We don’t usually think of the law as the place our most creative people go. Lawyers with a creative bent often drift into business, where a higher risk tolerance is often required to make a success of yourself. Some of our greatest writers and artists have legal training, but most seem to drop out when their artistic calling tells them law school isn’t for them.

Group of Robots and personal computer vector illustration

Still, creativity and innovation are all the rage in law schools today. Northwestern has a concentration in it as does Vanderbilt, and Harvard has a course on Innovation in Legal Education and Practice.

Like it or not, as artificial intelligence takes over an increasing number of dreary legal tasks, there will be less room for dreary, plodding minds in law firms. The creative and innovative will survive.

This doesn’t worry us, because we’ve long talked about the need for creativity in fact finding. It’s even in the subtitle of my book, The Art of Fact Investigation: Creative Thinking in the Age of Information Overload.

The book takes up the message we have long delivered to clients: computers can help speed up searching, but computers have also made searching more complex because of the vast amounts of information we need to sort through.

  • Deadlines are ever tighter, but now we have billions of pages of internet code to search.
  • Information about a person used to be concentrated around where he was born and raised. Today, people are more mobile and without leaving their base, they can incorporate a dozen companies across the country doing business in a variety of jurisdictions around the world.
  • Databases make a ton of mistakes. E.g. Two of them think I live in the house I sold seven years ago.
  • Most legal records are not on line. Computers are of limited use in searching for them, and even less useful if figuring out their relevance to a particular matter.
  • Since you can’t look everywhere, investigation is a matter of making educated guesses and requires a mind that can keep several plausible running theories going at the same time. That’s where the creativity comes in. How do you form a theory of where X has hidden his assets? By putting yourself in his shoes, based on his history and some clues you may uncover through database and public-record research.

The idea that technological change threatens jobs is hardly new, as pointed out in a sweeping essay by former world chess champion Gary Kasparov in the Wall Street Journal.

Twenty years after losing a chess match to a computer, Kasparov writes: “Machines have been displacing people since the industrial revolution. The difference today is that machines threaten to replace the livelihoods of the class of people who read and write articles about them,” i.e. the writer of this blog and just about anyone reading it.

Kasparov argues that to bemoan technological progress is “little better than complaining that antibiotics put too many gravediggers out of work. The transfer of labor from humans to our inventions is nothing less than the history of civilization … Machines that replace physical labor have allowed us to focus more on what makes us human: our minds.”

The great challenge in artificial intelligence is to use our minds to manage the machines we create. That challenge extends to law firms. We may have e-discovery, powerful computers and databases stuffed with information, but it still requires a human mind to sort good results from bad and to craft those results into persuasive arguments.

After all, until machines replace judges and juries, it will take human minds to persuade other human minds of the value of our arguments.

Step one: don’t have a manual. That’s the message in an information-packed new book about the inner workings of the SEC just after the Madoff and now largely forgotten (but just as egregious) Allen Stanford frauds.

Step 1

In his memoir of five years at the agency, former SEC Director of Investment Management Norm Champ (now back in private practice) writes that he was stunned to arrive into public service in 2010 to find that examiners had no set procedures both when looking at regulated entities or in following up on their findings.

“If SEC inspectors ever arrived at a financial firm for an examination and discovered that the firm had no manual about how to comply with federal securities laws, that firm would immediately be cited for deficiencies and most likely subject to enforcement action,” he writes in Going Public (My Adventures Inside the SEC and How to Prevent the Next Devastating Crisis).

Among his proudest achievements were instituting such procedures at the SEC, and holding accountable anyone at the SEC who begins to follow up on a whistle-blower’s report – the kind that the Commission ignored in relation to Madoff and Stanford.

We’ve written and spoken lots about our methodology for due diligence. You start from scratch and look not just to verify what you’ve been handed, but for information the person or company don’t want you to see. You don’t close investigative doors prematurely even though human nature makes you want to do just that.

Starting from scratch means that you assume nothing. You don’t assume Madoff has all those assets under management unless you check. It would have been easy to do but nobody asked. Anyone who was suspicious of the absence of an independent custodian or a major auditor similarly let it slide.

This is what we refer to as a Paint-by-Numbers investigation: the forms and relationships are all taken as givens, and all you get to do is decide on color. In Madoff’s case, the “forms” (the existence of invested money) were illusory. Who cares about the color (say, the risk profile of the “securities”) of something that doesn’t exist?

In Stanford’s case, there was lots of information he wouldn’t have been proud of. An April 2007 FINRA report on the Stanford Group Company said the firm had been found to be operating a securities business while failing to maintain its required minimum net capital.  A former employee of Stanford’s alleged in an April 2006 complaint in Florida state court that Stanford was operating a Ponzi scheme.

Without internal accountability procedures in place, did all of the people at the SEC just sit there? No. Champ (who arrived post-Madoff and Stanford) describes an agency packed with a lot of dedicated professionals but with a good bit of deadwood immune to the disciplines of the private-sector job market. As we read about the federal budget proposals that seek to cut funding at a variety of agencies, this book contains two other pertinent messages:

  1. If you could fire people in government the way you can in the private sector, it would be easier for the government to save money.
  2. That battle is so tough that most people (including Champ) just try to work with the good people they can find and leave personnel reform for someone else.

Champ makes no promises that there won’t be more Ponzi schemes, but hopes that his organizational reforms will reduce the chances. As in any due diligence, you can’t promise that you will always catch everything – only that if there are repeated indications of a problem staring you in the face (complete with former employees blowing whistles), you will follow up.

Among Champ’s recommendations for blunting the damage of the next crisis, one is especially welcome: eliminate the scandalous government sponsorship of lotteries. Lotteries are the world’s worst investment, and yet the poorest members of society spend like crazy on them, all prompted by a lot of misleading and predatory government advertising “far beyond what private businesses are allowed.”

Champ asks us to imagine what could be done with all that money people waste if it were properly invested and devoted to investor education.

We agree. The millionaires who lost with Madoff could at least have afforded $2,000 of due diligence on their investment. The poor who play the lottery and who should be saving their money are the ones who need help the most help from the SEC and from state governments that need to find a less repugnant way to raise revenue.

 

What to do when the databases you rely on start stripping out the very data you are paying for?Due diligence databases

Word in today’s Wall Street Journal that the main credit reporting firms will be removing many civil judgments and tax liens from credit reports prompts us to restate one our core beliefs:

Not only do databases routinely mix people up, they are far from complete in the information they contain.

Now, they will be even farther away from complete, because in order to list adverse information the credit reporting companies want several identifiers on each piece of information before they include it in a credit report. Even if there is only one person in the United States with a particular name, if his address and Social Security number are not included in a court filing against him, that filing may never make it onto his report. From what we’ve seen, there are almost no SSN’s in most of the filings we review.

As a result of this new policy, the credit scores of a lot of people are about to go up, says the Journal.

To answer the question posed at the top of this posting: what you do is you go after the information yourself. You (or a competent pro you hire) looks at databases and courthouse records for liens, litigation and other information people use every day to evaluate prospective associates, counterparties and debtors. If there’s enough money at stake, you may want to conduct interviews, not only with references but with people not on the resume.

The idea that databases are missing a lot is old news to anyone who stops to take a careful look.

The next time you are searching in a paid database, you may notice a little question mark somewhere around the box where you enter your search terms. Click on that and prepare to be shocked.

“Nationwide” coverage of marriage licenses may include only a handful of states, because such licenses are not public information in many jurisdictions. In other cases, the information is public but the database doesn’t include it because it’s too expensive to gather data that has not been scanned and stored electronically.

Of course, sending someone to a courthouse costs more than a few clicks performed while sitting at your desk. But does it cost more than lending to the wrong person who defaulted on a big loan six months ago?

What will it take for artificial intelligence to surpass us humans? After the Oscars fiasco last night, it doesn’t look like much.

As a person who thinks a lot about the power of human thought versus that of machines, what is striking is not that the mix-up of the Best Picture award was the product of one person’s error, but rather the screw-ups of four people who flubbed what is about the easiest job there is to imagine in show business.

Not one, but two PwC partners messed up with the envelope. You would think that if they had duplicates, it would be pretty clear whose job it was to give out the envelopes to the presenters. Something like, “you give them out and my set will be the backup.” But that didn’t seem to be what happened.

Then you have the compounded errors of Warren Beatty and Faye Dunaway, both of whom can read and simply read off what was obviously the wrong card.

The line we always hear about not being afraid that computers are taking over the world is that human beings will always be there to turn them off if necessary. Afraid of driverless cars? Don’t worry; you can always take over if the car is getting ready to carry you off a cliff.

An asset search for Bill Johnson that reveals he’s worth $200 million, when he emerged from Chapter 7 bankruptcy just 15 months ago? A human being can look at the results and conclude the computer mixed up our Bill Johnson with the tycoon of the same name.

But what if the person who wants to override the driverless car is drunk? What if the person on the Bill Johnson case is a dimwit who just passes on these improbable findings without further inquiry? Then, the best computer programming we have is only as good as the dumbest person overseeing it.

We’ve written extensively here about the value of the human brain in doing investigations. It’s the theme of my book, The Art of Fact Investigation.

As the Oscars demonstrated last night, not just any human brain will do.

There is a huge branch of the “fake news” business that gets no attention at all: the fake news consumed each day by corporate America that has nothing to do with politics, but everything to do with business – the bulk of the $18 trillion U.S. economy.Fake news investigation

We’ve been sorting through this kind of thing for years — It’s often why our clients hire us. I’ve also been talking on the subject recently in a speech called Fighting Fake News (see an excerpt here).

The everyday expression for figuring out what’s fake and what isn’t is: Due diligence. Good businesses are good at it, bad ones aren’t.

Six months ago, the term “fake news” meant false political information that the originator or spreader of the “news” knew was false. It’s hardly a new phenomenon, as the Wall Street Journal helpfully pointed out this week with Vladimir Putin’s Political Meddling Revives Old KGB Tactics.

By now, the term has been expanded to mean anything that’s partly or wholly untrue in the eye of the beholder, whether or not it was intentionally misstated.

What is corporate fake news? The massive amount of company, financial and personal information reported but never checked. Plenty of what’s put out is accurate, but a lot isn’t. Ask any public relations professional you know who will give you a frank appraisal of his business. If you issue a news release that’s well written, with nice quotes from your client, what happens to it?

In many cases, it will be printed word for word as a news story. There will be a news byline over it, but the body of the release will be all but unchanged. The “story” will be on dozens of television news department websites, in local newspapers, and then reproduced again based on that “reporting.”

Do “quality journalists” do this? Not that way.

Off the Beaten Track

But consider a company that is not sexy and attractive to Wall Street bankers or a lot of investors – perhaps a mid-sized printing company in Ohio or a private auto-parts manufacturer in Indiana. If that company issues a dull news release, the New York Times or the Chicago Tribune will almost certainly devote zero hours to verifying what’s in that news release. They may not report on the company at all.

If the company is public, you may get a couple of lines with earnings, usually in the context of “beating” or “missing” what analysts had predicted the earnings would be. Good luck relying on that. You would need to ask, are those the analysts who missed the dot-com bubble, the housing crisis, last year’s plunge in oil prices?

What are you to do then, when you are considering hiring someone who worked at one of these thinly covered companies? Or if you may want to enter into a long-term contract with one of them, or perhaps acquire one? Of what use will the “news” about the company be when you start looking?

There is another dimension to the problem aside from what the company says about itself. Company valuation is always relative to the health of its competitors, and they too have not only the same interest in promoting themselves, but also in reflecting negative news on their competitors.

If there is good news about fake news in politics today, it’s that people have heard a lot about made-up “news” sites, and reputable news outlets have devoted resources to reporting on them. Whatever your political viewpoint, there are plenty of places to go that will scrutinize the other side’s speeches and writings.

But where do you go if you need to scrutinize a thinly-traded or private company in refrigerated freight? Printing? A company that imports socks from Italy or manganese from Africa?

If you care enough, if the issue is valuable to you, you do your own research. Just as in the political realm, you read widely from a variety of sources and make your own decision.

Gray Matter

The problem with any kind of fake news detection comes when what is said is partially true. Neither black nor white, but gray. Evaluating gray takes the kind of gray matter a computer does not offer.

In politics, we see this all the time. President Obama’s promise “If you like your doctor, you can keep your doctor” has been given evolving degrees of truthfulness ratings since the time he said it. Many people have been able to keep their doctors; many have not (absent paying several times what they used to pay).

In business, things are almost always a shade of gray. During due diligence, an interview with a person who has posted an enthusiastic recommendation of a person on LinkedIn can reveal notes of hesitancy or qualification. You can ask questions that relate to matters not covered in the recommendation.

If a company has posted wonderful earnings, in depth analysis of the figures can show you that “wonderful” can mean “better than expected, but not sustainable because the company keeps selling assets to make its numbers.” Interviews can tell you it’s a lousy place to work, which could mean something if it’s a service business and may reflect poorly on the CEO and board.

As we tell our clients all the time, if you are about to hand the keys to a $30 million business to someone, doesn’t it make sense to make a few calls about that person to people not listed as references, and to see if there are jobs not listed on the person’s resume you’re holding?

In the world of due diligence, the most damaging fake news can come from omission — the information that is never written. Our challenge is to find it.

A wonderful piece in the Wall Street Journal here called “The Logic of Our Fear of Flying” does a great job explaining our irrational fear of flying using concepts from math. We all know that our chances of dying in a plane crash are much lower than dying in a car accident, and yet many of us get highly stressed when our plane takes off but think nothing of getting into the car and driving at 60 miles an hour on a crowded freeway. Why?

Mathematician Eugenia Cheng explains this irrationality in three ways.

  1. Conditional probability. Our chances of being in a plane crash are low, but our chances of dying IF we are in a plane crash are high. If our car has an accident it could be a fender bender from which we emerge unharmed thanks to seatbelts and airbags.
  2. Expected values. If you may win a $300 million lottery but there are 300 million tickets sold, your expected value is $1. If you attribute the value of your life as infinity or close to it, loss of that life (despite low chances of it happening aboard your aircraft) still looks like a nearly infinite potential loss.
  3. Rate of change. On a plane you go from feeling very safe (on the ground) to very unsafe (during takeoff, one of two most dangerous times to be on a plane) in the space of a few seconds. The faster the rate of change of the chance of disaster, the more anxious Cheng becomes.

I read this article and thought about another risk assessment problem I talk about when I speak to lawyers and lenders around the country about my book, The Art of Fact Investigation.

It’s the paradox that companies are happy to risk handing millions of dollars a year to a relatively unknown new hire who will run a part of their business worth hundreds of millions of dollars, and that they do this while insisting that to spend more than $2,000 on a background check of that person is too expensive.

Why do people take a chance (that they will lose their company millions) when for a thousand or two they could reduce the chances of disaster?

  1. Conditional probability. As with car accidents, there is low conditional probability that an employee who doesn’t work out is so awful that he takes down the entire company. Hiring an MBA to run your company is not the same thing as hiring a convicted murderer on probation to do any kind of job.
  2. Expected values. If you characterize the downside of a bad hire as a “bad fit” at the job that can be remedied, then you as the hiring decision-maker won’t get as much blame as if you had hired the next Nick Leeson who ruins you and everyone you work with.
  3. Rate of change. When an employee officially “doesn’t work out” it’s usually not a surprise event but a combination of factors that have built over time. Perhaps there has been high turnover of people under that person or a string of underperforming quarters, until the company decides that person doesn’t work. The Nick Leeson rate of change (from hero to zero overnight) is rare.

In mathematical terms, then, skimping on due diligence is explainable.

Still, imagine that for some reason the air crash statistics of individual airlines were not easily available, but for $2,000 every three years you could subscribe to a service that would tell you that Aeroflot crashes a lot more per mile travelled than Qantas.

Flying on Aeroflot is still safer than driving on July 4, but many of us would probably renew our subscriptions.

Any traveler challenged on paying this kind of money for such information would tell you, “I’m just doing my due diligence.”

A story in the Wall Street Journal Google Uses Its Search Engine to Hawk Its Products serves as a useful reminder for something we tell clients all the time: Google is there to make money, and if your ideal search result won’t make them money, you may get a less-than-useful result.

Dollar sign filled with an electronic circuit. Blue background.

Google is an indispensable tool when searching for facts, but Google is not a disinterested party, like a good reference librarian. Google is in business to make money.

The story reports that Google buys some of its own ads, so when you search for a particular thing that Google’s parent company Alphabet sells, guess what? Alphabet’s products have a way of turning out on the top of the list.

One of the first things ever written on this blog more than five years ago was an entry called Google is Not a Substitute for Thinking, and it was one of the most read entries we’ve ever posted.

Among the arguments advanced there as to why a Google search is hardly ever going to suffice in any factual inquiry, we argued that Google’s search results are stacked in favor of the ones that are paid for or that Google judges to be commercially advantageous. A Google entry about a dry cleaner in Joplin, Missouri that has no website would not be very profitable for Google, but if that dry cleaner owes you $50,000, you would want him at the top of page one.

The best way to think about Google is to treat it as a meta-search engine. Imagine not that Google will be able to give you the final answer, but a clue as to where to find the final answer.

If your dry cleaner has no website, Google may point you to a site such as Yelp that rates a different dry cleaner in Joplin. Yelp may then have the dry cleaner you want, but that Yelp listing won’t necessarily come up on Google. Or, you may notice via Google that Joplin or the state of Missouri may require a permit to operate a dry cleaner. Google can help you find where to look up such a permit.

Remember, any dolt at the public library can use Google. It takes a person with the capacity to think creatively to use Google to its greatest potential.

Every day now, we hear about the woes of readers unable to distinguish between “fake news” and real news, as if undependable news reporting is anything new. Readers and fact investigators have always needed to know how to figure out for themselves what to believe and what to question further.

Editor word built with wooden letters

I am proud to have been a journalist for nearly 20 years (The Wall Street Journal, International Herald Tribune, The Economist, NBC and others). Where I worked we always tried to get it right so that nobody could accuse us of putting out something “fake.” But that doesn’t mean we were always right.

As Charles Griffin Intelligence uncovers facts about people we use the media (traditional, electronic and social) as critical elements in building a picture of a person’s life, connections and tendencies. The same goes for reporting on companies that are the subject of our due diligence.

But if everything we needed was in a newspaper, our clients wouldn’t need us. This is not because newspapers try to get it wrong. For a few reasons, the news has always been a “first draft of history”:

  • Newspapers must publish whether they have all the facts nailed down or not. Except for their ads, print newspapers tend to be around the same size every day. That’s not because we have the same amount of interesting news each day but because newsprint costs money. Websites have infinite space but finite budgets to hire writers and editors. Journalists often go with what they know, leave out reporting about critical elements of a story they haven’t nailed down, and hope to be able to fill in the holes in the following days.
  • “Spinning” and outright lying aren’t new. They are as old as time. Good journalists are expected to write stories that quote powerful or knowledgeable people as saying X, when the journalists suspect that the truth is not X. Journalists can’t call those they quote liars without proof, but they still go with the stories. Sometimes they never get to prove that X is wrong. Sometimes, if they believe the truth is X, they don’t try to see if it isn’t.
  • Truth is harder to pin down than we would like. Lots of well accepted scientific “facts” turn out to be incorrect, even without the constraints of deadlines and having to depend on untrustworthy people. Samuel Arbesman’s excellent book, The Half Life of Facts demonstrated how many “facts” cited in scientific journals turn out to be contradicted a short time later.
  • Most importantly, a lot of “fake news” turns out to be founded on impressions and rumors that the writers have not had time to verify before “publishing,” which today can mean “Tweeting.” Some of the bad information of today would have been spiked by good editors, but today the writers and editors are often the same people, and first drafts get published moments after they are written.

The solution? The same things that good editors have done from time immemorial.

  1. Question the source of the story. Has anyone credible verified it? If there are many injured somewhere, can you see whether a police, fire or ambulance source confirms that? We used to need reporters to call the fire department, but today the officials from the fire department often put out statements on the web that anyone can check. Real news stories ought to have confirmations from officials in them.
  2. Is the statement by the official accurately reproduced? Sometimes those publishing items can put words into the mouths of officials to make a statement saying X appear to say Y. if it’s big news, look at the statement for yourself and decide if the reporter was being fair.
  3. If you see the story reported “all over the place,” is the source the same for all the of hits on Google? 18 entries quoting the same source is no more comforting than a single source. A one-source file at a wire service once supposedly provoked the famous cable from the desk back to the field: “You alarmingly alone on this.”
  4. If the story depends on public records, can you find the public record to see for yourself? If “court documents” indicate something, you should be able to see the court documents. If they are the basis of a story on line, they should be reproduced so that readers can judge for themselves whether the documents have been reported accurately.

All this verification is to combat what I like to call “paint by numbers” investigation. When you see a paint by numbers book, you have limited ability to question the “truth” of what you are seeing. You can change the colors in the book, but the forms and relationships in the picture are fixed.

Painting by numbers is for children. Adults should look at the picture a news story paints, break it down to its elements, and assess it all with as fresh an eye as possible.

This blog may be one of the few publications in the Western world that has never written the word “Kardashian,” but that has now changed. In the stories about the robbery in Paris of Kim Kardashian we found numerous issues that touch on the work we do.Kardashian Paris Investigation

After my recent book The Art of Fact Investigation came out in May, a number of people wrote to me and suggested another chapter in the next edition about what people could do to maintain privacy in the face some who may want to dig up facts on them.

The easy advice for Kim Kardashian-West: if you are on social media a lot with information about valuable possessions and your whereabouts, criminals will easily learn about your valuable possessions and your whereabouts. Big rings on Instagram? Not a good idea. The super-secret apartment hotel in Paris? With paparazzi following you everywhere, how secret is any place you go?

The harder advice both to accept and to act on relates to some speculation in the media that the crime was an inside job, because the thieves knew that Kardashian’s security guard was not on duty that night.

When we let others into our homes and into our lives, there is always the chance that one of those people may feed information to the outside. This is why many people like a preliminary background check of the electrician or plumber they are about to admit into their home. They like a more thorough look at someone who will watch their children. But Kardashian-West isn’t just dealing with plumbers and babysitters.

How many photographs are there of her bringing home groceries, for example? She eats therefore food is delivered by people. When she buys something large, that too is delivered. It is unlikely that she drives her car to Jiffy Lube when it’s time for an oil change. People drive for her.

We have written before about the value of talking to workers who have been in someone’s home. Movers, gardeners, handymen – all get to know the home to an extent and the people who work there. If one of them becomes estranged because they are fired or are not paid, they have every incentive to talk about the person they used to serve.

We are not saying that Kardashian-West has been betrayed by any of her staff. Only that when police found out that the bodyguard was off duty that night, they surely wanted to know: who else knew that? And they would have started the questioning close to home.

When your defense is that the law allows you to publish garbage without fear of prosecution, one takeaway is simple: the internet is filled with garbage that needs to be well verified before you rely on it.Internet searching

This blog thinks the Ninth Circuit got it right in exonerating Yelp this week from the lawsuit by a small business that was incorrectly identified in a negative Yelp ad. The decision is here.

While we feel terribly for the locksmith whose business was tarred with a brutally negative review that Yelp erroneously attached to his business, it seems clear that the court was right in deciding that Yelp was protected from prosecution by the federal Communications Decency Act.

The reasoning in Congress for this and other laws that grant safe harbor to internet facilitators of exchanges (of opinions, goods or anything else) is that if the internet sites were to be held liable for the contents of what they were portraying, the industry would shut down or need to charge a lot of money to compensate them for the risk.

As fact finders, we think the Yelp case is a handy example of why just about anything on line should be verified if you intend to make any kind of important decision based on what you read.

We recently had a case in which a negative review of a doctor became relevant in a malpractice case. Question one to us was: is this reviewer a real person and if so who is she? Based on her Yelp handle and city we managed to find her and to take a statement from her that turned out to be even more valuable than what she had posted on Yelp.

But what if “she” had turned out to be a competitor, an embittered but deranged former patient, or just a crank?

This is the not the first time we’ve written about this. In The Spokeo Lawsuit: Databases are Riddled with Errors we discussed a database that spits out some free information but then asks you to pay for more (often inaccurate) information.

As we tell our clients all the time (and as I’ve written in my book, The Art of Fact Investigation), even the most expensive databases confuse people with similar names, leave out key information such as where a person really lives or works, and are mostly hopeless with linking people and their shell companies.

The internet is a wonderful, useful and time-saving place, but there is no substitute for a good critical mind to sort investigative gold from the masses of garbage you find there.