Anyone following artificial intelligence in law knows that its first great cost saving has been in the area of document discovery. Machines can sort through duplicates so that associates don’t have to read the same document seven times, and they can string together thousands of emails to put together a quick-to-read series of a dozen email chains. More sophisticated programs evolve their ability with the help of human input.

Law firms are already saving their clients millions in adopting the technology. It’s bad news for the lawyers who used to earn their livings doing extremely boring document review, but good for everyone else. As in the grocery, book, taxi and hotel businesses, the march of technology is inevitable.

Other advances in law have come with search engines such as Lexmachina, which searches through a small number of databases to predict the outcome of patent cases. Other AI products that have scanned all U.S. Supreme Court decisions do a better job than people in predicting how the court will decide a particular case, based on briefs submitted in a live matter and the judges deciding the case.

When we think about our work gathering facts, we know that most searching is done not in a closed, limited environment. We don’t look through a “mere” four million documents as in a complex discovery or the trivial (for a computer) collection of U.S. Supreme Court cases. Our work is done when the entire world is the possible location of the search.

A person who seldom leaves New York may have a Nevada company with assets in Texas, Bermuda or Russia.

Until all court records in the U.S. are scanned and subject to optical character recognition, artificial intelligence won’t be able to do our job for us in looking over litigation that pertains to a person we are examining.

That day will surely come for U.S records, and may be here in 10 years, but it is not here yet. For the rest of the world, the wait will be longer.

Make no mistake: computers are essential to our business. Still, one set of databases including Westlaw and Lexis Nexis that we often use to begin a case are not as easy to use as Lexmachina or other closed systems, because they rely on abstracts of documents as opposed to the documents themselves.

They are frequently wrong about individual information, mix up different individuals with the same name, and often have outdated material. My profile on one of them, for instance, includes my company but a home phone number I haven’t used in eight years. My current home number is absent. Other databases get my phone number right, but not my company.

Wouldn’t it be nice to have a “Kayak” type system that could compare a person’s profile on five or six paid databases, and then sort out the gold from the garbage?

It would, but it might not happen so soon, and not just because of the open-universe problem.

Even assuming these databases could look to all documents, two other problems arise:

  1. They are on incompatible platforms. Integrating them would be a programming problem.
  2. More importantly, they are paid products, whereas Kayak searches free travel and airline sites. In addition, they require licenses to use, and the amount of data you can get is regulated by one of several permissible uses the user must enter to gain access to the data. A system integration of the sites would mean the integrator would have to vet the user for each system and process payment if it’s a pay-per-use platform.

These are hardly insurmountable problems, but they do help illustrate why, with AI marching relentlessly toward the law firm, certain areas of practice will succumb to more automation faster than others.

What will be insurmountable for AI is this: you cannot ask computers to examine what is not written down, and much of the most interesting information about people resides not on paper but in their minds and the minds of those who know them.

The next installment of this series on AI will consider how AI could still work to help us toward the right people to interview.

By now, if a lawyer isn’t thinking hard about how automation is going transform the business of law, that lawyer is a laggard.

You see the way computers upended the taxi, hotel, book and shopping mall businesses? It’s already started in law too.  As firms face resistance over pricing and are looking to get more efficient, the time is now to start training people to work with – and not in fear of – artificial intelligence.

And be not afraid.
And be not afraid

There will still be plenty of lawyers around in 10 or 20 years no matter how much artificial intelligence gets deployed in the law. But the roles those people will play will in many respects be different. The new roles will need different skills.

In a new Harvard Business Review article (based on his new book, “Humility is the New Smart”) Professor Ed Hess at the Darden School of Business argues that in the age of artificial intelligence, being smart won’t mean the same thing as it does today.

Because smart machines can process, store and recall information faster than any person, the skills of memorizing and recall are not as important as they once were. The new smart “will be determined not by what or how you know but by the quality of your thinking, listening, relating, collaborating and learning,” Hess writes.

Among the many concrete things this will mean for lawyers are two aspects of fact investigation we know well and have been writing about for a long time.

  1. Open-mindedness will be indispensable.
  2. Even for legal research, logical deduction is out, logical inference is in.

Hess predicts we will “spend more time training to be open-minded and learning to update our beliefs in response to new data.” What could this mean in practice for a lawyer?

If all you know how to do is to gather raw information from a limited universe of documents, or perhaps spend a lot of time cutting and pasting phrases from old documents onto new ones, your days are numbered. Technology-assisted review (TAR) already does a good job sorting out duplicates and constructing a chain of emails so you don’t have to read the same email 27 times as you read through a long exchange.

But as computers become smarter and faster, they are sometimes overwhelmed by the vast amounts of new data coming online all the time. I wrote about this in my book, “The Art of Fact Investigation: Creative Thinking in the Age of Information Overload.”

I made the overload point with respect to finding facts outside discovery, but the same phenomenon is hitting legal research too.

In their article “On the Concept of Relevance in Legal Information Retrieval” in the Artificial Intelligence and Law Journal earlier this year,[1] Marc van Opijnen and Cristiana Santos wrote that

“The number of legal documents published online is growing exponentially, but accessibility and searchability have not kept pace with this growth rate. Poorly written or relatively unimportant court decisions are available at the click of the mouse, exposing the comforting myth that all results with the same juristic status are equal. An overload of information (particularly if of low-quality) carries the risk of undermining knowledge acquisition possibilities and even access to justice.

If legal research suffers from the overload problem, even e-discovery faces it despite TAR and whatever technology succeeds TAR (and something will). Whole areas of data are now searchable and discoverable when once they were not. The more you can search, the more there is to search. A lot of what comes back is garbage.

Lawyers who will succeed in using ever more sophisticated computer programs will need to remain open-minded that they (the lawyers) and not the computers are in charge. Open-minded here means accepting that computers are great at some things, but that for a great many years an alert mind will be able to sort through results in a way a computer won’t. The kind of person who will succeed at this will be entirely active – and not passive – while using the technology. Anyone using TAR knows that it requires training before it can be used correctly.

One reason the mind needs to stay engaged is that not all legal reasoning is deductive, and logical deduction is the basis for computational logic. Michael Genesereth of Codex, Stanford’s Center for Legal Informatics wrote two years ago that computational law “simply cannot be applied in cases requiring analogical or inductive reasoning,” though if there are enough judicial rulings interpreting a regulation the computers could muddle through.

For logical deduction to work, you need to know what step one is before you proceed to step two.  Sherlock Holmes always knew where to start because he was the character in entertaining stories of fiction. In solving the puzzle he laid it out in a way that seemed as if it was the only logical solution.

But it wasn’t. In real life, law enforcement, investigators and attorneys faced with mountains of jumbled facts have to pick their ways through all kinds of evidence that produces often mutually contradictory theories. The universe of possible starting points is almost infinite.

It can be a humbling experience to sit in front of a powerful computer armed with great software and connected to the rest of the world, and to have no idea where to begin looking, when you’ve searched enough, and how confident to be in your findings.

“The new smart,” says Hess, “will be about trying to overcome the two big inhibitors of critical thinking and team collaboration: our ego and our fears.”

Want to know more about our firm?

  • Visit charlesgriffinllc.com and see our two blogs, this one and The Divorce Asset Hunter;
  • Look at my book, The Art of Fact Investigation (available in free preview for Kindle at Amazon). There is a detailed section on logic and inference in the law.
  • Watch me speak about Helping Lawyers with Fact Finding, here. We offer training for lawyers, and I speak across the country to legal groups about the proper mindset for legal inquiry.
  • If you are member of the ABA’s Litigation Section, see my piece in the current issue of Litigation Journal, “Five Questions Litigators Should Ask: Before Hiring an Investigator (and Five Tips to Investigate It Yourself). It contains a discussion of open-mindedness.

[1] van Opijnen, M. & Santos, C. Artif Intell Law (2017) 25: 65. doi:10.1007/s10506-017-9195-8

 

One lawyer we know has a stock answer when clients ask him how good their case is: “I don’t know. The courts are the most lawless place in America.”

What he means is that even though the law is supposed to foster predictability so that we will know how to act without breaking our society’s civil and criminal rules, there is a wide variety of opinion among judges even in the same jurisdictions about the matters that make or break a case on its way to a jury.

Our friend’s answer came to mind while reading an interesting roundup of experienced trial lawyers over the weekend about why the trial of Bill Cosby outside Philadelphia resulted in a deadlocked jury and mistrial, announced on Saturday.

In the New York Times, the attorneys mostly fell into two camps: those who thought lead witness Andrea Constand presented the jury with credibility problems because of inconsistent testimony, and those who thought the judge’s decision to limit the admission of evidence of many other similar allegations substantially weakened the prosecution’s case.

My view is that the two reasons are linked: evidence that many women have made claims similar to Constands’ could easily have overcome the credibility problem if the jury had been able to hear about many of the other women who alleged Cosby had drugged and had sexual contact with them too.

In another case with identical facts and a different judge, the other accusers may have made it in a great example of two things we tell clients all the time:

  1. Persuasive evidence is good, but admissible evidence is what you really want when you know you’re going to trial.
  2. A lot of legal jobs are now being done by computers, but while there are human judges they will differ the way humans always do: in a way that is never 100% predictable.

Admissibility

When we are assigned to gather facts in civil or criminal matters, all of the evidence we get must always be gathered legally and ethically. Otherwise it could easily turn out to be inadmissible. But even if you do everything right, admissibility is sometimes out of your control. The whole case can turn on it.

If all you are doing is trying to get as much information as you can without any thought of taking it to trial, then admissibility may not be much of a concern. Think about deciding whether someone is rich enough to bother suing using hearsay evidence; or finding personally damaging information that may be excluded as prejudicial, but even the thought of arguing a motion about that information would be too much for the other side to bear. It could increase the chance of a more favorable settlement for you.

In the Cosby case the information in question would have been very helpful to the prosecution.

Ordinarily the justice system doesn’t like to see evidence of other bad acts used in a case to paint a picture of  a defendant’s character. Rule 404 (b) of the Federal Rules of Evidence excludes this kind of thing, but allows admission of evidence of another act “as proving motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of accident.”

So the prosecution could have argued that all the other accusers making similar claims that they were drugged and subjected to sexual contact were evidence of Cosby’s intent, or a lack of accident, and may even have been seen as preparation for the time Constand went to Cosby’s home and was drugged.

But the judge wouldn’t let any of that in. In Pennsylvania, the rules in this section are tougher on the prosecution than are the federal rules. The state’s rule 404(b) (2) “requires that the probative value of the evidence must outweigh its potential for prejudice. When weighing the potential for prejudice of evidence of other crimes, wrongs, or acts, the trial court may consider whether and how much such potential for prejudice can be reduced by cautionary instructions.”

It seems that the judge was afraid that even warning the jury not to read too much into the other accusers would have prejudiced them even if he instructed them that the other accusers alone did not constitute proof of Cosby’s guilt — in this matter with Constand.

Unpredictability

The legal world is justifiably occupied in trying to figure out how to reduce costs by automating as many tasks as possible. Gathering of some facts can be automated, but not always, for the simple reason that facts are infinitely variable and therefore not wholly predictable.

Implicit in fact gathering is evaluating the facts you get, as you gather them. You are constantly evaluating because you can’t look everywhere, so promising leads get follow-up, the others don’t. Machines can scan millions of documents using optical character recognition because there are only so many combinations of letters out there. But the variety of human experience is limitless.

If machines can’t be trusted to properly evaluate someone’s story, imagine the problems if that story has never been written down. Think about all the things you would not want the world to know about you. How much of all of that has been written down? Probably very little. It was human effort alone that developed the other witnesses the prosecution wanted to call.

The only way a computer might have helped in this case would have been to predict – based on prior cases – which way the judge would rule in excluding the other evidence. Even that would be a tough program to write because these decisions turn on so many unique factors. But since judges are chosen at random, it wouldn’t have helped shape the decision about whether or not to charge Cosby.

Want to know more about our firm?

  • Visit charlesgriffinllc.com and see our two blogs, this one and The Divorce Asset Hunter;
  • Look at my book, The Art of Fact Investigation (available in free preview for Kindle at Amazon);
  • Watch me speak about Helping Lawyers with Fact Finding, here.
  • If you are member of the ABA’s Litigation Section, see my piece in the current issue of Litigation Journal, “Five Questions Litigators Should Ask: Before Hiring an Investigator (and Five Tips to Investigate It Yourself).

Another EB-5 visa fraud, more burned investors. For people outside the United States trying to pick a reputable investment that will get them permanent residency in the U.S., sorting through hundreds of projects is often the hardest part of the job.

EB-5 due diligence

There is plenty written about what you should do before you invest, one of the latest guides being from the North American Securities Administrators Association, here. You can read up on EB-5 frauds here.

What are the warning signs of fraud? Last year’s revelation of a huge fraud at a Vermont development that had sucked in hundreds of investors led many to wonder, “How could we have known this would blow up?”

There is no guaranteed way to find fraud, but if you see things that would give a prudent investor pause; if the project’s sponsors don’t have a good track record; if you don’t understand the risks of the project (and they all have risks) walk away.

Remember, many reputable immigration lawyers refuse to recommend an EB-5 investment because they don’t want to be sued if the investment encounters problems, whether of a normal business variety or because of fraud. Even if your lawyer recommends an investment, you should still perform due diligence on the project.

Even more surprising to some non-Americans, once the government spots EB-5 fraud, it’s often too late for the investors who have put in their money. Sometimes investors can recover and sometimes not, but the green cards they wanted will not be delivered and they have lost time in addition to money.

Looking at the track record of a developer is much easier than going through the hundreds of pages of documents you and your lawyer will need to examine before you invest your money. You will always need to do both, but as you sort through five or ten possible investments, start with the track records.

The Vermont Fraud Warning Signs

One of the most celebrated of all the projects was the group of investments in the northeastern state of Vermont, near the border with Canada. Jay Peak was an old ski hill that fell into the hands of a Canadian operating company. They began with the EB-5 program by raising money for one project, but then in 2008 the Canadian company sold the business to a man local press described as “mysterious,” Ariel Quiros. He grew up in New York, was of Puerto Rican and Venezuelan background, but had spent years in Korea building unspecified businesses which supposedly gave him the ability to buy Jay Peak for $25 million.

Once Quiros bought the mountain, the EB-5 projects accelerated, with six more projects for hotels and finally, before the scheme was exposed, a bio-technology park that was supposed to flourish among the ski hills and dairy farms of far-northern Vermont.

The main thing an investor should have asked about Jay Peak was, who exactly is Ariel Quiros, the owner? The whole sickening unravelling of the investment project is available at vtdigger.org (going from most recent to oldest story). But anyone investing after January 14, 2014 would have had an easy way to throw this one in the waste basket. A Vermont Digger article available on line described Quiros’ track record this way:

  • He lost his seat on the board of Bioheart Inc. after AnC Bio [Quiros’ company] failed to make the second installment in a $4 million investment.
  • Quiros also survived a Texas lawsuit in which two investors alleged breach of contract after they didn’t get their money back in full in 10 years.
  • And a Florida man claims he never received almost $16,000 worth of equipment from a [Quiros] company called Q Vision, but he appears to have dropped his pursuit of the matter.

Of course, full due diligence could involve verifying the assertions in this article, but if they turned out to be true, who would entrust half a million dollars and a green card to someone with a track record of not following through on investments and unhappy investors alleging breach of contract?

If Quiros occasionally had disputes with investors and partners, you would also ask a more basic question: how did he make his money – the money that bought Jay Peak — in the first place?

The article in January 2014 said,

“Quiros has melded street smarts from New York, military sensibilities from the Korean Demilitarized Zone and a love of adventure into a business empire that spans the globe, starting with international trade from Korea in the early 1980s… GSI Group, where he got his start in Korea, imported and exported goods ranging from shoes to women’s blouses to radios…He specialized in raw materials, much of it for the Korean government, he says.”

In addition, Bloomberg says that “Mr. Quiros serves as a Director and Principal of GSI Group, a raw materials procurement company for the South Korean manufacturing community with offices in Seoul, Beijing, Sydney, Hong Kong and Miami.”

The only problem is, GSI is one difficult company to find. Quiros shows up on open-source databases as a corporate officer of 96 companies, but these are all in Florida, Panama and Vermont. None of the Florida companies are called GSI.

On line, there is www.GSIkoreanet., but this mentions no overseas offices. GSI Australia’s website says it is a company dealing in poultry, swine and grain. There are no Korean links evident. And it is based in Queensland and Victoria, not New South Wales where Sydney is. The Australia companies registry provides no evidence of any Korean trading company registered in New South Wales.

In Hong Kong, a search of directors of all Hong Kong companies shows that nobody named Quiros and no company called GSI directs any Hong Kong company.

A search of regulatory filings in the U.S. turns up nothing on Quiros until 2010, after he bought Jay Peak. A news search on Bloomberg turns up only GSI Group Inc., a maker of agricultural equipment.

The earliest mention of Quiros in securities filings in the U.S. is in 2011, as an investor in a U.S. biotech company. His Korean address in this filing was: 10th Floor, H&S Tower, 119-2 Nonhyun-Dong, Gangnam-Gu, Seoul, Korea 135-820. A reverse search of this address turns up nothing on GSI.

Are we therefore stunned to learn today that according to the U.S. Securities and Exchange Commission, Quiros never used his own money to buy Jay Peak in the first place? Instead, according to the judicial complaint filed in 2016, Quiros took money investors had already put into Jay Peak when it was owned by the Canadians, and used that cash to buy the ski resort.

Subsequent cash that came in for new projects funded prior projects, but eventually the game was up when Quiros told investors that their hotel project was cancelled and converted into a loan. They would get their money back, he promised, but green cards would not be forthcoming. Quiros is fighting the SEC, while his President has settled with the agency.

In the Bernard Madoff Ponzi scheme, there were red flags that sent many prudent investors away: a small-time accountant for what was supposed to be a multi-billion-dollar enterprise, and no independent custodian for the investor money.

In the case of Quiros and the Vermont project, a history of unhappy investors and a murky source of funds should have been enough for investors to say, “Not this one.”

 

About the firm:

Charles Griffin Intelligence is an independent consulting firm that performs investor due diligence for hedge funds, corporations and individuals both inside and outside the United States. We never do work for any EB-5 developer or regional center. We do not provide legal advice, but can help investors and their lawyers assess the business risk of an investment.

For more information about the firm, please see the website at www.charlesgriffinllc.com. You can also read our blog, The Ethical Investigator, at www.ethicalinvestigator.com

 

Lawyers need to find witnesses. They look for assets to see if it’s worth suing or if they can collect after they win. They want to profile opponents for weaknesses based on past litigation or business dealings.

Every legal matter turns on facts. Most cases don’t go to trial, fewer still go to appeal, but all need good facts. Without decent facts, they face dismissal or don’t even get to the complaint stage.Better innovation in law firms

Do law schools teach any of these skills? Ninety-nine percent do not.  Good fact-finding requires something not taught at a lot of law schools: innovation and creativity. Of course, good judges can maneuver the law through creative decisions, and good lawyers are rightly praised for creative ways to interpret a regulation or to structure a deal.

But when it comes to fact gathering, the idea for most lawyers seems to be that you can assign uncreative, non-innovative people to plug data into Google, Westlaw or Lexis, and out will come the data you need.

This is incorrect, as anyone with a complex matter who has tried just Googling and Westlaw research will tell you.

The innovative, creative fact finder follows these three rules:

  1. Free Yourself from Database Dependency. If there were a secret trove of legally obtained information, you would be able to buy it because this is America, where good products get packaged and sold if there is sufficient demand for them. And Google won’t do it all. Most documents in the U.S. are not on line, so Google won’t help you. For any given person, there could be documents sitting in one of the more than 3,000 counties in this country, in paper form.
  • If you use a database, do you know how to verify the output? Is your John C. Wong the same John C. Wong who got sued in Los Angeles? How will you tell the difference? You need a battle plan. Can your researcher arrange to have someone go into a courthouse 2,000 miles away from your office?
  • How will you cope with conflicting results when one source says John C. Wong set up three Delaware LLC’s last year, and another says he set up two in Delaware and two in New York?
  1. Fight Confirmation Bias. Ask, “What am I not seeing?” Computers are terrible at the kind of thought that comes naturally to people. No risk management program said about Bernard Madoff, “His auditor can’t be up to the task because his office is in a strip mall in the suburbs.”
  • For your researchers, find people who can put themselves in the shoes of those they are investigating. Not everyone can say, “This report must be wrong. If I were in the high-end jewelry business, I wouldn’t run it out of a tiny ranch house in Idaho. Either this is a small business or Idaho’s not the real HQ.” If someone doesn’t notice a discrepancy as glaring as this, they are the wrong person to be doing an investigation that requires open-mindedness.
  1. Don’t paint by numbers. Begin an investigation on a clean sheet of paper. Don’t base your investigation on what someone’s resume says he did. Verify the whole thing.
  • Look not just at what’s on the resume, but look for what was left off Jobs that didn’t go well, and people who don’t like the person.
  • Despite that your client tells you, they don’t know everything (if they did they wouldn’t hire you). If your client thinks you will never find a subject’s assets outside of Texas, look outside of Texas anyway. You owe it to your client.

Want to know more?

  • Visit charlesgriffinllc.com and see our two blogs, The Ethical Investigator and the Divorce Asset Hunter;
  • Look at my book, The Art of Fact Investigation (available in free preview for Kindle at Amazon);
  • Watch me speak about Helping Lawyers with Fact Finding, here.

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.

Want to know more?

  • Visit charlesgriffinllc.com and see our two blogs, The Ethical Investigator and the Divorce Asset Hunter;
  • Look at my book, The Art of Fact Investigation (available in free preview for Kindle at Amazon);
  • Watch me speak about Helping Lawyers with Fact Finding, here.

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.

Want to know more?

  • Visit charlesgriffinllc.com and see our two blogs, The Ethical Investigator and the Divorce Asset Hunter;
  • Look at my book, The Art of Fact Investigation (available in free preview for Kindle at Amazon);
  • Watch me speak about Helping Lawyers with Fact Finding, here.

 

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?

Want to know more?

  • Visit charlesgriffinllc.com and see our two blogs, The Ethical Investigator and the Divorce Asset Hunter;
  • Look at my book, The Art of Fact Investigation (available in free preview for Kindle at Amazon);
  • Watch me speak about Helping Lawyers with Fact Finding, here.

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.

Want to know more?

  • Visit charlesgriffinllc.com and see our two blogs, The Ethical Investigator and the Divorce Asset Hunter;
  • Look at my book, The Art of Fact Investigation (available in free preview for Kindle at Amazon);
  • Watch me speak about Helping Lawyers with Fact Finding, here.

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.

 

Want to know more?

  • Visit charlesgriffinllc.com and see our two blogs, The Ethical Investigator and the Divorce Asset Hunter;
  • Look at my book, The Art of Fact Investigation (available in free preview for Kindle at Amazon);
  • Watch me speak about Helping Lawyers with Fact Finding, here.