Absolute Power Curbing Corruption in Your Building

"I'm on the board of my co-op in Queens, and there's a problem with our current president; without consulting the other board members, he has cancelled our upcoming meeting, saying there's "˜nothing on the agenda,' and he signs service and construction contracts without getting more than just one or two bids, and without presenting them to the board for approval. Is this kind of behavior simply unethical, or is it illegal?"

"...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.

Not a New Problem

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.

The More Eyes, the Better

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."

The Kickback Quagmire

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.

Petty Crime"¦is Still Crime

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.

What to Do and Not Do

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."

I Have Proof - Now What?

"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.

Stephanie Mannino is a freelance writer living in New Jersey.

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7 Comments

  • I am a shareholder in a coop building that has very poor cash reserves. In reviewing the lastest financials, there was a $120,000 in decrease of cash, whereas revenues went up from prior year due to increase in maintenance and special assessments and liability decreased. I would like to request substantiation of where the money was spent. I'm suspecting that the board members are either mismanaging the money or stealing it. Please help. Thanks.
  • "It goes without saying that the overwhelming majority of co-op and condo boards are run by honest, ethical people who work hard" beyond cliche, I doubt the how much truth is in this statement. everyone is in for themselves, and everyone has their own agenda, which often times lead to their own interests. I just posted a blog item @ iopenbid.com.
  • I live in a small condo complex and the property manager continually "pads" his pocket when it comes to maintenance issues, work at the complex, landscaping, pool maintenance, etc. This type of work is then billed to the tenants via HOA Dues, tenant direct bill, etc., which in turn ends up "padding" the property managers own pocket. We find this practice unfair, however before anything is said, we would like to know what the law is pertaining to this subject. Thank you pdcali38
  • Absolute power is more like a free ticket to violate laws, rights of others. In a small co op community where I reside, most, if not all owners have limited financial resources. The board resorts to unethical and criminal tactics when one might question anything, fight for their rights within the lease, etc. They harass, talk freely about the owner with intention to cause ill feelings, divide and conquer. Of course, owners will stay away, in fear of retaliation from the board. Isn't this criminal? I fail to recognize them as a board but as a "gang", aren't their actions synergistic of a gang? The constant landscaping that goes on and now a big overhaul of all the front beds to remove and replace beautiful shrubbery and plantings is quite questionable. Why would one choose to plant annual flowers and huge amount of them, they would have to be replaced year after year? Without managing to get involved one cannot find the evidence of what they suspect. No one wants to find their vehicle vandalized or other actions meant to deter, hurt and harm potential exposure. So, Absolute Power is a free ticket to do whatever comes to mind, this is uncomprehensible. Any advice on this one, Phew!!
  • Oh yes it happens in our complex. My georgeous impatience are a beautiful row of sunshine for the past 6 years since I purchased my free standing condo. This year two board member decided just mine shouldn't be there. Every neighbor loved seeing them all neat in a row for just 3 months by the way. Everyone else inclipudimg these 2 board members have flowers in the front also. Just not my kind. Amazing after the minutes were delivered in my storm door, the next morning a stone basket of flowers were dead! Georgeous that night but the next morning dead! I took them to the farm where we purchased them and they tested it to be bleach. We emptied the pot cleaned and filled it again with new flowers. Another $30.00 for the new plant. The next monthly meeting the minutes come around again, by the way it was the presidents husband who wants our flowers gone, and the next day not only was my plant dead in my stone basket, all my impatience were dead like sticks in the morning. We were crushed, saddened by such vindictive people, although we know in our hearts, can't prove it. We have two board members whose authority is for themselves. We are single family homes, everyone so nice and neat homes and people, but they pick and pick on ones they don't like. My husband and I are very well liked and enjoy parties and fun for everyone. We invite everyone to attend and never would ever single out anyone but they do not attend which is their choice. We want them off the board, even one of them. We just found out that the President is having extra work done with our landscaper and driving him nuts doing extra things atoned their property that none of us get. We pay for hills in back of our yards being done with our own monies or hard work with some that do it, and she gets it done for free. I asked the landscaper why is he doing this? He says she hasn't threatened, but insinuated we can get a new landscaper anytime. Several workers have told me the same thing. I just happened to fall on all this. I took pictures of them mowing her hill, which was said at several meetings are the u it owners responsibility if they want it done. Can anyone give us some advise how to start this conversation with our pictures of proof. Also isn't this a breech of her fiduciary responsibility to all of us to be honest and trustworthy. If she could do this so blatantly in the open, why should we trust her with anything else? This person holds vendettas with everyone and uses it. Not a happy camper she is with anyone who challenges anything she does or says! She is out spoken, mean to people and so rude with her looks, comments etc. She was not elected, just came on the board because someone quit, then no one wanted to run, so she was just put in. How can we get her off? Do we need 2/3 or can we hold a special meeting with 20% as it says by law. Do we have to get proxy votes to ge ther off? Or can we vote her off at this monthly meeting and ask her to resign? Any help. This board will not approve getting an attorney for this 39 units. We all paid $329,000 to $400,000 for our homes and have $100,000 in the bank and stocks. So these are not low income units and we have no attorney. They like the control and do not want anyone overlooking the board. We have ONE board member who is with us. She was our President, but these two directors voted her to vice president and made herself President.
  • I am VP. I believe our Treasurer is accepting a kickback. We considered changing vendors, and he threw a fit. When I checked, his (required) insurance is with this vendor too--for years! And I know in my heart there is more going on, but this is all the 'proof' I have. Is it enough to take action against him of ANY kind?
  • My suggestion to posters is to support new laws sitting stale in Senate, e.g., Co op Condo Ombudsman, licensing management, etc. Change.org is a great site to start a petition, get signatures, write, write, write and call representative. Be proactive and help to create change or you can just sit there and be violated! Make your choice!