Fraud in 4A

Dennis Greenstein, partner in the law firm Seyfarth Shaw, calls it “a perfect storm” of events. Fraud, abuse of power, apathetic shareholders, a tyrannical board president, a passive board, no independent oversight. “You might see one or two of those things occur in one property. But to have them all appear in one place is really remarkable.”

That “perfect storm” took place at 4-6 West 105th Street, just off Central Park West in Manhattan Valley – a neighborhood that changed dramatically from gang-ridden to high-biddin’ in the time frame involved. Not that this six-story, 35-unit building, completed around 1900, has itself changed that much. Then and now, it’s a co-op in the nonprofit Housing Development Fund Corporation (HDFC) program, created to provide affordable housing for low- and middle-income individuals.

But over the years, questions had arisen about Apartment 4A: a place which has seen a revolving door of residents – whose names nobody knew – and whose ownership seems to have always been in question.

You Say You Want a Resolution?

The details of the case, recently decided in Manhattan Supreme Court and reproduced here from court documents, involve many people but the two alliterative names to remember are Gladys Gutierrez and Raymond Ramos. Gutierrez served as board president of the self-managed co-op from 1990 to 1996. Ramos, her son, purported to buy shares to Apartment 4A for the bargain basement price of $9,000 (half the asking price). Here is where the questions start.

Did Ramos actually pay for the apartment? Why didn’t the board interview him? Ramos was unable to show a signed contract of sale or a canceled check, bank statement, or any other document reflecting that he paid anything to the shareholder who lived in the unit, Patrick Millet. Although there were strict financial requirements, Ramos did not provide any financial information about his alleged purchase, and he had never attended an admissions interview.

Did the board actually approve the sale? Was forgery involved? There was a board resolution approving the sale, signed by Ramos’ mother, the president; Nilsa Adorno, the secretary; and Elias Yacob, the treasurer. But Yacob couldn’t have signed: his driver’s license, admitted into evidence, shows a signature bearing, as a judge later put it, “no resemblance to the purported signature on the board resolution.” Had someone forged his name?

Did the transfer ever take place? The purported sale occurred, Ramos said, during a “meeting downtown somewhere.” But details were sketchy at best. He never signed any of the required documents, yet his mother, the president, gave him a signed stock certificate and proprietary lease. In court, Gutierrez admitted that certain procedures had to be followed when selling any HDFC apartment, including 4A. A seller needed to advise the board in writing that he or she intended to sell, the board had to approve the buyer and price, and the buyer’s credit history and tax returns needed to be reviewed once the contract was signed. No such notice of intent nor any contract of sale was produced at trial. Although Gutierrez insisted that all proper procedures were followed in the sale of 4A, she also admitted that her son’s background had not been checked because he had previously been employed by the co-op as a temporary super. She claimed that there were 14 sales while she was president and all had been done properly.

Who were all those people in 4A? A year after the purported sale, it became apparent that Apartment 4A had a “revolving door” policy toward the residents: throughout a six-year period, at least five different people had lived in the unit, including the board president, who sometimes stayed in 4A so she could sublet her own apartment. (Con Edison representative Zola Farquharson said that from 2002 on, electric bills went to five separate individuals.) From at least 2002 to 2007, Ramos seemed to have moved out; during that time, he was receiving his mail at a Brooklyn address.

Why was the treasurer shut out of day-to-day business? Apartment 4A was the tip of the iceberg. The president also did not allow the treasurer – or anyone else, for that matter – to see any of the documents relating to the building’s finances. She refused to turn over documents when the other board members requested them. She even refused to release the corporate seal.

Why didn’t the board take action? It did. In 1996, after six years of autocratic rule, the board president was ousted. The minutes from that period state that Gutierrez was not allowing other board members access to financial documents and mentioned concerns over the “self-ruling style” and “misdealing by the president for the 1995 fiscal year” – issues that the president refused to address. Indeed, in a separate Supreme Court action started in 1996 by Gutierrez challenging the election where she was ousted, she was found to be in contempt of court and directed to turn over the financial records for nine apartments (not including 4A) or be committed to the custody of the sheriff. At trial, Gutierrez admitted that she withheld some documents from the board.

Even with the president gone, the consequences of her actions lingered on. From 2003 to 2008, Apartment 4A was “sublet city” – and the board took no action. But Ramos’ behavior – the shady “sale” and the collection of sublessees – apparently came to the attention of the corporation. It didn’t like what it saw and filed an eviction notice against Ramos in 2009, saying that he was not a shareholder but was a sublessee of the original shareholder. It gave him 10 days to vacate.

After that, in what could only be described as a demonstration of supreme arrogance, Ramos filed his own lawsuit. That might not have been his smartest move. His house of marked cards tumbled down. On December 30, 2013, the court confirmed that Ramos was not a shareholder “and that the purported stock certificate and proprietary lease issued to the plaintiff are invalid and void... the purported resolution approving the sale of the shares does not appear to be authentic. While it contains signatures of Gutierrez, Yacob and Adorno, Yacob denied that he signed the resolution. Gutierrez claims that she abstained from the vote, as she was required to do. This leaves only two of the five board members as purported signatories to the resolution, an insufficient number for a quorum as she claims. Since a majority of board members did not approve the resolution, the transfer of shares to plaintiff was not valid.”

It Can’t Happen Here?

Very interesting tale, you say, but that was an HDFC co-op. It can’t happen to us.

Or can it?

“This terrible situation, although quite rare, is not confined to just HDFC or other government subsidized co-ops,” observes Arthur Weinstein, a longtime co-op/condo attorney in private practice. “I have seen situations where unethical board presidents combined with ineffective boards of directors have run their co-ops solely for the benefit of that board president. All co-op board members should always be vigilant to prevent this from happening, to be sure that they do not have a runaway president acting in his or her best interests.”

Although she says such widespread fraud is rare, attorney Linda Plotnicki, a partner at Kaufman Friedman Plotnicki & Grun, notes: “I had one situation where a stock and lease were submitted that were forgeries, but the managing agent didn’t pick up on it, and it was a pretty good building, too. There was actually a loan on that apartment but it was sold, and it ended up working itself out in a deal. But there was fraud.”

So, what should boards do to be sure that even one of those elements doesn’t occur?

Do your job: track money, keep records. Professionals agree that such fraud is more likely to happen when board members shirk their fiduciary responsibilities. Each officer must perform the functions of his or her office, as set forth in the bylaws. The treasurer tracks the money, the secretary keeps detailed records of board meetings. “She must also keep copies and insist on getting copies of all contracts between the co-op and its vendors,” says Weinstein.

The secretary should also, in the absence of an active building attorney, maintain the stock book of the corporation and ensure that no stock certificates are issued unless the board has properly authorized a transfer of shares. “All board members should participate in the process of approving transfers of co-op apartments and all the other routine operations of the co-op,” Weinstein explains.

“When stocks and leases are signed and stocks are issued,” Greenstein says, “the board must make sure the proper approval is made for a transfer, and make sure that’s consistent with what the documents say. I can’t imagine how the board [in this case] could approve a sale and not have a clear review and understanding of [who was living there]. If you approve Ramos as the shareholder and later find out that Gutierrez has become the stockholder [without board approval], that’s inexcusable.”

Watch out for the take-charge president. Fraud can occur when a single, forceful individual takes charge of the board. “If everybody else is just apathetic and not really paying attention – if you have somebody who is running the show and no one else is paying attention and they let that person do it, fraud could happen,” Plotnicki says.

Weinstein agrees that problems can develop when you have a take-charge president who does most of the work or a manager who runs everything. “I have numerous powerful, active board presidents that do wonderful jobs,” Weinstein says, “but the bottom line is that there must also be an active and trustworthy accountant, lawyer, and board behind that active board president.”

Follow the money. You are entering dangerous waters if you don’t follow the money. The treasurer should be reviewing all bank statements and a monthly report of building expenditures and income. “In smaller co-ops that are self-managed where somebody is holding the checkbook and no one is watching them, you don’t know if things are being paid,” Greenstein notes. “I got a call yesterday from someone who is in a self-managed co-op in Brooklyn. The board refuses to raise the maintenance to cover the expenses, and they’re now in default.”

If you’re self-managed, he adds, “you, as a shareholder, have to take an active role and make sure that one person cannot do all of these things on their own, cannot take control over the money. If I was representing a self-managed co-op, two signatures would have to be on every check; you would never give one person check-writing ability.”

Follow the contracts. Every time a co-op has a contract with any kind of vendor, your attorney or treasurer should look up the company under the state filing requirements. When Weinstein became the lawyer at one co-op, the board raised questions about a vendor’s work. Weinstein’s investigation found that the managing agent had incorporated this company in Connecticut under his own name as the legal incorporator. The contractor who hired the subcontractor acknowledged that it had been recommended by the site agent. The board contacted the agent to make inquiries, and soon after that, he disappeared; cell phone calls, home phone calls, and e-mails were not answered. Immediate actions were taken to conduct a full examination of the manager’s records. The investigation eventually disclosed a variety of six-figure co-op payments to the subcontractor owned by the site agent as well as contracts and purchase orders that could not be tied to proper vendors of services and materials actually received by the co-op.

Beware of apathy. There are dangers when board, shareholders, or unit-owners are apathetic, a common complaint by boards. “In [the building under discussion],” says Plotnicki, “it’s almost like a renter mentality, so they’re not watching, and there’s a lot malaise about operating a co-op.” That can be dangerous for individual board members; if it’s found that they’re acting in bad faith, the directors’ and owners’ liability insurance “is not going to indemnify board members who may be found liable for breach of fiduciary obligations,” says Greenstein.

Seek professional guidance. Self-managed buildings can find themselves being cheated when there are no professionals supervising the building. The co-op at 4 West 105th Street was a “perfect storm” in another way, Greenstein notes: “They did not have an independent manager who could oversee and point out [what was wrong] before they got too deep into this issue.”

“There was no management agency, no active board; just somebody who is taking the reigns and everybody’s happy to let them deal with [the running of the building],” says Plotnicki. “If you gave somebody enough control over the paperwork and it’s all concentrated on one person, it’s like any other business. If that person is not on the up-and-up, if that person is dedicated to illegal activity, there’s not going to be too much anybody can do about it. But it’s more likely to occur if people are not paying attention.”