In our recent co-op board election, there was a much higher number of proxy votes than normal. I am not alone in suspecting that the election results could be fraudulent. How can we find out? And if they are, is there anything we can do?
As most condos and co-ops permit voting by proxy, which enables owners and shareholders to appoint another building resident to vote on their behalf in quorums and elections, the concerns you and your neighbors have could be valid.
“The most common fraud seen in co-op and condo board elections is forged proxies,” says Steve Wagner, a NYC real estate lawyer and partner at the firm Wagner Berkow & Brandt. “I don’t even know if there is a case that we’ve handled that hasn’t involved some aspect of forged proxies.”
New York’s Business Corporation Law authorizes election challenges and provides the procedure by which an aggrieved party may challenge an election. To do so, you should write a letter setting out the grounds for the challenge and requesting the election results not be certified until the ballots and proxies are reviewed, and requesting a review of the ballots, proxies, sign-in sheets, and corporate records to check the validity of proxies and ballots.
This can sometimes result in a resolution of challenges quickly and without much expense, but if the co-op refuses the request, the person challenging the election may have to go to court to force access and to have a judge decide the outcome.
If it turns out that there are just a handful of questionable proxies, however, “the court will not likely review an election challenge if the number of proxies at issue is small and the outcome of the election would not change,” Wagner says. “A challenge that involves only a few proxies and does not change the election outcome would be a waste of everyone’s time.”
Cases that do reach that point, though, are usually settled if it’s likely there has been proxy fraud or tainted board election results, and a new election typically follows. While there could be criminal liability, "I have never seen a criminal proceeding result from a co-op or condo election," Wagner says. "There are procedures to ban bad actors from serving on the board, but it is different from an election challenge."
Examples of proxy fraud
Wagner recently had a case similar to yours that involved a large co-op building that had, for the first time ever, more than 90 percent of shareholders turning out for a board election.
“The co-op never had more than 65 or 70 percent before that, and if you looked at the proxies, which we did, there were many signatures on certain proxies clearly written by the same people,” he says. “It was remarkable how blatant the fraud was. The handwriting was not even disguised.”
Another example of proxy fraud could be a tampered-with proxy statement or verbal misrepresentations, which misleads the person giving the proxy about how or for whom the proxy will be used. If the person requesting the proxy says he/she will use the proxy to vote for a particular candidate in favor or against a proposed resolution and then does not, this could result in a challenge.
Having a slew of proxies all dated the day of the election could be a red flag, too, because if a shareholder or unit owner gave a signed proxy to more than one person, the one with the later date is the one that will be counted. Grossly unexpected election results may also indicate fraud is afoot, Wagner adds.
Proxy fraud: What’s the worst that can happen?
"It’s important that co-op or condo board election results be fair and proxies submitted for them be accurate because these buildings are essentially multi-million dollar businesses," says Leisl Kerechek, associate attorney at Wagner Berkow Brandt. "They’re run by a board that is elected by unit owners and shareholders to oversee what is likely the largest investment they have: their apartment."
A deceptive proxy holder could swing an election to vote in favor or against a resolution to amend the bylaws or proprietary lease of your building. And since the board manages the building’s reserve funds, maintenance, bill payment, vendor selection, etc., this could be critical.
“If you get somebody who is bad enough to submit false proxies, what else are they going to be doing fraudulently?” Wagner asks.
How to prevent proxy fraud in board elections
Unless special rules in your building’s bylaws require a proxy be signed in the presence of a witness or notary, a proxy that’s valid on its face will be counted, Wagner says.
It’s the duty of the inspector of election to, among other things, tabulate and certify election results; make sure that residents signing in are who they say they are; and ensure that proxies are valid. There are limits on what the inspectors of election may do, but they may confirm the validity of the proxy by comparing signatures on it to what is on the building’s corporate records.
The building’s managing agent is often tasked with serving as inspector of election, but your board could also hire a third-party company. While they can be costly, especially in large complexes, it may be worth it considering the amount of risk involved. Ensuring fair and fraud-free elections is well worth the cost both in terms of the comfort it will give to shareholders that the elections were run properly and in avoiding the election of bad actors, who may waste or steal a reserve fund or who could sign a contract with a vendor who either may have an undisclosed affiliation with a board member, not charge a fair price, or who may be paying kickbacks.
“The cost of having an election service or managing agent check proxies is a small price to pay to ensure those things aren’t happening,” Wagner says.
Other ways he’s seen buildings do their due diligence to prevent board election fraud is by keeping records of sign-ins and proxies, marking proxies and ballots with stamps or signature to ensure they’re not tampered with or copied, and opening and counting ballots in front of everyone (a level of transparency that is “pretty unusual,” Wagner says).
New York City real estate attorney Steven Wagner is a founding partner of Wagner, Berkow, & Brandt, with more than 30 years of experience representing co-ops, condos, as well as individual owners and shareholders. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation, send Steve an email or call 646-780-7272.