign, or the board needs to vote him or her off. If the misconduct is grievous and ongoing, it may then become a matter of a criminal investigation.
"You can vote a board member off, then make the decision as to whether the co-op sustained damage," says Manzi. "Say the corrupt board member experienced gain, or has taken a kickback. The board needs to make a determination whether they are going to take legal action." Again, you must be able to show there was damage in order to proceed. Generally speaking, a co-op has a much better chance of seeing results in the case of criminal matters, such as receiving kickbacks. Otherwise, says Manzi, your recourse is slim.
Fear of liability and reprisals from dishonest board members may keep some people from coming forward. According to Lee Shue, one way to take the pressure off whistle-blowers is to have an independent agency, such as the District Attorney's office, intervene. The DA's staff knows the law, knows how to apply it, and can stand as an ally with residents or ethical board members who have had enough of their compatriots' misdeeds. Besides, the involvement of the DA raises the profile of an investigation, and - as Lee Shue says - "Sends a message to board members that corrupt actions will have consequences."
In a statement made to the press regarding the mass indictments made in 1999, Department of Investigation Commissioner Edward J. Kuriansky said that, "By violating their positions as managing agents, building superintendents, and co-op board members to divert tenant funds into their own pockets, the defendants siphoned off the scarce resources that co-ops and residents need to make critical repairs to their buildings and pay off their mortgages." Then-Police Commissioner Howard Safir echoed Kuriansky's words, and added, "Economic crime is just as important as street crime"¦Defrauding co-op residents show[s] that this type of corruption and theft still plagues the industry, costing innocent New Yorkers millions of dollars in inflated costs for repair, maintenance, and building supplies. Those indicted"¦are no different from criminals who steal cars."
Indictments and criminal charges are the unfortunate endgame for some who choose not to play by the rules in favor of padding their own pockets. Long before it comes to that, however, you can defend your building's balance by putting safeguards in place to insure transparency and checks-and-balances in its day-to-day business functions. Reducing the temptation and opportunity may be the single most effective way to curb corruption and fraud in your building community.