The Ethical Investigator

“Three may keep a secret,” wrote Benjamin Franklin, “if two of them are dead.” While attorney-client privilege confers a lot of power on lawyers and their agents to keep a secret, the privilege is never absolute. It can be waived by the client anytime, and can be breached in all sorts of ways.

That’s why it’s unwise to promise an interview subject that what he tells us will forever remain confidential, no matter what.  

As investigators, we are sometimes asked by people we interview whether what they tell us can be kept “secret,” “just between us,” “confidential” or “off-the-record.” Those terms and other similar ones may have specific legal meanings under the rules of evidence, but can also mean different things to different people.

Good reporters always go over the ground rules of an interview if a subject seeks to put a limitation on what may be reported or disclosed to third parties.

Good investigators ought to do the same if asked. We’ve written before about the importance of using templates – a script of how an investigator will represent himself and the degree to which he will identify his client, in Trial Ethics: A Template Can Save Your Life.

In every one of our templates is a response to the question from the person we are seeking to interview, (if asked): “Can my comments remain confidential?”

Our answer tends to be something like, “Our firm has to share anything I hear from you with our client, but we won’t tell anyone else that you’ve told us anything unless a court orders us to do that.” This makes the investigator’s promise truthful, but doesn’t promise that what the person making the comments says will forever stay between that person and the investigator.

If we are hired by an attorney, then we will assert that anything we report to that attorney is protected by attorney-client privilege. As agents of the attorney, for the purposes of privilege it’s as if the attorney is doing the interviews we do.

But what happens if word gets out that we have done an interview, and the other side in litigation seeks a court order demanding that we hand over our notes or divulge the contents of our conversation? Our letter of engagement with attorneys promises that

we will promptly notify you [our client] and follow your direction with respect to any third-party effort, by subpoena or otherwise, to gain access to any document or information pertaining to this matter, including any effort to obtain testimony from us.

In other words, we’ll get our clients the information we learn in an interview, because our first duty is to our clients. And, we’ll fight as hard as our client would to preserve that secret. Beyond that, what happens to the information we report can be taken out of our control.

What works best for everyone concerned is that everything we promise is written down in an interview template and a letter of engagement. It helps our clients sleep better, and when they are happier, so are we.

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.

In September 2011, Gauss, a new malware described by the tech-press “as a cyber-espionage tool kit” emerged from the Middle East.  Gauss steals highly sensitive data, including browser passwords, online bank accounts as well as cookies and system configurations.  Gauss closely resembles the malware Flame and Stuxnet, which according to Kaspersky Labs, were created in state-sponsored factories.  Consequently, analysts believe that it too might be state-sponsored.  Since its debut, Gauss appears to have infected 2,500 machines worldwide.  However, the total number of victims may actually be much higher, in the realm of tens of thousands. 

And that number could just keep growing.  Shortly after Gauss was discovered in June 2012, its command and control infrastructure was disabled.  This may sound like a victory, but it is actually far from the truth.  As tech journalist Larry Dignan explains on Cnet.com, the Gauss “malware is dormant waiting for servers to become active.” In other words, it may continue to wreck havoc.

Admittedly, this sort of thing—state-sponsored hackers breaking into bank accounts— could keep one up at night.  What is interesting from an investigative point of view, however, is the way that computer scientists have figured out how to root out the Gauss malware before it causes harm.  Apparently, computer scientists have determined that the font Palida Narrow is used during a Gauss cyber attack.  Therefore, programs designed to detect Gauss check for that particular font to help determine whether the malware is in fact present and needs to be rooted out. 

To be clear, the font does not cause the theft to occur.  Instead, its presence merely correlates with the malware that does.  It is an indirect and yet highly elegant and quick way to detect whether a problem may exist.

As investigators, we can’t always get exactly to the evidence we want to prove.  Sometimes it merely doesn’t exist.  Often, ethical and legal constraints keep us from being able to obtain the facts we definitively need to prove what we are investigating. 

It’s easy to get lost searching for the unsearchable, pining for that one nugget that will help everything fall into place.  But investigators don’t have that luxury. 

So, we sometimes have to do what the computer scientists have done by pinpointing a font as a sign of trouble: We have to take a step back and look for clues elsewhere.  This may mean getting off one path and onto another. For instance, we may not have direct evidence of wrongdoing, but we can scour the evidence in order to detect patterns that suggest wrongdoing.  Alternatively, we can review the facts to see if we can find any that correlate with what it is we’ve been asked to help prove or disprove.

This is not about making assumptions—we never say that because x exists, therefore y.  Instead, it is about being able to look for solutions that advance our clients’ knowledge, even if they fall short of the ideal solution.  

Attorneys have a professional obligation to protect client confidences and communications, but technology has made this increasingly difficult.  As a recent article in the Wall Street Journal, “Lawyers Vigilant on Cybersecurity,” explains, lawyers face serious cybersecurity threats precisely because their clients entrust them with highly sensitive and classified information.  Criminal and state-sponsored hackers target law firms to gain access to these confidential cases, especially if the information involves corporate mergers or acquisitions.  In some instances, insider information could be sold for millions, and so tech-savvy criminals go after the weakest link—the lawyers with access to this sensitive data.

There are no statistics of how many firms have been hacked: The FBI doesn’t keep records on which types of businesses have been the subject of attacks, and law firms have been less than forthcoming about whether they’ve had security breaches.  Admitting client information leaks would be far too damaging to a firm’s reputation.  Law-enforcement officials suggest, however, that more and more often, law firms find themselves the targets of cyberattacks.  As the Wall Street Journal article notes, the FBI has evidence of confidential business documents exfiltrated from law firms via cyberattacks.

Recently proposed changes to attorney ethical rules by the American Bar Association (ABA) also suggest that the profession sees technical breaches as an industry-wide problem.  Earlier this week the ABA Commission on Ethics announced that its proposed changes to the Model Rules includes requiring lawyers to take proactive measures to protect their client’s information when using new technologies.  The proposed edits suggest that lawyers have to be more aware of both “inadvertent and unauthorized” disclosures—in other words, leaks from inside and hacks from outside a firm. These changes warn technophobes that they need to abandon their Luddite ways, because lawyers now have a duty to "keep abreast of changes in the law,... including the benefits and risks associated with relevant technology." In other words, claiming ignorance is simply not an excuse.

By putting the onus on lawyers, the ABA is acknowledging what those of us who study and track security breaches have been shouting from the rooftops for years: preventing security breaches is not just about technology; it’s about changing human behavior.  As the Wall Street Journal article makes clear, “the weakest link at law firms of any size are often their own employees.”

Other industries face similar problems.  For example, a recent article on data breaches in the health care industry suggests that the epidemic of breaches of confidential health care information has more to do with human error than it does with IT shortcomings. As Larry Clinton, president and CEO of the trade association Internet Security Alliance succinctly points out, when it comes to data  breaches, “[p]eople are the biggest problem.”  Consequently, Collins predicts that breaches in hospitals and health care systems will only be prevented if these organizations approach these breaches as a “human-resource management issue and not an IT issue.” 

In other words, phones don’t just go around leaking information. Email accounts don’t shoot off confidential messages at random.  Computers are not really out to get us.  These technologies become weapons in the hands of adversaries because users didn’t take the necessary precautions to protect their data.   

Moreover, despite what people usually assume, taking these precautions doesn’t require having a Masters degree in computer science.  In many instances, all that’s called for is simple behavior modification coupled with a healthy dose of common sense: 

• Password protect your cell phone, tablet and laptop. 
• Use different passwords for different devices and accounts, and make sure they are hack-proof. Programs like Kaspersky Password Manager can generate virtually hack-proof passwords and keep a running list of all your different passwords.  
• Don’t use free Wi-Fi connections, since hackers rely on free Wi-Fi to eavesdrop on users’ conversations.  
• Don’t click on links in text messages because doing so might activate malware that could log keystrokes or even record phone calls. 
• Be suspicious of any emails from unknown senders that ask you to open attachments or click on links—these so-called Trojan emails will retrieve data from your computer. 
• Invest in good computer security software, and for heaven’s sake, keep its settings updated and make sure to run checks on it on a regular basis.  Otherwise, it’s like investing in an expensive alarm system for your home but refusing to set it before you go out. 

The real key to security for cell phone communications, internet browsing and emailing is human behavior. Peace of mind will only come once people change how they act. For lawyers, that time may be sooner, rather than later.   

Good investigators are not necessarily smarter than the people they help. What often makes a good investigation is one in which “known” facts are independently evaluated once again.

Just as we sometimes want a second opinion on a complex medical or legal matter, gathering and weighing the credibility of facts can also benefit from a fresh pair of eyes.

The recent article by Jack Hitt in The New Yorker called “Words on Trial” explores the field of forensic linguistics. Famous for figuring out the identity of anonymous authors (as in the case of “Primary Colors”), or threatening notes based on word patterns and other signs, this field also looks at the apparently plain meaning of a transcribed phrase and whether or not the phrase could mean the very opposite of what’s printed on the page.

In one case described in the article, “I would take a bribe, wouldn’t you?” on the transcript could also have plausibly been “I wouldn’t take a bribe, would you?” and resulted in a hung jury. Another controversy was whether a transcribed “No, she didn’t” may have been “Sure, no, she did.”

All the more reason to interview people if you can, rather than rely on the reporting of others. We’ve repeatedly stressed the value of doing your own interviews in other entries, including “The Key to a Good Interview is Silence” and “Talk Isn’t Cheap, Even When Offline.”

Beyond the ability to listen and to tease out meaning, a second look at information can help because people are sometimes irrationally disposed to put too much or too little weight on one source or another. We’ve written in our “Fact Finding Test for Lawyers” about the inordinately heavy amount of trust people put into a Google Search.

Now comes a study from Penn State Professor Mike Schmierbach and Ph.D. candidate Anne Oeldorf-Hirsch that claims “a New York Times story posted on the newspaper’s website was seen by respondents as more credible than when the same story was posted on the newspaper’s Twitter feed.” This makes no sense because the Twitter feed links to the supposedly more trustworthy website.

But it does beg the question: how many times a day do we put the wrong amount of trust in a quotation, a statistic, an asserted fact or other piece of information?

What does it really mean when an investigator says that they are going to do a background search on a person and track down all the relevant documents “on the public record”? Well, let’s start with what it doesn’t mean: bank documents and cell phone records are not public record.  Any investigator who tells you he can track these down for you is ostensibly promising to break more than a couple of laws to get you that information.  In addition, given that he’s acting as your agent, odds are it could get you in a heap of trouble as well.

So what can you expect instead?  Below is a list of the various public documents that you should expect from your investigator when investigating a person.  Future blog posts will detail similar lists for background research on companies and for asset searches.

For due diligence on an individual:

• College or university enrollment and graduation information: Colleges and universities will often confirm if someone did or did not graduate from their institution.

• Professional licenses and affiliations: If someone’s job requires a license (think doctor, accountant, attorney), public records will indicate if they are licensed and whether or not they are still in good standing with the licensing authority.  Similarly, any professional sanctions against someone whose work is licensed are often publically available.
• Criminal behavior: Despite what cheap background search companies will tell you, there is no way to do a quick and easy nationwide criminal background search.  No central database compiles this information from the federal, state and local governments for anyone outside of law enforcement.  However, it is possible to do searches of federal records and of individual state and local records to confirm whether someone has ever been tried or convicted of a crime, or been the subject of a restraining order. Done right, this is done state by state or county by county.
• Civil litigation: Public records will confirm whether someone has ever sued or been sued, although copies of the court documents are usually not available unless you go to the proper storage locations in person or hire a subcontractor to do that on your behalf.  Usually the most important documents are the complaint, answer and disposition of the case, as well as any judgment or notice that the case settled.  The complaint and the answer are especially helpful—they get to the heart of the case and often provide a summary of facts that can help fill in any gaps about the person’s involvement in the matter.
• Corporate affiliations: Corporation records, filed with the Secretary of State in the state in which the company is doing business and where the company was originally incorporated, can help link a person to a private company.
• Securities and Exchange Commission filings: Publically held companies are required to file information with the SEC, and these documents may link a person to a public company or provide information about their salary and any bonuses or stock options awarded. They are useful for turning up new addresses too.
• Property records: Deeds and to land are publically available.  Furthermore, mortgaging information and liens against a property are as well.  Records of loans outstanding on other property, including cars, motorcycles, aircraft and watercraft are also available to the public.
• Liens and judgments:  A search of litigation records and public-records databases will help determine whether someone has a judgment against them or has been subject to a state or federal tax lien.
• UCC filings: If an individual has entered into a secured borrowing transaction with another individual or a company, then they should  have filed a Uniform Commercial Code (UCC) record detailing the transaction, including what items or equipment have been put up for collateral.  UCCs are available on the state and local level.
• Bankruptcy records: Some clients are surprised to learn that bankruptcy records are not sealed.  You can determine whether someone has filed for bankruptcy using general database searches, and can usually obtain copies of the documents filed by paying only a small copying fee.
• Media mentions: If something has been published in the press about a person, or posted online, then it’s definitely worth tracking down. Not all publications are on line, however. As with courthouses, your investigator may need to get out of the office to find what you need.
• Driving record: The public record will provide information on driving violations. 
• Voter registration records: Public records will detail where someone registered to vote and whether they are affiliated with any political party.
• Political contributions: Every time someone gives money to a politician as an individual and not through a corporate entity, their name, the amount given and to whom will be made publically available.
• Security/terrorism sanctions: This may seem unlikely, but it is worth doing a name search on 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.

Recently we were hired to track down a man who defaulted on a million dollar judgment against him by our clients.  The man's family owned and operated a successful retail business.  Since the judgment against him, the man had declared bankruptcy.  He alleged that he no longer had income from or access to his family's vast business fortune. 

Our client suspected that this was far from the truth, and that perhaps the man was still affiliated with the family business. They asked us to connect him to the company. 

We tried a number of ways. We visited the family’s retail business in person, but we didn’t find any suggestion that the man was still working there. 

So we moved on to the paper trail. For instance,

• We looked at all the company’s public records, including property records, credit agreements, UCCs, incorporation documents, and the like.  Unfortunately, he had successfully kept his name off anything affiliated with the business. 

• We reviewed all the company paperwork filed with the US Patent and Trademark Office.  We thought we’d caught him then, because his name was on the company’s application for a trademark.  But the application had been filed pre-bankruptcy. For all intents and purposes, it was useless to us. 

• We looked over the company's customs records, but they proved equally disappointing.  The man was on file as the receiver of shipments of raw materials from South America, but all the shipments had been signed for prior to the bankruptcy.  Records for shipments since the bankruptcy were incomplete and therefore inconclusive. 

How did we eventually make the link between the man and his family’s company? By picking up the phone.  As mentioned earlier, at the start of the investigation we had visited the business but hadn’t found any indication that the man was there.  But guess who answered the phone when we called a few weeks later?  The man himself.  Sure enough, when we dropped by a few minutes after the call was made, there he was in the flesh. 

We wrote about this in "Sorting and Unsorting Facts"—investigations are not linear.  Sometimes investigators have to do things over and over again in the hopes of getting a different result.  In this instance, if we had not doubled back and tried once again to connect him physically to the store, we’d never have made the connection.

If we'd limited ourselves to the paper trail, we’d also have fallen short. 

It's just like your mother told you: If at first you don't succeed, try, try again.  Perseverance may be all that makes the difference between success and failure.    

We wrote in our pieces "What Greg Smith and Goldman Sachs Tell Us About Investigations" and "Hiring Due Diligence Should Include an Attitude Check" about how indispensable it is to talk to people during an investigation. No matter how thorough a database may be, no matter how savvy your search terms are or how much you've actually managed to pull up via an expansive public records search, picking up and calling someone is often the key to a successful investigation.  

Clients, many of whom are highly concerned about maintaining secrecy and protecting their privacy, are often understandably reticent to have us pick up the phone.  And so we make a point of exhausting all database searches first before moving on to this step, just in case we can find what we need via public records or court cases. 

When we do get to the stage where a call is the logical next step, we ease our clients’ concerns by arranging with them in advance of any calls a template of what we’re going to say. That way our clients can rest assured that we've taken the appropriate measures to protect their identity while still representing ourselves ethically and honestly. 

Although we plan in advance what we’re going to say, we always tell clients that we can’t guarantee that we will stick to the script verbatim—conversations tend to move around, topics get discussed earlier or later than expected, sometimes we just don’t get to some topics at all.   But we do promise them that we will be attentive to the information they do or do not want revealed. 

Usually, however, it’s not just what we say that makes a difference between a home run interview and a strike out.  Often success depends on what we don’t say: A confident interviewer knows that there is great value in pauses.  It is in those silences after a question has been answered, before moving on to the next question, that you often learn a great deal about the person you’re speaking with. Very often people will keep speaking, and they will start to tell you more than just the answer to the question you asked. 

You just have to be calm and confident that handing over control of where the conversation is heading will not derail the call.  You can always work on getting the interviewee back on track later.  But in the meanwhile, remain flexible and attentive to what’s said after you have your answer.  What you learn may be completely unexpected and just what you were looking for.  

A superb column over the weekend by the personal investing columnist in the Wall Street Journal, Jason Zweig, "Polishing the Dimon Principle," struck a chord or two with us because of what it said about human knowledge and the occasional lack thereof.

Zweig was advising investors not to look to J.P.Morgan Chase’s CEO Jamie Dimon for guidance about sound investing practices, but the late Nobel physics laureate Richard Feynman: "You must not fool yourself—and you are the easiest person to fool."

For investors, says Zweig, “the bigger the commitment, the more certain they become that they must have been right to make it—and the harder it becomes to let go.” It’s all the more difficult to let go of ideas blessed by experts. Risk valuation used by banks has blown plenty of banks up, but bankers continue put their faith in it. Investors in turn put their faith in banks using this flawed technology.

Zweig advises that if a great investment such as J.P. Morgan Chase (prior to Friday) has paid handsomely, you should seek opinions of people who think you are wrong just to make sure you aren’t. If you love a stock, analyze the arguments of short sellers who hate it.

How does this translate into the world of fact finding? Take the brilliant candidate up for an executive posting: he’s never had a single black mark on his resume, every one of his references loves him, and he’s had great press for the past 10 years. He’s the J.P. Morgan of executive candidates, and he’s the perfect person to have examined by a fact investigator who will look for the following:

• Litigation that hasn’t made the news;
• Ownership of secret companies previously unknown, which could reveal business activity and litigation that also flew under the radar beforehand;
• People this person worked with but were left off his resume because they dislike or distrust him.

Or take the requirement for an asset search either to enforce a judgment or to track down money held by a spouse in the midst of a divorce proceeding. Would we need to do the asset search in Switzerland or the Caribbean, or even across state lines? Clients often say no, but really have no way of knowing where the assets may be.

The only way to find out is to start with all the information we can get from the client (all company names, phone numbers personal and commercial, addresses just for starters). We then take an open-minded approach and follow the leads.

The thing that often throws even experienced investigators off the trail is finding something they don’t expect to see and then figuring they must be wrong. “Our guy has never left New Jersey, so this can’t be his huge house in Pennsylvania that’s owned by a Cayman Islands company” is about the worst thing an investigator could conclude.

Zweig’s kicker is worth remembering for investors and investigators alike: “The smarter you are, the more easily you can fool yourself.”

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.

If it seems like every other day there is a new story about someone who was fired for something they posted on social media, that’s because there is.  There seems to be no shortage of cautionary tales about people who have yet to comprehend the impact their social media activities may have on their livelihood.  Recognizing the treasure trove of information potential hires sometimes post online, companies and public agencies have integrated social media checks into their hiring practices.  Many allege that they want to ensure they’re not bringing on board someone who is involved in illegal activities or is affiliated with a gang.  But most employers have a more benign concern: They don't want to hire someone who will post or tweet something that may reflect badly on his employer.

But there is a difference between a thorough social media check and an unabashed privacy violation.  Recent news reports note that some companies and public agencies have gone so far as to request that prospective hires turn over their user names and passwords for their email, Facebook and/or Twitter accounts.  That way, the potential employer can log in and take a good look around all their online activities. 

Some companies or public agencies have heeded warnings from privacy advocates and social media sites arguing that such measures may be too invasive. But sometimes their tactics are also questionable.  For instance, they may ask applicants to friend someone in the company’s human resources department so that person can have a look around.  Or, they might request that the job applicant please log into their accounts during an interview so their postings can be scrutinized on the spot. 

Of course, we advocate that anyone wanting to know more about an individual needs to invest some time and energy to tracking down their online persona.  After all, federal laws permit employers to use information that is publicly available on social media sites during background checks.  And we recognize that, as that never-ending stream of horror show news stories proves, businesses and public agencies are right to be concerned that new hires may say or do something online that could reflect badly on their employers. 

But we agree that asking potential hires to “consent” to having their privacy invaded in the name of due diligence is going too far.  As law Professor Lori Andrews argues, “[v]olunteering is coercion if you need a job.”  If there is a fear that an employee’s comments online could tarnish a company’s reputation, then employers are much better off counseling potential hires about the need to maintain strict privacy settings on their Facebook and Twitter accounts.  That way, efforts have been made to ensure that an employee’s online complaints or questionable comments are shared only among his online friends, and not the public at large.  

A report on National Public Radio written up here outlines the problem: legitimate businesses are increasingly subject to identity theft. Businesses find imposters are misusing their credit ratings, while there’s serious risk that people are using exterminators, contractors and other businesses being run by those same imposters.

While businesses guarding against ID theft are in the same position as people afraid of having their credit ratings ruined, there is an extra consumer angle to business ID theft: How can you be sure you’re dealing with the company you think you are?

a) Check the Secretary of State on line for the company you’re dealing with. We don’t mean Hillary Clinton. Companies in the U.S. are formed at the state level, and the government department that regulates corporate formation is usually headed up by the the Secretary of State.

 At the Secretary of State, check the following:

• Is the corporation in good standing? If not, back off. Even if it is, was it recently revived after a long period of inactivity? If so, beware and look elsewhere because scammers sometimes slip into the shoes of long-dormant companies in order to give themselves a cloak of legitimacy.
• Who is the owner of the corporation? Ask on the phone when you’re making your deal, and then check to see if the records match. If not, ask why not.
• Is the address for the company one where you would expect to see this kind of business? Does it operate out of a vacant lot or a gas station? Google the address and see what pops up. If your business doesn’t, you may have an ID theft.

b) Google the telephone number you’re calling. Even businesses without a website tend to be listed by other services. If you’re calling someone’s throwaway cell phone, that number probably won’t come up on the web as being associated with the business.

c) If the business you’re dealing with is subject to a professional or occupational license, you’ll usually be able to look that up too.

How would all of this work with the business that was impersonated in the NPR story, AAA Termite and Pest Control in Memphis, Tennessee?

There is only one such business listed on the Tennessee government site here. You find that it’s based at an address on Macon Road and that it was established in 1975. Except for a four-year hiatus in the 1980s, it has been in business ever since. Someone from the Burnett family at the registered address is the company’s registered agent.

What about licenses? While license checks are possible on line in some states, rules vary by state and even within states. Sometimes licenses are handed out at the municipal level. You can look up nurses and chiropractors in Tennessee, but not licensed pesticide dispensers. To check on AAA Termite’s license status, you have to use a telephone.

That may seem labor intensive, but if you’re not hiring new contractors every day, taking a few minutes out to make sure you’re dealing with the right person can save you a world of trouble.

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.

An enraging story by the Associated Press spells it out: computers used by background checkers mix up two people with the same name. Blameless woman gets tagged with a criminal record that isn’t hers, can’t get work and ends up homeless.

We’ve written about the danger in relying on the “intelligence” of computers here, and the limitations of Google here. The message in these as well as the AP story about the ruined lives of background checks gone wrong are the same: there is no substitute for having an intelligent person conduct your research.

We saw such a problem earlier this year: a client called and said he wanted to hire (let’s call him) Robert M. Johnson for a high-paying job. Robert M. Johnson is an accomplished professional with a great resume and wonderful references. How then to explain the criminal record for fraud turned up by one of the databases? Robert M. Johnson the candidate said, “I’ve never been convicted of any crime. You’ve got the wrong person.”

Turned out he was right and the database was wrong. How could we tell?

1. We looked up the criminal case in question. While the AP story is correct that more and more criminal records are on line, the cases themselves – the critical documents – often are not and in any case need careful reading. We looked at the sentencing report in this case and found that the criminal Robert M. Johnson was sentenced to serve his time in a particular southern state to be close to “home and family.”

2. We then found that the Robert M. Johnson up for the job had no ties whatsoever to this southern state. His parents didn’t live there, he had never lived there, his Social Security number was not issued there, and he was working in Connecticut while the criminal Robert Johnson was committing his crimes down south.

This seems like simple work, but the databases were incapable of making the mundane connections that distinguished two very different men with the same common name. Why would this be?

To start with, not all databases come up with the same information. One may know where a person has worked for the last ten years, while another will have no information about employment. Still, the employment-light database will do a great job associating a person with companies he may own or on whose boards he serves. Both kinds of information are vital, but no machine can yet put them together to draw a complete picture.

Complete pictures come when the human mind gets involved, and even then, databases can only take you so far. We’ve written here about that too, and how interviewing is sometimes the only way to get the information you’re looking for.

But interviews or not, automated searching is like letting a robot build a car and then having another robot inspect the thing. The robots are certainly useful and lower the cost of the vehicle, but would you drive that car before a person had looked it over? 

It happens all the time.  A divorce lawyer calls us and says his client is thinking of suing her husband for divorce, but knows very little about the family’s finances. What are the sources of income? Where is the money invested? Does the husband have anything hidden in companies she doesn’t know about?

After years of telling clients to tell us “everything you know about your husband’s money, investments and habits that could help us to find assets,” we came up (at the suggestion of a client) with a better idea: a checklist to help clients under stress ask themselves all the right questions before we begin an asset search.

Here is that list. It’s been very helpful not only in a couple of recent divorce cases, but also in other kinds of asset searches.

The questions are to be asked about the person being searched, not the client being interviewed.

1)      What are their full names? Have they ever used any other names? Single names? Other married names?  Variations of their current names? (E.g. using their middle name or initials instead of their first, etc.?)

2)      When were they born?

3)      Where were they born?

4)      Where do they live? What are the addresses? Do they own property there? Keep in mind this includes real estate, as well as cars, boats, planes, etc. And real estate is more than just homes: It also includes land and commercial buildings.

5)      What phone numbers are associated with them? Home? Office? Mobiles?  

6)      Where do they vacation? Do they own property there? What are the addresses? What are the phone numbers for those properties?

7)      Where do they like to travel? How frequently do they go there? Might they own property there?

8)      Where do they bank?

9)      Do they have investments? Stock? Bonds? Property? Other businesses?

10)   Do they have any paid insurance policies with cash value?

11)    Do they have any annuities that you know of?

12)    Where do they currently work? What is the address there? What is their position?

13)    Do they have any ownership interest where they work?

14)    Do they or have they had any partners? What are their full names? Where do they live? What are their addresses?

15)    Have they had any previous jobs? What was the address there? What was their position?

16)    Have they had any ownership interest where they previously worked?

17)    Do they currently own any companies? What are their names? What do they do? What are their addresses? What phone numbers are associated with them?

18)    Have they previously owned any companies?

19)    If they own companies or have owned companies in the past, what were they named? Are there any naming conventions they’ve relied on? For example, initials of names? City names? Variations on the same name? (St. Mark Co., St. Mark Associates, St. Mark Partnerships, etc.). Can you guess what they may name a new company?

20)    What did the companies do? What are their addresses? What phone numbers are associated with them?

This story on the Huffington Post sneeringly treats a new offering in the financial world: negative publicity insurance. The policy will be offered by a division of AIG, and will give companies in crisis access to PR damage-control specialists Burson-Marsteller and Porter Novelli.

Why is this a story anyone should feel negative about? The fact that AIG didn’t do very well controlling its own damage is immaterial, since it’s offering insurance so that the reputation of others can be helped by companies other than AIG.

Beyond a gratuitous swipe at AIG, lazy journalists don’t tend to like PR companies, period. That’s because journalists like to get right at the company they’re writing about and often resent intermediaries. Yet intermediaries are simply another kind of specialist. Why would the CEO of an oil company know the best way to talk to the media, any more than a reporter would know how to run an oil company?

It’s not always a matter of just “telling the truth,” because during a crisis litigation is almost always pending and certain facts are subject to attorney-client privilege.

Better journalists mind PR companies less, because better journalists use a lot of the same resources good lawyers and investigators use: public records and interviews with former employees of the company they are looking at.

And guess what? If you call up a PR company standing between you and the CEO of an embattled company and you ask a great question based on lots of research in securities records, court documents, and interviews, it will matter much less whether there’s a PR company in your way. If the company needs to answer the question, it will do so regardless of any PR advisor. If they can’t or won’t answer it, a good question is still a good question whether or not there’s a “no comment” after it.

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. 

Following is an entry from our firm's website originally published in September 2009 and, we think, timely.

Plenty of people - even sophisticated lawyers - sometimes ask us in the course of an investigation: “Can you get me his phone or medical records?”

The answer for anyone interested in staying out of jail is no. If you’re interested in hiring a firm that plays fast and loose with the rules, just remember that you could be held liable for the actions of your agents.

Medical records have been strictly off limits under federal law since 1996 under HIPAA, and there are state laws that may also restrict information flow.

As for phone records, despite all those ads on the Internet featuring companies that can get you someone’s cell phone records, you might want to ask them how they’re doing it before you hand over your money. Investigators used to love to pretend to be someone else when they called up a phone company and requested a duplicate copy of their cell phone bill.  But since 2007, that’s against federal law too.

Put simply, you should stay clear of any investigator who uses pretexting – impersonating someone else – to obtain information. If an investigator seems vague about how he’s getting his information, back away. Nothing he’s doing for you is rocket science and it should all be easily explainable. 

Memo to federal regulators: it’s not enough to impose fines; you have to make sure you collect them if you want people to be afraid of you. The same goes for private litigants thinking of suing to collect money they’re owed. Without chance of collection, what’s the point?

The Wall Street Journal reported on Friday that the Securities and Exchange Commission and the Commodity Futures Trading Commission have failed to collect more than one-third of the $12 billion in penalties handed out since 2005. Looking at the CFTC alone, a staggering 75% of fines imposed are not being paid.

This story reminded me of my debtor-creditor professor in law school who opened his second-year course with a speech that said something like:

“In first year, you do the baby courses – torts and contracts – where A sues B and A wins. Now in second year, we find out that B often doesn’t have to pay. In the real grown-up world, B wins.”

In the real world, B may have well-protected assets in a series of limited liability companies or limited partnerships, and can afford a little more risk than a person with 100% equity in a house held in his own name. B may also have real estate you don’t know about because it’s in a different state or offshore. B may also own shares in companies with good liquid assets, but first you have to identify those companies.

While the government imposes fines first and then figures out how to collect, private litigants get to decide ahead of time whether suing someone is worth the effort. Later on, the decision may come once they have a default judgment in hand, but no hint of easily-seized assets.

Here is a brief checklist of some of the things our clients like us to look for when doing asset searches:

• Where does the subject live? Who owns the house? If it’s a company, that could be his.
• Who owns his place of work? Some people like to have the shareholders pay rent to the landlord, who turns out to be the company president collecting rent for himself.
• Are any companies you don’t already know about run out of either home or office?
• Has anyone ever sued or been sued by any of the companies we may now be discovering? Litigation opponents who got discovery against our subject may know lots more about him than we do.
• Interviewing people with knowledge of the subject can yield tremendous results in a highly-cost effective way. The public-record steps taken above can spit out the names of a dozen people easily located and contacted in a matter of hours.

The cost of such an investigation done right is often a tiny fraction of the money at stake or the fees involved in complex litigation.

One thing we always tell new clients: there is no such thing as a “local” investigation. A Russian guy in L.A. means you could be dealing with a Nevada corporation in addition to Russia and California. An apartment in Miami may be owned by a British Virgin Islands company.

That’s a good thing to remember when dealing with Greece, and especially if you’re counting on the solvency or liquid assets of a business partner. Your business could be in Greece, but your partner’s collateral could be sitting in HSBC in Switzerland, or in Cyprus. While cracking a Swiss bank account isn’t as hard as it once was, it’s no piece of cake even with a subpoena. Cyprus may be part of the European Union, but it’s not a member of the Financial Action Task Force, the OECD’s umbrella group that fights money laundering. We’ve had experience trying to find assets in Cyprus, and our clients don’t find it fun.

As Greece’s new restructuring plan (which The Economist says is doomed to fail) includes plans to sell state-owned assets, it’s easy to envision foreign investors going into partnership with locals to buy up cheap assets. The local participation may be to get around Greece’s legendary bureaucracy, and local partners sometimes put up cash or guarantees. Given what’s been going on in Greece of late, bank balances in euros held in Greek banks don’t seem to be the most secure kind of backing an investor could be looking at.

The Bank of Greece’s own statistics make for sobering reading. In April, Greece’s net capital flows veered into negative territory. The numbers would have been much worse this year but for large injections of money from the EU.

As long as a year ago The Financial Times was reporting that Greeks were shoveling their bank deposits out of the country to Switzerland, Cyprus and other international points. With the teargas and the fragile plans being discussed this week, no asset search of a Greek person of any means should be complete without looking beyond the country’s borders.

Some other tips before concluding a deal with anyone in Greece or any other jurisdiction with risk of capital flight:

• As part of your standard due diligence, find out whether this person has ever been sued in the places he or she does business, such as the U.S. or the U.K. Previous business partners will have come to know this person and will probably have included associated companies along with the person in their lawsuit. Those companies could contain assets worth going after either as part of a guarantee or to attempt to attach later on.
• Do a basic verification of the person’s alleged contacts in the home country. We have seen many people boast that they are “very close” to a key minister or other connected official, when in fact no particular bond exists. In countries where relationships matter most, it’s the quality of those relationships that is critical. Such things are seldom written down, but are rather determined by quietly interviewing knowledgeable people in the country in question.
• Insist on adjudication of disputes outside the country in question, whether you are looking for arbitration or traditional legal remedies. According to Transparency International Greece’s public corruption problem is worse than Romania’s and almost as bad as the rating achieved by India.

Just what a generation of Googlers doesn’t need: more false hopes from Google Chairman Eric Schmidt that Google is a treasure trove of answers to their questions.

Schmidt said in an interview this week that that Google aims to “compute the right answer” to questions typed in by users rather than just provide links.

We’ve written before here about why Google as a business is not the same as a neutral finder of information, as well as why computers such as Jeopardy’s Watson or the ones at Google don’t actually think, but only seem as if they are thinking.

Just why, then, is Google going to be unable to “compute answers” much of the time? Among other reasons,

• Most things in the world aren’t on Google. You can’t get answers to questions that depend on information that isn’t there. Google yourself: how much information about your whole life can you find? Every roommate you ever had? Every job? Significant other? Dispute? Most people can find perhaps one percent of their life on line, if that. The fact that Google wasn’t around before 1998 is one reason for this, but there are others.
• As we wrote before, Google likes to give you information about the things that are profitable for Google, not useful for you. We know how a library index is put together, but Google’s algorithms, ever changing, are a business secret. Libraries get funding from the public, but Google has to make its money from ads.
• Using Google properly requires “meta searching,” or searching for the thing that will lead you to the answer you want. You think a computer can do this, but it’s remarkably difficult to program. Say you want to find an optician in a particular state. He probably won’t be on Google, because the authority that licenses opticians there is either not on line or uses PDF documents that Google’s robots don’t index. But if you Google optician licensing authorities, you could then download and read the PDF file to find the person you’re looking for.
• Google and most computers are rotten at telling you what ought to be there, but isn’t. Can’t find a Big Four accounting firm that looks after Bernard Madoff? Google might give you the answer that his accountant is a one-room operation in the suburbs. It won’t add that this seems mighty fishy and there are more important questions with which to follow up.

 Remember that Google is tool for thinking people, not a substitute for thinking.

Will the costly wiretaps that were essential in convicting Raj Rajaratnam of insider trading lead to a “CSI effect” in white collar crime?

After Rajaratnam’s conviction, The Associated Press quoted plenty of lawyers as saying that the use of wiretaps -- formerly used in organized-crime and drug cases but not insider trading – led to a resounding success. The problem could come in raising expectations of what juries will need to see to convict on this crime. You can’t wiretap everyone. There are warrants to get, and as importantly, wiretapping is hellishly expensive.

The debate over a CSI effect in criminal law has been on for years. Jurors watch crime shows on television in which scientific evidence is gathered in what seems like a day or two, presented in a nice neat package and used to convict people we are certain are bad guys. Some jurors come to demand evidence just like they’ve seen on TV before they convict.

As Jeffrey Toobin outlined in a New Yorker piece a few years ago, the ease with which investigators get “a match” of nail clippings or other evidence can be greatly exaggerated on television.

In the Rajaratnam case, prosecutors eventually prevailed with what the jury found to be convincing wiretap evidence of guilt, but a human being still had to sit there and listen for nine months, and then sort through that huge amount of raw evidence to make sense of it for a jury by playing portions of just 45 conversations.

That’s expensive labor. In 2009, the average cost of a federal wiretap was more than $60,000, according to a report by the Administrative Office of the U.S. Courts. With an average length of 42 days per wiretap, imagine what Rajaratnam’s eight months of recordings cost to gather and analyze.

If wiretaps are what it’s going to take to convict on insider trading, expect a few blockbuster cases like Rajaratnam’s and the hope that those will act as a deterrent for everyone else.

As clever as Watson the computer was on Jeopardy!, computers will never be able to replace something professionals bring to their practices: the ability to think. This was hit home to me in John Searle’s brilliant reprise in the Wall Street Journal of a paper from 30 years ago, “Watson Doesn’t Know It Won on ‘Jeopardy!’”

Lawyers, accountants, doctors and dentists all rely on machines to help them do their work, but who would ever want to assign a really tough job to a machine when a great professional was available?

Anyone can buy Turbo Tax, but sophisticated tax situations require sophisticated accountants who make judgment calls on lightly-tested IRS regulations, and who can talk to the IRS and negotiate on a client’s behalf. As we all know, negotiation is about facts, but it’s about persuasion too. Persuasion can involve emotion, humor, and a host of other things we can’t program for because they don’t involve the manipulation of symbols – Watson’s signature (and only) calling card.

Say you are in the dentist’s chair. Watson has now been programmed to operate a dental drill. A patient has a button that can shut Watson off and stop the drill whenever there’s pain or discomfort, so dentists figure that’s a perfect substitute for a human being sitting there saying, “Just let me know if it hurts and we’ll stop right away.”

None of us would go for Watson.  If you said it hurt, you would have to say how it hurt, and how much, and just where. If you find “for sales, press 4” annoying, imagine what it would be like to have that kind of response from a machine wielding a drill.

When it comes to lawyers, Paul Krugman of the New York Times took the bait dangled by self-interested e-discovery companies who argue that computers can vastly reduce the number of lawyers needed to look at documents in discovery.
 
Enter Ralph Losey of ediscoveryteam.com, with a convincing essay that rebuts the Times story: New e-discovery software that can scan documents may be fine, but

Advanced e-discovery search and review technologies all still require lawyers to operate. They still require skilled attorneys to fit the technologies into a larger legal methodology. They still require the [electronic discovery] to be understood. The software programs do not run themselves. They are only a tool. They are just a hammer, and without a carpenter, they will not build a case on their own.

As Searle wrote, while playing on Jeopardy!,

Watson did not understand the questions, nor its answers, nor that some of its answers were right and some wrong, nor that it was playing a game, nor that it won—because it doesn't understand anything.

Any professional that obtuse would lose his license.