Kickbacks

THE KICKBACK INVESTIGATION

More Indictments

Ellis Hayeem, board president at a co-op at 85 Eighth Avenue, was more than surprised. He was shocked.

He had just been talking to a reporter about his co-op’s former manager and had been singing that man’s praises: “The [management corruption] scandal didn’t really affect us,” he was saying about the 1994 indictments of managers who had taken kickbacks. “We had a very good managing agent at the time; a man we could trust. The person who was running our building was an exceptional person. Have you heard of him? Eric Dubbs.”

The reporter certainly had heard of Dubbs. The manager had just been one of 59 individuals and 21 corporations cited in a new round of indictments by the Manhattan district attorney’s office.

“What is that?” said Hayeem, visibly shaken. “I cannot believe it.” After a moment, he said:  “I am shocked at this. I worked with Eric very closely and never thought he would be a person to take money.” He sighed. “I  am very saddened by this.”

Hayeem is not alone. In mid- and late June, boards throughout the city were expressing shock, dismay, and growing anger after Manhattan District Attorney Robert M. Morgenthau announced the indictments of dozens of managing agents, management companies, building superintendents, architects, engineers, waterproofing contractors, and even board members – the first time those other than managers or their staff had been cited in the ever-widening scandal. In two indictments on June 22, Marvin Gold Management and Elm Management, formerly two of the city’s largest management firms, were indicted for Enterprise Corruption under New York’s racketeering law; each was charged with defrauding buildings they managed out of more than $1 million.

“The residents of the cooperative apartment buildings in this city entrust their most valuable assets – their homes – to their buildings’ managing agents,” Morgenthau said at the time of the first indictments on June 11. “The defendants indicted today systematically abused their trust, defrauding those residents and stealing their money. Although the managing agents indicted today did not work together, their kickback schemes were alike. In return for being allowed to work in an agent’s buildings, a vendor or contractor had to kick back a percentage of its billings to the managing agent, almost always 10 percent.”

At a June 22 press conference, New York City Department of Investigation Commissioner Edward J. Kurianski noted that, “For the first time, in these charges, we have seen this corruption spread to government-subsidized Mitchell-Lama housing projects throughout the city.”

Those indicted (see box, p. 16) represent such luxury buildings as 370 and 400 Central Park West, 1001 Park Avenue, 717 Madison Avenue, 360 Riverside Drive, 123 East 93rd Street, 220 East 67th Street, and 50 East 80th Street, among others. The amounts reportedly stolen ranged from $2,200 allegedly taken by 711 Amsterdam Avenue superintendent John Kropman to $194,000 allegedly collected over one year by site manager Michael Wegielski of Clearview Gardens in Queens.

The new indictments are the latest developments in the the probe into contractor payoffs to managers that was announced on June 15, 1994, by the D.A.’s office. At that time, 72 managers pled guilty to kickback schemes, with 34 individuals and three corporations agreeing to pay restitution to a special fund established by the D.A.’s office to reimburse victims. One manager went to jail.

The management industry, aware that its image was tarnished, had vowed to clean up its image. To that end, a group of leading managers banded together to form a group that would set standards for and dispense information about the business. Sixteen of the industry’s top managers joined forces to form the Association of Cooperative and Condominium Managers (ACCM).

Through its public relations and education campaign, the ACCM hoped to heal the damage of the indictments by generating positive press about managers and educating its clients – New York’s board members and apartment owners – about the importance of property managers. More than $10,000 of the organization’s first $25,500 budget was slated for advertising and public relations programs (see “Hotline: Setting Standards,” Habitat, March 1995).

In an ironic twist, however, former ACCM board member Marcia Taranto, the president of Taranto & Associates (which is still one of the ACCM’s member companies), was indicted on June 11 for allegedly stealing more than $30,000 at six buildings that she had managed from 1996 to 1998.

“The board’s position right now is that we’re disheartened,” says Ken Lovett, president of the ACCM. “The ACCM started as a group when this issue came up several years ago. Since then, we’ve created an organizastion to promote professionalism in management. We developed a code of ethics that all management companies have to sign off on each year.

“We do have to keep in mind that all people under investigation are innocent until proven guilty,” he adds. “This is a real black eye for the industry. But we’re going to continue in our role to educate the managers, to promote professionalism in the industry, and to re-emphasize ethics. We feel that if those indicted are guilty they should pay the consequences. There is no excuse for this kind of behavior. It’s a shame some people didn’t take the warning.”

It was clear early on that this set of indictments would be different from the last series. During the summer of 1998, rumors began circulating that trouble was afoot when the D.A. obtained search warrants to enter the homes of the principals of a number of large management firms. At the June 22 press conference, Morgenthau reported that thousands of dollars in cash were discovered at the homes of Marvin Gold and his daughter. Within months of the searches, Gold’s company was sold to Arco Management and Elm was purchased by Century Operating.

Although the D.A. had previously indicted the principals of one firm, Darwood Management (which subsequently went out of business), most of the others cited in the scandal in 1994 had been lower-level executives and/or site managers. The new indictments, however, target principals of large firms. For instance, Michael Cantor and his company, Cantor Real Estate, were indicted for taking more than $60,000 in kickbacks in connection with 14 buildings he managed. Arnold Zabinsky, formerly president of Elm, was named as part of an “enterprise corruption” scheme in which his firm defrauded the residents and shareholders of 29 cooperatives of more than $1.3 million.

“Zabinsky was the leader of the Elm grroup and received 75 percent of the kickbacks for doing business in buildings managed by his company,” Morgenthau said on June 22. His managers – called “bag men” by the D.A. – picked yp the kickbacks and took a 20 to 25 percent cut and distributed shares of the kickbacks to individual agents from Zabinsky’s split.

This series of indictments is also different because the prosecutions have not been solely against managers. With board members and architects, engineers, and contractors in the mix, the reach of the probe has grown much wider. For instance, Sheldon Lieverman, a board member at Linden Hill 1 Co-op in Flushing, Queens, was charged with taking more than $35,000 in kickbacks related to contracts at his building. In another incident, Park City 3 & 4 Apartments, in Rego Park, alledfedly passed on $36,000 to board member Mohamed El-Goarny as part of a kickback paid in a waterproofing contract that exceeded $1 million.

“Having members indicted is shocking,” observes Mary Ann Rothman, executive director of the Council of New York Cooperatives. “That is as flagrant a breach of fiduciary duty as can be. It shows that if you don’t all pay attention and vote at annual meetings, or agree to take part in the work of committees or serving on committees – if you abdicate responsibility – that  creates an opportunity to abuse power. If you live in a co-op or condo and never have an inkling of what’s going on – if there are no newsletters, no notices, no channels for suggestions or complaints – that is a serious warning sign that things could get out of control.”

Also charged were such waterproofers as Kay Waterproofing, Tindel Waterproofing & Restoration, and C & D Restoration, and architects John Anastasi and Steven Cohan. At a June 23 press conference, the D.A. said that the contractors charged had run the vast majority of waterproofing jobs in the city.

“It goes to show you that there’s a lot of liability for everyone,”observes Greg Carlson, president of the Federation of New York Housing Cooperatives. “You need to watch the managing agent but you also need accountability by board members.”

To many professionals, the new indictments are discouraging because those indicted apparently did not learn from the last round. “There was a definite warning given to the industry only a few years ago,” says Jeffrey Levy, vice president of property management at The Argo Corporation. “I feel they should have heeded that warning. If they are guilty, they didn’t deserve to operate. Managing agents have a fiduciary responsibility to protect the investments of the owners. I don’t think they took it as seriously as they should have.”

Some boards saw signs that managers did not take the corruption very  seriously.  After the 1994 indictments were announced, Howard Biren, board president at  275 Webster Tenants Corporation, a Brooklyn co-op, spoke with Jeff Gold, who oversaw management at Marvin Gold Management, the property’s manager.

“I said, ‘What if you found that our manager was on the take? What would you do?’ Gold told me he’d call him into the office and yell at him. I said, ‘Would you fire him?’ He said, no, he’d yell at him. I wasn’t satisfied with that answer. My feeling is you give a guy a chance to defend himself but if you have definitive proof about corruption, he’s gone.”

Many observers feel that a number of boards bear responsibility for the continuing problems. Some instituted safeguards after the last scandal (for instance, attorneys such as Saft inserted a clause into contracts for client buildings requiring that any contractor convicted of bribery forfeit the entire value of the repair, not just the amount of the bribe). But others simply continued operating as they had before. “Boards bear responsibility, absolutely,” Levy notes. “The board of directors run a corporation, and they have a responsibility to protect and guard against misspent funds. That can mean checking bills to see that service or supply is delivered, or else making sure that the managing agent is soliciting competitive bids.”

“What concerns me tremendously is that so many boards just don’t seem to care,” complains the principal of a large firm. “They don’t care about what the contractors do. They don’t care about what the managers do. I don’t understand it.  We’ve had situations where we’ve given out new waterproofing jobs and we’ve told the boards what was going on, that some contractors offered kickbacks for work. And 9 out of 10 boards said, ‘So?’ I find it mindboggling. Also, when you look back at the last round, several guys were indicted, pled guilty, and paid a fine. Then they continued in management. They would take their buildings with them to a new company. And the boards were happy to keep them.”

Another management executive recalls that a board member tried to get him to hire a manager who had pled guilty to a misdemeanor on tax evasion. “I  said no. Here was a board member trying to get me to hire someone because he liked working with him. Why wasn’t I willing to forgive a mistake? I don’t want to play judge or jury. I just took the position that I wasn’t going to hire anybody with a record.”

“There’s an inherent problem in having board members run the building,” argues one principal at a mid-sized management firm. “It’s a business but not a business. They’re not professionals and they often don’t know what they’re doing.  They don’t know what things cost; they don’t know how to spot corruption. When we manage rentals, we know what a job costs. We are professionals and know the costs. In every other business, people who are in the business run that business. If you don’t know your field, it’s easy to make a mistake. If you don’t know how to read a financial statement, or if a pump needs to be replaced and you have nothing to compare it to, you do not know the questions to ask. You do not know what to look for.”

Some argue that the low fees paid to many managers invite corruption. “The biggest indicator of possible corruption is price,” adds attorney Robert Tierman, a partner in Manhattan-based Salon Marrow & Dyckman. “If you’re getting management or contracting work too cheaply, especially if it’s a smaller company and the owner is involved day-to-day, or a bid comes in below the rest, I would be real suspicious. No one is giving it away and staying in business.”

“The fee structure is low,  a manager ends up handling ten properties,” complains a management principal. “He can’t adequately oversee the business. I thought the last round, fees would rise, but there’s always some new kid on the block who will underbid you. So boards pay less and corruption occurs.”

Some disagree with that assessment, however. “I am not from the school that management fees are so low that you get what you deserve,” notes one manager. “That’s ridiculous. In these indictments, you have little guys who made little money who took and owners making mega-dollars who took. It’s not about fees. It’s just greed. Some people rationalize it by saying, ‘We’re doing a great job bringing in the lowest bidder, so what have I done that is wrong? What’s the big deal?’ I reject that. I have zero tolerance for both arguments.”

When will the investigation end? “Often these investigations are like branches of a tree,” explains Manhattan attorney Kenneth J. Aronson, who represented an indicted manager in the last series of indictments, “A manager gets arrested, and he makes a deal to give up other names. And it goes on and on until the D.A. decides that they’ve done enough.”

What next? What now? “I hope it’s at a point now where we can clean up the industry,” says the principal of a large management firm untouched by the investigation. “I think there has to be some governing body in place. They should take money from the restitution fund to set up a governing body that issues licenses and guidelines. Most other states require licenses for property managers. New York is one of the only states where that doesn’t happen.”

Another manager argues against licensing, however. “You can’t license honesty,” she says. “You have people who work in banks and the securities industries, and they are licensed and you hear every day about people stealing.  I don’t think a written license will stop someone who wants to commit a crime. What we need to continue to do is bring people in who are professional.”

Others argue for increased vigilance. “In any industry or any situation where anyone can economically profit, you have a problem,” says Neil Davidowitz, president at Orsid Realty.  “I don’t think it’s impossible to safeguard a building. You can’t say the safeguards in place didn’t work. I’m not sure there were safeguards at those buildings.”

“Some boards don’t want to get involved in the day-to-day,” insists Robert Grant, director of management at Diversified Property Management. “But where you’re spending hundreds of thousands of dollars, they should get involved. It’s incumbent on the management company to drag them in. They’ve got to tear apart those bids.”

“It was an incredible shock in ‘94 when we learned that there were so many incidents of managers taking advantage of co-ops and condos,” concludes Rothman. “It’s even more distressing to think that it’s still going on. Because co-ops and condos are run by volunteers, it may be that they are easier victims. But we need to learn to be more vigilant, to put in place procedures that absolutely minimize opportunities for corruption. In essence, this is an ongoing investigation; it’s another piece of what we saw started in ‘94. In the last few years, buildings have at least had their consciousness raised; they’ve made honest attempts to institute controls. Perhaps people are still too trusting or perhaps those stealing are too crafty and need another wake-up call.”  

HABITAT July/August 1999