Paula Chin in Board Operations on March 3, 2020
When the Great Neck Terrace co-op in North Hampstead, Long Island, held elections in 2018, the atmosphere was toxic. The campaign at the 650-unit complex 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 had joined the board 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.”
Perlstein got in touch with 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 fallout was swift. Two of the entrenched members were forced to resign and were also barred from running for the board 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 questions: How did the fraud happen? And what could be done to prevent a recurrence? “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 goi, 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. The result? The co-op’s most recent election, held last summer, went off without a hitch. Proxy fraud over.
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