James Samson is a partner in the law firm of Samson, Fink & Dubow. He recently talked with Tom Soter, Habitat’s editorial director.
HABITAT What are the challenges of being a whistle-blower in a co-op or condo?
SAMSON Well, there’s a dual problem here. On the one hand, discussions by the board should stay within the board. I hate it when someone writes out a seven-minute “he-said/she-said” session in the minutes. Because the conclusions should be in the minutes, but not necessarily who’s on what position on what topic. And you don’t get an open and frank discussion of the issues if the parties can’t feel like whatever they’re talking about is going to stay within the board. On the other hand, you get these situations where the board members have a duty to report it to the shareholders or to deal with it.
We have one right now, which is a knockdown, drag-out – which I think the board members absolutely did wrong. But there was an eight-member board out in a building in Queens, and seven of the eight board members wanted to refinance the mortgage on the building. The eighth member decided that wasn’t what he wanted to do, and he recalled the entire board – just happened to be the secretary of the co-op, so he sent out a notice recalling the entire board. It was really complicated, and it had a lot to do with sponsor control, and who was going to be in charge, and all this other stuff that goes along with it.
I had a managing agent where they actually permitted the board president to backdate documents by a year. And worse than that, they were too stupid to realize – that you could document quite easily – that not only were the documents backdated, but they couldn’t possibly have existed at the time. The person in the transfer office refused to notarize the signatures used to backdate the documents. She had started working for me as a receptionist, and she was going to college at the time; when she graduated from college, she was a full-blown transfer agent. So she went to work for the transfer agency, and her comment to them when they tried to do this was, “Jim Samson wouldn’t let me do this, and I’m not doing it now.” She blew the whistle.
HABITAT The board didn’t know this was going on.
SAMSON Well, the board found out because she called me and told me what was going on. The board said, “Are you sure?” And I said, “Besides the fact I trust the person that’s telling me this,” I said, “there’s also the fact that every six months you file two tax returns showing every transfer, and you sign it under oath. Two tax returns have been submitted. That’s peculiar.”
HABITAT But what a kind of pressure does a board member face if he or she has to blow the whistle?
SAMSON The problem is this: is a [complaining] board member who doesn’t like what the board’s doing just [rabble-rousing] or is he really uncovering something?
HABITAT How does a board know?
SAMSON That’s an interesting problem, isn’t it? Not only that, but the guy that’s rabble-rousing has the true believer conviction that he’s on a messianic mission. So what you get are board members who will go outside of the board to sell their agenda. That’s not whistle-blowing, that’s politicking: taking the board decision and turning it into a political football. You have to find a middle ground.
But here is the problem of cooperative ownership. For whistle-blowing, you can be ostracized, and you can be smeared, because the rules about defamation are much more relaxed in a club-like setting that a co-op is viewed as, and the politics that go on in that. An awful lot of horrible, untrue things can be said and people get away with it without being sued because the court systems offer a more relaxed standard.
Having said that, I think boards have an obligation to reveal that information to the other shareholders. If that’s the financials of the building, then every shareholder has a right to look at those financials, and every shareholder has the right to know that the people serving on the board are not corrupt. And that they will not either participate in or get other people participating in irregularities. I constantly am amazed at how tolerant cooperatives are of corruption. It’s like they expect it. And the only way to root it out is to not only not expect it but to expose it immediately when the problem arises. As much as the rest of the board may want to put it under the rug and not embarrass somebody, the fact that it existed in the building – every shareholder should know about it. I really believe that. Because it also prevents it from happening again; it puts everybody on watch. I don’t know how a board can make a decision not to let everybody know.