New York's Cooperative and Condominium Community

Habitat Magazine October 2020 free digital issue

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ARCHIVE ARTICLE

The Numbers Don't Lie

When the Great Neck Terrace co-op in North Hampstead, in Nassau County, held elections in 2018, the atmosphere was toxic. The campaign at the 650-unit complex – a mix of middle-income shareholders dating back to its conversion in the 1980’s, plus newer residents and families – had been brutal, pitting long-entrenched board members who held the majority against a slate of younger candidates.

Turnout at the annual meetings had typically been low, and the elections so close that every vote counted. That meant that proxies – a document authorizing a specified person to vote your corporate stock, generally because you cannot attend a meeting – could tip the balance.

The ballots were counted and, once again, the older directors held on to their majority. But David Perlstein, an upstart who became board president in 2012, saw telltale signs of foul play. For one, the number of votes cast was unusually high, with more than 80 percent of shareholders participating in person or by proxy, compared with about 60 percent in past elections.

Perlstein also knew how many proxies his allies had – and that those proxies should have been able to elect a majority of directors. The only way they could have fallen short would have been if someone had voided some of their proxies and replaced them with forged ones. “It was clear that there was tampering involved,” he says. “It was proxy fraud.”

Given the history of mismanagement at Great Neck, Perlstein wasn’t exactly surprised. When he was first elected to the board as treasurer in 2011, he was shocked to discover that board members had been playing a shell game with the co-op’s money. “There hadn’t been maintenance increases for 15 years because they wanted to make units easier to sell,” he says. Proceeds from flip taxes were being funneled into the operating budget instead of the reserves, which, according to Perlstein, explained why badly needed capital projects – from roof replacements and facade restoration to replacing sidewalks and rehabbing the parking lots – hadn’t been done.

As treasurer, Perlstein, the director of internal audits at the Shubert Organization, Broadway’s biggest theater owner, set about putting Great Neck’s books in order. He oversaw the refinancing of the $25 million underlying mortgage with NCB, securing an extra $8 million to do repairs and funneling flip-tax proceeds into the reserves. But bitter divisions persisted, and going into the 2018 elections the old guard still held four seats on the nine-member board – an effective majority since two seats are held by the sponsor who, by an informal agreement, votes for its own representatives and not any shareholder candidates.

“I think at the beginning they had good intentions to do things for the community,” Perlstein says of the entrenched majority. “But that took a wrong turn pretty quick, and then they were hanging on for the power and glory.”

Indeed, Perlstein had first suspected proxy fraud in 2016. “I went to the co-op’s attorney with my concerns, but he would never investigate or follow through,” he says. “I also contacted the Nassau County district attorney, but since the number of contested ballots wasn’t high enough to have changed the election outcome, my complaint was moot.”

 

Legal War Breaks Out

That didn’t appear to be the case in 2018, however. Perlstein reached out to attorney Steve Wagner, the managing partner at Wagner, Berkow & Brandt, who had represented Great Neck in the past. “I asked to look at the proxies, and the co-op attorney said I’d have to go to court to do it,” Wagner says. Perlstein and three other shareholders promptly filed suit contesting the election results.

“We took advantage of a special provision in the Business Corporation Law that allows you to get in front of a judge very quickly,” Wagner explains. “He allowed us to look at the ballots, proxies, and sign-in sheets, and when we compared the signatures on the proxies with those on the co-op documents, we discovered there were some 60 proxies that had clearly been signed by the same person.”

The court’s decision was swift. Two of the entrenched members were forced to resign and were also barred from running or serving on any board committee for five years. “On top of that, they had to pay my legal fees and all the costs incurred in the challenge,” says Wagner. “The candidates who should have been seated were seated, which flipped the balance of power.”

With things set right, the board faced a question: How did the fraud happen – and what could have been done to prevent it? “They had a ballot company, but it was retained merely to sign people in and count the votes, and not to make sure that the proxies were valid,” says Wagner.

To ensure fair elections going forward, he sat down with the board and developed a formal written protocol, which includes checking the signatures on proxies against the signatures on corporate records, such as proprietary leases, alteration agreements, and letters on file.

“Basically, we’re talking about any document that has a signature on it,” he says. “And since you can’t exactly check everyone at the door when you've got a 600-unit co-op, we now have a complete and accurate sign-in sheet with the names of shareholders and the correct number of shares they each have. We also specified that people show picture ID when they sign in, which they hadn’t been doing in the past.”

Great Neck also hired a new election company – and instructed it to follow the protocol to the letter. “Yes, it’s unusual, but outside companies have their own ways of doing things, and it’s not necessarily how you would do them,” Wagner explains. “I would never assume that they can just handle it all.”

That said, there’s no one-size-fits-all solution when it comes to the proper preventive measures. A 6- or 30-unit co-op, for example doesn’t even need a protocol, since there are fewer proxy ballots and less potential for fraud. “But at any building with 60 units or more, it doesn’t hurt to have them in place,” Wagner advises.

One sure way to avoid fraud is to distribute each ballot as the apartment owner is checking in, and to have it authenticated by either numbering, stamping or initialing it, which allows you to keep track of how many ballots are in circulation. Another option is to have voting done through a computer program that requires a password for each shareholder or unit-owner. “There are a lot of variations on the theme,” he adds. “Nothing’s etched in stone.”

 

War Gives Way to Peace

The Great Neck co-op’s 2019 elections, which were held last summer, went off without a hitch. “All the ballots and proxies were impounded, and about 15 questionable ones were put aside,” says Wagner. “When the counting was finished, it wasn’t enough to have made a difference in the outcome, so there was no need to go over them, and the results were certified.”

Meanwhile, capital projects at the sprawling property are continuing, the reserve fund stands at more than $500,000, and values for the garden-style apartments are at an all-time high.

“Shareholders are happier because they can see we’re focused on fixing problems,” says Perlstein. “They know there will be maintenance increases every year, but everything is open and transparent, so they can see that we’re spending wisely.”

Still, he’s not resting easy. “I didn't plan on staying president this long, but I worry about who's going to fill the void if I leave,” he says. “The people who were forced to resign are still lobbying and have a loyal following, and they can run again in a few years.”

If they do, elections at Great Neck – which hired Wagner as corporate counsel and is now managed by Akam Associates – will be completely aboveboard. “Now we can verify things upfront instead of having to figure out what went wrong after the votes are in,” Wagner says. “Going to court takes time and money, and it casts a cloud over the board. But you won’t have to with the right protocol in place. Whether you have an independent firm or your management company count the ballots and check the signatures, boards should always talk to them and explain exactly how you want the job done.”

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