Q I just found out that a member of my co-op board has been issued a check for a very large amount from our operating account. There has been no explanation or discussion about this, and now nearly six figures worth of our community funds are in this person's private account. Understanding that there might be a reasonable explanation (even though nobody has offered one) and not wanting to accuse a board member of outright theft or fraud, what is the best way to go about investigating this situation? And if we find that there really is something criminal going on, how do we handle that?

—Concerned Shareholder

A “There is good reason for the building's shareholders to raise questions about this type of transaction,” says attorney Stewart E. Wurtzel of the New York law firm of Deutsch Tane Waterman & Wurtzel, P.C. “It may well be innocent but, without a doubt, it is unusual. It certainly gives the appearance of impropriety; if a reasonable and proper explanation exists, the board should be more than willing to share it.

“The first step would be simply to approach the president and/or treasurer and ask for an explanation about the transfer; if a complete and satisfactory answer is not forthcoming, it should be followed with a letter (or preferably letters from numerous shareholders) demanding an explanation. If questions remain (either because they were not answered or inadequate explanations given), the shareholders may wish to avail themselves of the right to inspect the corporation's books and records of account as authorized by the Business Corporation Law Section 624 and/or the cooperative's proprietary lease (the right to inspect under the proprietary lease is often broader than the right granted by statute). This provision generally allows the shareholder to make an inspection of the corporation's books wherever they are normally maintained (usually with the managing agent). While not set forth in the statute or the proprietary lease, many judges have ruled that books and records include the bills and receipts supporting a corporation's payment. Certainly, a substantial payment to a member of the Board should be supported by an invoice justifying the expenditure (i.e., reimbursement of expenses incurred on behalf of the cooperative). If the cooperative refuses to honor this request, it can be enforced by commencement of a Supreme Court action requiring the cooperative to give access to its records.

“If the process has reached this point without resolution or explanation, the shareholders would be well-justified to attempt to remove the director. Shareholders do not need to have cause to call a special meeting to remove a director (though 10% of the shares must join in the petition.) At the same time, it would be prudent to contact the local district attorney to see if a criminal investigation is warranted. Finally, after making demand on the board for it to recover the transferred monies and the board having failed to do so, the shareholders would have the right to commence a derivative suit in the name of the cooperative against the director for return of the corporation's money.”