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Habitat Magazine July/August 2020 free digital issue

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PROXY FRAUD

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Proxy Fraud

Jan 21, 2020

What can boards do to make sure that proxy nightmares don’t happen? Habitat asks Steven Wagner, partner at Wagner, Berkow & Brandt, for his legal advice.

Board elections in co-ops can either run smoothly or turn into proxy nightmares. What can boards do to make sure that the nightmares don't happen?

Let me tell you about a case I just handled for a 600-unit co-op on Long Island. Despite their size, they didn't have a management company or an election monitoring company. After the election, we suspected fraud, so I contacted the co-op’s attorney and asked if I could look at the proxies, but he said no. So the shareholders filed a lawsuit, and we found there were at least 70 proxies that were clearly signed by the same person, with the signatures not even coming close to matching.

No one had checked the signatures on the proxies against documents the co-op had in its files?

Correct. So the insurance company came in, and their attorney agreed with our findings. We took advantage of a special provision in business corporation law that allows you to get in front of a judge very quickly, and asked to look at the ballots, proxies, sign-in sheets and files in order to verify the results. It was very clear there had been proxy fraud.

What happened next?

The board members who were elected improperly were off the board, and they agreed not to run for several years. The people who should have been seated were seated. The board agreed that going forward, they would hire a monitoring company have the proxies and ballots vetted.

How do you actually do this? Are we talking about checking proxies at the door?

It depends on the building’s size – with a big co-op like this one, you can’t do that. So for their next election, we created a written protocol with detailed instructions and gave it to the election company. It specified checking the proxies against corporate records, like proprietary leases, alteration agreements, recognition agreements and letters – anything with a signature. Also, there had to be a sign-in sheet with the correct name of unit owners and the number of shares, and they had to present picture ID.

And how were the votes tallied?

The election company impounded the ballots and put the proxy ballots aside to consider later. After the counting was finished, it turned out the 15 or so proxies wouldn’t affect the outcome of the election, and they were able to certify the results.

Is it typical to give an outside company specific instructions? Wouldn’t they have their own protocol?

They do, but their way isn’t necessarily how you would do it. So I would never assume that election companies can just handle it all. I'd want to know exactly what they were doing.

Any additional advice for other boards?

If there's going to be a candidates’ night and bios of people will be distributed, boards might consider putting out their own to ensure fairness. They should make clear whether people can be nominated at the meeting and if they require a second. As far as proxies, we attach the form to the ballot and mark them both with a little stamp – or have the person checking them in put their initials on them – so you know that they go together.

What should boards do when the certified results are challenged?

If that happens, I wouldn’t require filing a lawsuit to look at the documents. That takes time, and meanwhile the board has to operate with a cloud over its head. If a clear protocol is set forth, you can point to that later on and say, “We followed this to the letter.” That way, there’s no argument.

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