The Ethical Investigator

For expert witnesses, websites abound that help to connect a particular specialty with the trial attorneys who may need someone to speak about pediatric cardiology, warning labels, or the particulars of earthquake insurance.

Fewer in number are the people who can help sort through the experts’ backgrounds – people who can help prevent an unanticipated attack on the credibility of the expert witness.

Imagine this nightmare: from an ocean of choices, you find the expert who comes well recommended after a small number of successful appearances. He seems terrific and you’ve decided to depend on him heavily. Once his report is in, you find out that he left an academic post nine years ago under a bit of a cloud. Last year, he and his engineering partners experienced a messy business divorce, and allegations of trade-secret theft were exchanged.

This sort of information surprise happens more often than we like to think – the assumption that because someone is already employed by you or has been used successfully by someone else – that he has been properly checked out. We wrote about this issue in our post Due Diligence for Current Employees.

What to do with this news about your expert?  Neither problematic item was on your expert’s resume, but the other side may get wind of this information. Only when you know what they may know will you be able to anticipate fully the questions that will follow.

Good due diligence takes time, even self-due diligence. A quick Google search on your own name won’t cut it, as we’ve outlined in our post, A Fact Finding Test for Lawyers.

Ask yourself if you’re an expert:  What controversial cases are in your past that could be seized on and used by the other side against you? Is there anything else in your past you would find a little awkward to talk about? If it’s findable through public records or interviews (and if the stakes are high enough), the other side may uncover it. We provided a look at how much there is to find on people in public records in our post Scratching the Surface.

What follows is an incomplete but still useful starting point for thinking about potential problems in an expert’s past, especially those that won’t jump out at us with a quick and dirty search for a criminal record.

• Resumes. These can be fiddled with when people stretch dates of previous jobs. The resume indicates a job starting a couple of months earlier than it really did – just long enough to conceal the job held for a couple of months that ended in a quietly-arranged departure to avoid unpleasantness. You want to know what that unpleasantness was.
• Litigation in a place lived in long ago. You have a New York-based expert who tends to restrict work to the Northeastern U.S. But ten years ago he spent eight months in Dallas. A good background check would look at upper and lower court records in Dallas County and perhaps adjoining counties if  he lived or worked in any of those. On line searches won’t suffice, because most of the public record is not memorialized on line.
• Difficulties with co-workers or colleagues. Much of this kind of thing never makes it on to the public record, but background interviews can turn over good information. Some of the best interviews come with people not offered as references and who may have worked with your expert at a company or institution not listed on the resume.
• Conflicts with other experts in the field. Were there debates at conferences, tiffs in journals or other kinds of conflicts with other experts in the field?

Remember this basic principle of sound due diligence: if you don’t know who did the report and how it was done, assume the worst – that no report was done at all.

Investigators are often asked to track people down—for instance, we are sometimes asked to find former employees of a company who might be witnesses in litigation.  In some cases, we don’t know who we’re looking for exactly, but we know where they worked, or we have an old address.  These assignments can be time-consuming, but clients are often sympathetic because they realize the challenges involved in tracking down a person whose name remains unknown. 

But even having a person’s name does not guarantee smooth sailing.  For instance, tracking down a man with a common name like Bob Smith is far from easy. Sure, it helps if we know more information—like that Mr. Smith lived in Atlanta between 2005-2007, and that he worked as an auto mechanic. But that still requires a bit of effort to find just the right person and not someone else who, coincidentally, has the same name and the same personal details. The world is really far smaller than we often realize.

A good investigation begins with the information the client has provided, but it certainly does not end there. In cases where an investigation fails to yield any viable results, among the first steps is to challenge the information given.  After all, as we said in our article for InsideCounsel, "5 Tips When Searching for Assets," you don’t know what you don’t know. 

For a person search, this might mean questioning the name provided.  There are enough variations in names to allow for numerous other search terms that might be more fruitful. Sure, Mr. Smith may be known as Bob to his friends, but what if he appears as Robert M. Smith in database records? What if his last name is actually spelled Smyth? What if Bob is short for his middle name, and his legal name is actually Thomas Roberto Smith?

Below are a few suggestions for alternative search terms when investigating an individual by name:

•  First name:
  • Is it a nickname? What is the formal name?
  • Is the first name spelled properly? Are there alternative spellings? Is it a name that is frequently misspelled or mistaken for another?
  • Could the name used as a first name actually be a middle name?
• Middle name:
  • Is there one? Is it used as a first name?
  • Was the full name searched with and without middle initial?
• Last name:
  • Is it spelled properly? Search variations of the spelling, including phonetic spellings.
  • Sometimes database entries inverse names, especially if the last name is also sometimes used as a first name (so Thomas Connor could be entered as Connor Thomas). This is especially true for Asian names. In those cases, search with the first name last and the last name first.  
  • For married men and women, search using their maiden name and their spouse’s last name as well, whether it was legally changed after marriage or not. Don’t assume this is only relevant for women—we recently had a client with a federal lien against him but he hadn’t been properly notified because the documents were under his estranged wife’s maiden name and he was erroneously believed to have the same last name as her.
  • If the last name is hyphenated or if there are two last names, run searches with each name separately, and with both names together.  Also, searches with the names inverted and with and without hyphens. 

Some of these searches might seem redundant, but remember that databases are quirky: A slight tweak can make the difference between the hit you need or no hit at all. 

If there are still no hits, you can start combining some of these variations for the different names with each other and see if that helps.

• For example, for Bob Smith, search for Robert Smyth, or for Bob Smyth.  If he has a middle initial M, run a search for Bob M. Smith and Bob M. Smyth, as well as Robert M. Smith, and Robert M. Smyth. Also consider searching for Robby Smith/Smyth and Roberto Smith/Smyth with and with the M. middle initial.

Clients are often surprised to learn how much corporate information is on the public record.  Of course, public companies are forced to disclose a lot more data than private ones, but it's still possible to learn about private companies using smart and thorough public records searches. 

And there’s more to learn than just what assets a company holds.  For example, determining what the organizational chart is at a corporation, including who reported to whom and on what projects they collaborated may help an attorney trying to create a witness list for a case.  A law firm doing due diligence for an acquisition may want to know if a company has been sued, and by whom.  They will also want to hear what current and former company insiders have to say about the company’s ins and outs.  A non-profit  interested in naming a corporate executive to its board of directors may want to make sure that the company the executive works at doesn’t have any skeletons in its closet in the form of embarrassing litigation, financial irregularities or regulatory failures. 

So what can a client expect from a public records search for a corporation? Below is a list of just some of the available information:

• Secretary of State corporation records: Corporate record filings from individual Secretary of State offices will sometimes include information on where the company was originally registered, the names and addresses affiliated with the company, including any parent company or any other companies doing business under different names (knows as “DBAs” for “Doing Business As”).  These records will indicate if the company is still in good standing in the state, having paid all the necessary fees and provided updated copies of appropriate paperwork, perhaps including any important changes in leadership.  Public records of the state where a company is doing business will help identify where it was originally registered.  Incorporation records are often publically available for a small fee and detail the company’s original structure and its key players. 
• Real property records:  A search of property records (usually at the county level) using the corporation’s official name, or, if relevant, any of its DBAs, may help determine the corporation’s real property.  In addition, property records usually detail mortgages and whether there are any liens pending.
• Personal property rolls: Some state and local governments tax businesses on their personal property, requiring corporations to declare their assets to determine how much they owe.  In some cases, these financial records are publically available.  
• UCCs: Companies file Uniform Commercial Code (UCC) records when they enter into a secured borrowing transaction with another company or an individual.  The records detail the transaction, including what the borrower declared as collateral.  This information may help determine what assets a company holds.  UCCs are filed at the state and local levels.
• Intellectual property: The U.S. Trademark and Patent Office databases detail any trademarks and patents a company has filed with the federal government.  In addition, company copyrights can be searched via the U.S. Copyright Office databases.
• Securities and Exchange Commission filings: If the company is a public company, SEC filings will provide information on the company’s financials, as well as any accounting issues or regulatory concerns that have to be addressed or explained.  Also, records may list current or former employees, executives or board members worth interviewing.
• Litigation: There should be a criminal and civil litigation search on the federal level, as well as any state where the company does business. Such searches may be time consuming if the company has various locations, but it is worth being thorough.  Litigation searches will also help expose if there are any judgments against the company, and trial records may help uncover individuals at odds with the company who may be willing to shed light on any potentially damaging company information.  They could be former employees or simply adversaries whose litigation uncovered important company information.  In many cases, we also find it helpful to search lower courts as well at the county or city levels.
• Former employees: Former employees of a corporation are often worth interviewing.  Some databases provide names of all employees their records indicate are somehow affiliated with a particular company.  The results may require some culling, but better too much than too little.
• Media searches: Learning what sort of press coverage a company has received is invaluable.  Any press coverage that ranks the corporation in relation to its competitors may prove helpful in anticipating problems or concerns.  Pay close attention to how the company’s financial standing is represented in the press—whether these analyses are correct or not, public perception of a company is valuable information. Similarly, it is important to review local press coverage of the city and state where a company is based or headquartered.  Local coverage can be a lot more thorough, and in some cases, more critical than national coverage.  Furthermore, any articles that quote company employees and executives, or press releases about the company may provide leads on people worth tracking down to learn more about the company’s inner workings.
• Regulatory and licensing records:  If a company is in a business regulated by the state or federal government (or even a municipal government), the inspection certificates and any records of regulatory violations may be available to the public.  This could entail filing a Freedom of Information request on the state and federal level, which may be time-consuming, but helpful nonetheless.
• Fire inspection records: City governments may have on file fire inspection certificates detailing when a company was last inspected and whether any fire code regulations were found.  
• Political contributions: While corporate political contributions are not always transparent, at a bare minimum contribution search engines may provide information on the politicians and causes companies have supported.
• Security/Terrorism sanctions: Make sure to run all the company names through the U.S. Treasury’s Office of Foreign Assets Control list, as well as Interpol, the International Financial Action Task Force and UN Sanctions lists.

We have had a number of recent cases involving foreign companies who entered into large-scale sale agreements with American-based corporations.  These companies are run by sophisticated, experienced executives. In most instances, the agreements were for millions of dollars’ worth of merchandise. 

Both sides hired attorneys who scrutinized the proposed contracts.  They carefully considered payment and delivery plans, including letters of credit.  They haggled over details, negotiated changes and agreed upon final terms. Soon after, they signed and executed the contracts. 

Yet, despite all these efforts, the Americans swindled the foreign companies. 

Those letters of credit that were supposed to provide so much protection and peace of mind? Well, they were useless. 

It turns out the Americans conned the banks as well.  The foreigners had to sue for payment or the return of goods, sometimes both in their home country and in the United States.  Despite prevailing in court, their wins were cold comfort.  As litigators know all too well, having a judgment and collecting on a judgment are two very different things.  The U.S. courts agreed that they had been deceived, but these foreign companies were unable to collect the money or merchandise that was rightfully theirs.  In more than one instance, the Americans declared bankruptcy and the foreign company found itself in the unenviable position of trying to recover from a bankrupt debtor.

This is where we were brought in.  The foreign company’s American lawyers retained us to assist in those collection efforts. In some cases we were asked to uncover any hidden assets. In the cases where the Americans had declared bankruptcy, we were asked to help determine if the foreign companies could build a case of fraudulent conveyance against the debtor.

What we discovered stunned us. 

A cursory review of the public record on these American business partners pulled up a number of red flags. Not just little warning signs or judgment calls, but big, flaming, impossible to deny red flags. 

It was a greatest hits of warning signs:

• Bankruptcies;
• Houses in foreclosure;
• State and federal tax liens;
• Numerous dummy corporations;
• Litigation. Lots and lots of litigation.

This litigation was the most damning.  These businesses had repeatedly been sued for defaulting on contracts. 

And our clients knew nothing about these lawsuits, or anything else that was easily accessible in the public record, before they brokered their deals.  It is unclear to us exactly what due diligence practices they’d initially had in place, if any.  Maybe these foreign companies did a thorough public records search in their own country while failing to take into consideration any charges that might be pending in the company’s home country.  Maybe they were satisfied by the personal assurances of their peers that these foreign businesses were safe and reliable.  Maybe they figured the letters of credit provided enough protection.  

Whatever they had done, it had not been enough. 

A cursory investigation of the American records alone would have justified refusing to enter into any agreements whatsoever. These American companies clearly couldn’t be trusted to sell a stick of gum, never mind millions of dollars’ worth of merchandise. 

We’ve seen it before.  Businesses take the time and money to hire sharp lawyers to craft tightly-worded contracts.  They hire tough litigators and investigators to help sue swindlers and try to collect on judgments.  But the most important step of all—due diligence before the transaction—is woefully inadequate.  And this simply can’t be fixed after the fact. 

Do it right the first time or suffer the consequences. 

When brokering a business deal, be it with a domestic or a foreign company, thorough due diligence is a must: 

• Public Records: Look at the public records of the countries in which the company is based as well as where it does most of its business; 
• Other Companies: See what other companies the executives are affiliated with;
• Litigation: Investigate who they have sued or been sued by;
• More Litigation: Obtain copies of the litigation documents to get all the necessary details. 

Clients may balk at the time and money this requires, but this is about more than peace of mind. This is good business sense:  It is far easier to prevent a bad business deal than it is to get a con artist to pay you what is rightfully yours.

Adam Davidson recently wrote "Making Choices in the Age of Information Overload," for the New York Times magazine where he explained how consumer choices have changed in the Information Age.  With so much data about a potential purchase—from price comparisons to reviews by ostensibly objective consumers—we are drowning in a sea of information.  Consumers often feel overwhelmed by the mounds of data they have to sift through. This would be the proverbial “information overload” we assume is unique to our information age, but which media historians point out has been a constant throughout media revolutions. 

Does all this information help shape our choices? Well, not really. 

Davidson explains that in order to make a decision, consumers routinely tune out all this noise and instead rely on “signals”—cues that companies use to indicate their market prowess—to make their decisions.  For example, endorsements by high-profile celebrities send the subconscious signal that the product must be in high demand because otherwise the company wouldn’t be able to pay the celebrity’s hefty endorsement fee. 

As business Professor Hemant Bhargava explains in the article, if you don’t have the time to research a product or just can’t make heads or tails of all the information you can find out about it online, then you can set all that aside and trust the product’s signals instead.  

In other words, consumers aren’t drowning in information overload because they’ve found a way of effectively and efficiently filtering out the information they don’t need.  As media analyst Brian Solis of Altimeter Group recently explained in his blog, information overload is a fallacy.  That feeling of being overwhelmed by information is nothing more than a failure to filter, an unwillingness to really focus on what’s important. We all have the ability to filter out the information we don’t need and instead focus on what’s most significant to us before making a decision.  

This is certainly the case in fact investigation.  The odds are that if a client has hired an investigator, then the information they need is not readily available, or there is too much information and they don't have the time or expertise to sift through it all.  Sometimes our searches lead us to scores of facts that we then have to analyze. Sometimes the facts don’t provide us with what we need, but they get us close. Other times we uncover information we weren’t expecting, but that after more digging turns out to be useful to our client nonetheless.  The process is not linear, and it’s often more time-consuming than our client anticipated.  

We have an obligation to work as efficiently as possible, and the right filters ensure maximum efficiency. 

For example, we recently did an asset search on a man who had declared bankruptcy but who we had reason to believe might have hidden assets.  At first glance, there weren’t that many facts to sort through:  The man had been savvy enough to avoid hiding assets in his name or via the various corporations he ran.  But there was no shortage of people associated with him.  This man had a number of relatives and associates he’d been in business with throughout the years.  Might he be hiding any assets through them?  Investigations of his family and his most recent business partners were fruitless.  So then we investigated the spouses of his ex-partners.  Sure enough, the wife of his most recent partner had incorporated a business less than a month after the partners had shut down their latest venture.  And our guy was linked to the business via a trademark application filed by the new company.  In this instance, filtering through the dozens of people linked to this man had yielded just the sort of information our client was looking for.

The next time you feel like you’re drowning in a sea of data, remember, there is no information overload.  As an investigator it’s all about coming up with the right filter.  Take a step back and make sure you have the correct filters in place.  With creativity, experience, and trial and error, it’s possible to dig out from underneath all that data and find the information your client needs.

There are plenty of excited articles around these days about the new JOBS (Jumpstart Our Business Startups ) Act and the effect this new law will have on the marketing of hedge funds. In brief, it’s now going to be easier for hedge funds to market themselves to the general public. If previously hedge funds ever thought of running ads on TV or radio, or writting guest promos on blogs and social media, they would have been restricted by a legal prohibition against such things. The JOBS Act changes that.

Another big change is that hedge funds, rather than having to collect only really large sums of money from wealthy people, will now be able to raise up to $1 million a year in small amounts from people not previously allowed to invest in such vehicles. Remember all the complaining that only the really rich had access to the elite performance hedge funds were able to provide? That protected a lot of little people from Bernie Madoff, but never mind – now the little people will have the same chance as everyone else to make a lot of money or, if not hand it to a criminal, invest with someone who won’t deserve the huge fees he will be charging.

Now say you are thinking of putting money in a hedge fund, or are given the task of checking out a prospective hedge fund for your client. The hedge fund has been around for three years and has pretty good returns. What else should you look at?  We’ve written in "Allen Stanford: Persistent Due Diligence Could Have Made a Difference" about the huge red flags Allen Stanford had flying if investors had just cared to look. Bernie Madoff, aside from his tiny auditor, declared with the SEC just a fraction of the stocks under management he was supposed to have had.

In the interest of avoiding such disasters in future, here for starters are some of the questions would recommend:

• What funds did the principals run before? Hedge funds can (and often do) close up shop when they don’t do well. They return money to investors and dissolve. But what about the managers of those poorly-performing funds? It’s accepted practice in the world of hedge funds that managers of failed funds get new investors and open new funds under a different name. Is your manager one of those on the rebound?

• What were the circumstances that caused the old fund to close? Was it the retirement of the manager’s partner, or just sub-par returns? If unclear on this, are there any former employees or investors we could talk to in order to find out what really happened?

• Beyond previous fund experience, have the managers ever been subject to regulatory sanctions? Have they ever been sued by investors or anyone else? If the answer to the lawsuit question is “yes, but the legal matter settled,” we would advise that you retrieve the court documents (manually is usually the way we usually do this, not on line) and then read the allegations made against your manager.

• Finally, you want to make sure the fund is registered where it says it is and the principals are really the people as represented. We’ve written before in "Prevent Corporate Identity Theft: A Consumer's Checklist" about preventing corporate identity fraud, and now that hedge funds can advertise you want to be especially careful that the address to which you send your money corresponds to the one in official records.

Will all of this take a little bit of time? Sure. But given that some people agonize for a year about which kind of luxury car to buy, it makes no sense to us that cocktail party chatter alone should be the basis for an investment worth several Porsches.

Due diligence isn’t as much as fun as the Porsche showroom, but failure to do it right could mean a downshift to a Hyundai when you least expect it.

One of our most closely-guarded pieces of personal information, we nonetheless are obliged to divulge our Social Security numbers several times a year. You want a job? Hand it over.

A client once approached us to see whether we could run a quick background check on domestic helper he was thinking of employing. She cheerfully offered references, photocopies of a foreign passport and green card, plus a social security number. Our conclusion after about an hour? Her SSN was probably faked, and her green card probably was too.

How did we know without picking up a phone or looking at the document? Anyone with a SSN issued after June 25 of last year got a randomized number. There’s no way for us to tell on our own whether it’s valid or where it was issued. Employers who want to find out if a prospective worker has a real SSN need to use the Social Security Number Verification Service here. You need to register, and there’s a time lag.

What’s nice for anyone else looking at SSN’s issued before June 25 of last year (as our subject’s supposedly was) is that there used to be a system employed in issuing the numbers that could be helpful in figuring out where a person may have lived and when the number was issued.

The first three numbers related to which state the number was issued in. We often find it helpful to know that if someone we’re investigating claims to have lived his entire professional life in New York, his SSN issued in Michigan or Texas gives us a clue that for a time, anyway, he was outside of New York. For someone born in the U.S. that may just mean that he was with his family for a year when he was 12.

But for a person who grew up abroad and got a SSN when he was 35, it’s nice to know where he was when he got that number. For one thing, when checking for a criminal record you get a second state to look at since there is no such thing as a single, national criminal records check available to people outside of law enforcement.

The second two numbers of the SSN are called the series number, and we use these to figure out when the card issued. This was also how we figured our domestic helper was probably faking. The series numbers were not issued sequentially, but were issued according to a known system. If you know the system and when someone’s number was issued you can see whether the number matches the real SSN series issued in that month for that state prefix. Just check the “high number” list).

In the case of our domestic helper, she had a number that should have been issued several years earlier than her arrival in the U.S. Our theory was that she copied part of the legitimate number of a relative who had a good SSN, but that relative had been in the U.S. a lot longer.

Former Goldman Sachs employee Greg Smith caused quite a stir when he took to the New York Times op-ed page to explain why he was leaving Goldman Sachs after 12 years. Smith, who the Times identified as a London-based executive director for Goldman heading the firm’s United States equity derivatives business in Europe, the Middle East and Africa, described a company where senior employees disparage clients as “muppets” and where workers push deals irrespective of their clients’ needs or wishes.  It was this wanton disregard and disrespect for clients that finally led him to leave Goldman, he wrote, inspiring his explosive good-bye letter. (By noon on the day the op-ed was published, Goldman Sach’s stock had fallen over 3%.  Financial shares on the S&P 500 fell over half a percent).   

Smith reminds us that if you want to really know how a company or an organization functions from the inside, it’s worth taking the time to track down and carefully interview former employees.  Sure, a current insider would be preferable, but with any mole, the odds of convincing them to tell you all they know are slim.  After all, they still work there, and they have to make sure to protect their identity while guarding their interests.  Former employees have fewer such fears.  Like Smith, former employees can be outspoken because they are no longer beholden to the organization, or because they no longer fear being fired for their candor. 

And senior-level former employees are not the only ones worth tracking down.  The day the op-ed was published, some in the business press alleged that Smith was just a disgruntled low-level employee, resentful perhaps about how little he’d moved up during his tenure at Goldman, here and here. 

Certainly it’s always important to assess whether an employee has genuine information or just an axe to grind, but just because an employee is low on the totem pole doesn't mean that their insight into the company is any less valuable. 

Lower-level employees may still know the key players in an organization and how decisions are made.  They also have personal insight on a company’s corporate culture and how former co-workers were perceived.  And while they may not have been leading the meetings or writing the emails that conveyed sensitive information, they may still have been in attendance, or received copies of those messages. 

An employee's low stature in the company food chain is not a reason to discredit what they say altogether—it is just something to factor in when weighing how much credence to give the information or opinion they offer.  

If you’ve ever had to hire people, you know what a tough job that is. You know that you are making a decision that will have a profound impact on a number of people—not only on yourself and whoever you choose, but also on everyone in your company or organization that will have to collaborate with that individual.  It can be a daunting experience.  And while it’s a great feeling when you find someone who turns out to be a good fit and a real asset to your organization, it feels just awful to realize that you’ve hired someone who is a big disappointment.  And a bad fit can be bad for business, because someone who doesn’t mesh with your corporate culture can keep your company from moving forward.

Experienced entrepreneurs know this.  Business people who’ve been around the block a couple of times know that success is contingent not only on a steady flow of capital or high profits, but also on the people they have working at their side.  The New York Times recently chronicled entrepreneurs who are lured back to buying their old companies.  Most decided to dive back into familiar waters out of boredom, or because they wanted to get back in the game and they thought the reacquisition of their old firm made good business sense. 

But whatever their motivation, all of the executives chronicled pointed out the same thing: in large part they were able to successfully re-launch their old companies because they were able to reassemble the same management team they’d had before.  As one business analyst explained, next to having enough financing for their new/old ventures, keeping the experienced management team in place increased the odds that the buyback would thrive.   Hiring matters.   An idea and money will only take you so far without the right people to transform the illusion into a reality.  Knowing that a team works well together and has done so successfully in the past is, as they say, priceless. 

Hiring well is as much of an art as it is a science. It requires due diligence that isn’t afraid to ask tough questions or uncover information that might be uncomfortable to discuss.  And this means probing deeper than whether or not someone has lied on their resume.

It also means calling up ex-coworkers or former bosses and finding out just what someone is like to work with.  This is more than just the proverbial, Do they play well with others?  As experienced entrepreneurs know, a co-worker with an attitude problem can be a drain on a firm, and can keep a team from making strides together.  So you have to ask if your potential hire is a good collaborator.   How do they handle adversity—is their instinct to overcome challenges or to buckle under them? Are they optimists or pessimists? Are they whiners? Are they part of the problem or part of the solution? 

Sure, you may get glimpses of this attitude check from an interview, or from a good letter of reference.  But the real nitty gritty information, what will make a difference at a company day-in day-out, is the sort of information that only an experienced interviewer can acquire from the people who know best.  

The Allen Stanford alleged Ponzi scheme case is currently before the courts after years of delays.  We are finally getting to hear from witnesses and co-conspirators about what they say were the lengths undertaken to defraud Stanford’s investors.  Given the magnitude of the alleged $7 billion fraud, it would be no surprise if Stanford had elaborate mechanisms in place to ensure that his scheme remained undetected.  But no matter how sophisticated any attempts at subterfuge, a basic public records search should have been sufficient to uncover enough red flags to send investors running for the hills. 

For instance, several witnesses have testified that Stanford knew that prospective investors would want assurances that his banks were properly insured.  These former co-workers allege that, perhaps concerned about being subject to a legitimate insurance company’s rigorous due diligence, Stanford created a shell insurance company.  They explained that Stanford based his mythical company in London, and gave it an appropriately self-important moniker, the British Insurance Fund Ltd.  This was back in the early 1990s, when folks didn’t have access to the Internet and Google wasn’t even invented.  So, when a conscientious prospective client requested confirmation of the insurance company’s coverage, Stanford is alleged to have gone so far as to fly his CFO from Texas to London to keep up the ruse.  Once there, his colleague faxed the prospective client a fake confirmation from an empty office in London outfitted with little more than a fax machine for that very purpose. 

It’s unclear if this was enough to answer any concerns that unwitting prospective client may have had.  It’s easy to imagine, though, that with that fax in hand he could now invest in confidence that he had done his due diligence. 

But had he really done enough?  You can’t assume that because one item on your due diligence to-do list has been properly satisfied—Insurance Confirmation, check!—that you can go easy on the other items on that hypothetical to-do list.  You don’t stop just because you got good news.  You have to keep digging around, rigorously pursuing additional information, because regardless of what you’ve affirmed so far, you never know what you will find. 

For instance, although Stanford may allegedly have had an elaborate charade in place to trick customers into believing he was adequately insured, what he couldn’t hide was the fact that as far back as 1990 he had been in serious trouble with the IRS.  According to a 1997 Tax Court case, he had been assessed an eye-popping deficiency of $497,000. Certainly uncovering that the sole owner of a bank you are considering investing in is in tax trouble is a red flag for any prospective investor.

But that’s not all.  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. FINRA saw fit to list an extensive group of companies owned by Allen Stanford, including Stanford Group (Antigua) Ltd.

In addition, a former employee of Stanford’s, Lawrence de Maria, alleged in an April 2006 complaint in Florida state court that Stanford was operating a Ponzi scheme. 

And all that was needed to uncover this information was an unwillingness to stop digging.  

What’s the difference between a forensic audit and a regular audit? We think we know the difference when we see it, but what is it?  The issue came up before a short talk I was giving to some accountants last week, and the answer was relevant to our fact-finding business.

A regular audit is not comprehensive. It doesn’t presume there’s something wrong and it doesn’t even look at every supporting document in a company’s accounts. If it did, annually auditing an entire large company would be impossible.

A forensic auditor goes in with the presumption that something may be wrong, and decides to leave nothing unexamined on the hunch that there is fraud in a particular department or company line of business.

The distinction holds for many other kinds of investigations. You can do the once-over-lightly check for criminal history and check references given, or you can decide to turn over every court case involving your subject, check for side companies at every address he’s had in the past five years, and perhaps talk to everyone he’s sued or been sued by – ever.

That’s what we would call a forensic investigation. If the New York State Society of CPAs says that a forensic accountant “prepares each case as if it will result in litigation in the future,” that is the approach a good investigator should take too. Gather facts, but do it meticulously so that you can back up your findings if anything goes to court. And whatever you do, don’t break the law or violate ethical rules when you gather your facts, because a fact that’s not admissible as evidence may turn out to be useless to your client.

How could this distinction work in practice? A normal “investigation” could turn up five court cases in Jefferson County. An investigator could report that none of them were criminal matters and had all settled. We’ve seen reports that really say this, and they are often not worth the paper they are written on.

What you should ask when you hire a fact finder is not for reports of settled cases, but a summary of what was in the papers filed in court. What were the allegations against the person? What kind of evidence was on the public record? And (probably only available by interviews), what were the terms of the settlement?

When it comes to due diligence on a prospective CEO or investment partner, regular background checks verify employment, education and call the places on the resume to make sure the person worked there.

Forensic due diligence looks for the places the person worked that are NOT on the resume (Fired? Quit to avoid being fired?) and the people not listed as references (“Everyone thought he was lazy and were happy when he left.”)

It’s not that a forensic investigator presumes that everyone he looks at is hiding something bad. But if they are, he has a much better chance of finding it than someone using the approach of once-over-lightly.

A thought-provoking column in the Wall Street Journal here that argues in favor of routine changes of auditors got me thinking.

If we should change our auditors on the grounds that they get too close to us and are afraid to displease us for fear of losing our business, why shouldn’t the same thing apply to other professionals we hire over long periods? Say, financial advisors and even lawyers?

The case for firing auditors is that even though companies hire them and are responsible for paying them, auditors are really there to deliver what can often be “bad news” to company management keen to suppress unpleasant facts from public view. When bad decisions get translated from company spreadsheets into annual reports, bonuses get cut and executives get fired.

So instead of giving independent advice, auditors work for the same company for so long that they end up being “co-dependent,” says the Journal’s Jason Zweig.

Would that ever affect a lawyer or a financial advisor? At least with financial advisors, there are independent benchmarks that can compare your investment returns to those of similarly placed individuals. You can see whether or not your annual fee helps you beat an index, and you can shop around to see if your advisor’s fee is excessive.

What about lawyers? They are bound to a code of ethics, but so are accountants. Lawyers can’t just ignore wrongdoing, but accountants too are supposed to blow the whistle on that kind of thing. The problem arises in life’s hundreds of shades of gray, between best possible behavior and reportable criminal activity.

Many a lawyer reading this can easily recall putting down the phone after an uncomfortable call with a major client who has just instructed that lawyer to do something that gives the lawyer pause. The lawyer might think to himself: “Is it ethical to do this?” but then go ahead and do it anyway. If it just passes the smell test, how many lawyers tell their clients they are treading a very fine line? We hope some, but does yours?

Changing auditors can be a real pain, which is why companies don’t like to do it. Barriers to entry can be high because there are only four big firms to service the world’s largest companies, and because it can take a new audit team a long time to get up to speed on a complex set of accounts.

That can be true of personal investment portfolios and legal issues, but often a lawyer is not tasked with taking care of every aspect of a company’s or individual’s set of legal issues.

So if you don’t feel like firing your longtime attorney or other professional, at least do what you might with your trusted physician. Get the occasional second opinion.

Federal District Court Judge Jed Rakoff shook up the securities bar with his widely reported rejection of a settlement between the Securities and Exchange Commission and Citigroup. The decision and order has thrown into turmoil decades of what Judge Rakoff sees as shoddy enforcement practice. It’s nicely laid out on the PorterWright Federal Securities blog, here.

This blog takes no position on what Citigroup did or how good the SEC is at doing its job, but we do applaud Judge Rakoff for helping to illustrate the point that most settlements don’t tend to shed very much light on what actually happened prior to the commencement of litigation. 

That’s important, because when investigating a person or company, the overwhelming majority of legal actions end in settlement. You can almost never tell from the documents whether:

1)  The complaint was overreaching and the complainant settled for peanuts;

2)  The complaint was well founded and the respondent forked over a boatload of cash because he was going to lose anyway, and saw no point in paying a lawyer through a long trial to come to the same result, or;

3) Something in between.

How do you find out what happened before the litigation occurred and in the negotiations leading up to a settlement? It’s hard work, and always involves interviewing people. What it cannot involve, all on its own, is looking at the court documents. Those usually just say “Dismissed with prejudice.”

What was said during depositions leading up to the settlement? You won’t find that on PACER. Who got fired as a result of the lawsuit and would be willing to talk about what happened in the days or years leading up to the lawsuit? Look all you want in the court documents – it won’t be there.

Prospective clients sometimes wonder why in the age of the internet background checks can’t just cost $300. One reason is that any robot can find a federal court document that says “dismissed with prejudice.” But it takes a professional’s time to look behind those documents and to analyze dozens of moving parts to find out what probably led to the settlement.

Now that Steve Jobs is gone, attention turns to Apple’s Board of Directors (1), a group that’s been criticized in the past for being too deferential to Jobs, as made clear in this Wall Street Journal Story.

Steve Jobs was a business genius, but are these directors good at doing their jobs to inform shareholders and stand up to a strong CEO if necessary, or are they the kind that like to take a fee and then not do as much directing as they should? Remember, many great and famous people were on the Board of Enron. They sat on the board during that company’s Apple phase of being among the world’s growth leaders, but also during its implosion.

What boards do Apple’s directors sit on in addition to Apple’s? Are they as hands-off with those other companies as they are reportedly were with Jobs? Are they too distracted by their primary distinguished careers to do a hands-on job at Apple? These are questions worth asking if you’re thinking of putting them on your board, or if you’ve invested in a company they direct that isn’t blessed with a CEO of Jobs-like vision.

(1) Apple’s independent directors are:

William V. Campbell is the Chairman of Intuit, Millard Drexler, Chairman and CEO of J. Crew; Al Gore, former U.S. Vice President; Andrea Jung, CEO of Avon Products; Arthur Levinson, former chairman and CEO of Genentech; Ronald D. Sugar, former chairman and CEO of Northrop Grumman. 

Getting fired is never pleasant, and it’s even worse when it comes as a complete surprise. Getting fired as a surprise while you’re driving your car must be really awful. That’s how Yahoo! Inc. reportedly fired its CEO Carol Bartz on Tuesday.  

Rarely is the way someone leaves an employer reported in such detail, so Bartz’ parting is a lesson for anyone doing due diligence. People leave jobs every day, but the way they leave (Fired? Quit? Amicable? Contentious?) is every bit as important to know if you are thinking about doing business with them.

What are you supposed to do when someone hands you a resume that reports four jobs worked in the past 15 years? You certainly want to verify that they really did those jobs, but then the hard work begins. You should want to find out why they left each job. Unless they’re as famous as Carol Bartz, you have to call people who were there at the time.

You won’t find any commercial database that will tell you something like: “He was roundly hated by the Board but negotiating his package took months because he had some dirt on two of the board members and they felt they couldn’t move too fast.”

The Bartz episode has something else to say about due diligence: what kind of directors can’t even wait a day to summon their CEO to a meeting to get rid of her? Depending on your point of view, they were endlessly patient with a bad executive until they snapped, or unusually cold-blooded in the way they dealt with their most important employee.

If you needed a new director and were considering one of Yahoo’s board, you would want to know how Bartz was treated to help you make up your mind.

A quick reflection on the executive at Allstate, who according to the Wall Street Journal lost his job in part because of profanity-laced comments about a superior to colleagues in a bar.

How did the Journal get the story? Not by crawling around blogs, not by looking at the executive’s Facebook page, but by old-fashioned interviewing.

As we’ve pointed out here and here, very little of our lives sits out there on the Internet. How many of your ex colleagues, friends, romantic partners, apartments, cars and other possessions are linked to you via Google? Less than one or two percent in most cases.

To find out about people, you nearly always have to talk to others about them. That’s what the newspaper did in this case: they talked to people who the paper said had either heard the comments by the executive, Joseph Lacher, or else people familiar with the company’s internal investigation.

No Facebook, no LinkedIn, no blogging, no emails accidentally sent to the wrong person.

It’s an investigation that could have taken place just this way 20, 40, or even 80 years ago. And as we often tell clients, it’s an indispensible part of investigations today too.

Of course, a lot of what you may hear could turn out to be gossip. But being gossip doesn't always mean something isn't true. It can also mean that it's factual information someone doesn't want you to know about. 

I have no feeling on which way the new lawsuit against Match.com, reported here at the Huffington Post will (or should) turn out, but the case highlights a feature of online dating that has puzzled me for some time.

According to the report, the plaintiff (identified for now as Jane Doe) was sexually assaulted by someone she met on Match.com, and claims that the dating service should have performed background checks on the people it features on its site.

You probably wouldn’t buy a car without knowing its crash test results. You check out crime rates and schools before you buy a home. Yet if you’re like many in the U.S. you may think nothing of entering into a relationship with someone with whom you have no friends in common. Whatever personal story that person gives you, you’ve got nobody to check with to see whether you’re getting an accurate picture.

What’s puzzled me is that with all the available information we have about people, strangers persist in becoming intimate with one another even though the dating sites usually warn that they have done no screening as to the participants’ backgrounds. I talked about this in an interview with PBS done last year.

The risk you run is right there in eHarmony’s safety tips (“Do your own research”). Other dating sites advise you to “do a little digging” on the other person. Some have it right on the front page that they have performed no background check on their subscribers. Others review personal information to make sure customers are appropriate, but take at face value the information submitted.

Was there really that job with the large company in Europe until last year? Really no marriages until now? Have there been arrests, court orders or other legal proceedings in this person’s past, perhaps in a state you don’t know they lived in a few years back? What about if their history is half in another other country with non-electronic records?

Even the best background check won’t give you 100 percent certainty that someone is all he says he is. But if someone is lying to you and that information can be found, wouldn’t you want to find out sooner rather than later?

More publicity for Reputation.com in the New York Times Sunday Styles section, featuring lots of people worried about unflattering information about themselves on the web. How to get rid of it?

It turns out you often can’t. Once something is online, the best a lot of services can do is to push an unflattering item down in the Google rankings, from page one to page six or seven. No good investigator is going to stop looking at Google results after a couple of pages, so those photos will still get found if someone searches thoroughly.

We’ve already commented on another big takeout featuring Reputation.com when it was featured just last month in Time. We said that tracking over the web gets individuals wrong as often as it gets them right and that a good investigator can find out tons more about people than tracking software can.

It’s the same story here. Work all you want on erasing your past, but always assume we’ll find it anyway.

So if you have a picture of yourself wearing a hula skirt in a blizzard while sipping a beer through one of those straws attached to a container on your head, take a bit of advice from someone who might find it:

• Not everyone cares that you got drunk in college. They probably did too.
• Employers you should strive to work for are the ones like it when people they hire tell the truth at work and in interviews. At least, those are the employers I admire most.
• Therefore, be ready with a frank explanation of the information. “I’m not proud of that photo, but I don’t do that kind of thing anymore” will serve you a lot better than stunned silence or a half-baked “that was taken out of context” when the photo is shown to you.
• Think about turning controversy your way. A friend with an unusual name was in the middle of a messy whistleblower lawsuit and wondered how he could push that down the search rankings. My advice was to be proud of it and use it to his advantage: “You’ve seen the whistleblower suit,” he could offer to prospective employers. “I took on that big company, which means I won’t be swayed by cash in doing the right thing for you.”