Co-op Board Misdeeds: Should You Turn Your Board In? When Must You?

As with any other private corporation, a co-op board falls under less scrutiny and fewer regulations than do boards of public companies, financial institution or even private companies that are government contractors. In many of those cases, boards are required to self-report wrongdoing. And in terms of protecting your shareholders, said the SEC in a 2001 report, "Self-policing, self-reporting, remediation and cooperation with law enforcement authorities, among other things, are unquestionably important in promoting [their] best interests."

Yet as with anything, there are exceptions. The particular type of wrongdoing factors into whether you should self-report, say attorneys. For example, if someone on the board or on the building staff is embezzling or is stealing co-op property, thereby victimizing the co-op, it's prudent to seek help from the proper authorities. It's usually also wise to self-report if one of your board-members or staff is doing something illegal even if it doesn't directly affect the co-op.

Attorneys also say to weigh the evidence. Strong evidence warrants self-reporting. But all else being equal, you may not want to self-report if the evidence is unclear or ambiguous. Aside from preventing a rush to judgment, that very uncertainty provides a reasonable excuse should a regulator ask why you hadn't self-reported.

Shocking But True

The next factor some attorneys bring up may be uncomfortable or even shocking to the layman: the likelihood of getting caught. "If discovery of the wrongdoing is unlikely, the [board] has more flexibility to decide not to report,"  attorneys Michael B. Mukasey and Andrew J. Ceresney of Debevoise & Plimpton have written, cautioning that, "Of course, handicapping the chances that regulators will discover misconduct is by no means easy or certain."

The likelihood rises, they say, if regulators are currently doing similar investigations at  other co-ops; if authorities have announced a crackdown on certain offenses; of if the wrongdoing involves fraud against the government. The existence of a disgruntled former board member or other potential whistleblower is also a factor in whether to self-report, as is whether the wrongdoing is an isolated case, or part of an easily detected pattern.

Self-policing, self-reporting,

remediation and cooperation

with law enforcement are

important in promoting

shareholders' best interests.

Since self-reporting will incur costs, including possibly fines, they argue, "exercising [your]  right not to self-report may be the best strategy when the wrongdoing is small in scale." However, proactively self-reporting may — and this is always a big question mark, but may — clear a path for leniency by authorities. In federal cases, at least, U.S. Sentencing Guidelines section 8C2.5(g) say that companies that self-report wrongdoing soon after the offense and before the likelihood of discovery, and who accept responsibility, and cooperate with investigators, are entitled to a fine-reduction.

Self-reporting, and taking your lumps, may also prove a effective deterrent to future potential wrongdoers  than just your board's internal controls.

Where Do I Give Myself Up?

So if you're self-reporting, who do you report to? Your co-op board's attorney will offer important advice, of course. Generally, you don't want to self-report to different regulators and authorities at the same time — this could result in your board getting a multitude of perhaps conflicting orders. As a rule of thumb, criminal activities such as embezzlement or fraud are reported to criminal authorities. If a federal issue is involved — taxes, say, or interstate fraud via the Internet — approach the appropriate federal authority rather than a state authority.

It comes down to striking out a balance, attorneys say. If the wrongdoing is serious enough, or if not self-reporting leaves some lesser wrongdoing open to discovery by outside parties, then self-reporting is probably the better choice.

The bigger picture, however, is that you do have a choice. After all, write Barry F. McNeil and Brad D. Brian in their book Internal Corporate Investigations (American Bar Association, 3rd edition, 2008), "Effective compliance programs routinely generate allegations of misconduct, and those allegations will ordinarily be reviewed by [your] counsel." You literally don't need to make a federal case of everything on the wide spectrum from bad judgment to outright criminality.