I’m asked all the time when I meet other professionals, “Who’s a good referral for you?”

I usually answer, “Litigators are good – if you want to see if it’s worth suing, or you want to look into the people on the other side, and we do trademark and copyright work too.

And anyone thinking of making even a modest investment ought to know who it is will be taking their money.”

All the work we do with cases studies is also on our website.

But recently, someone asked me, “Who’s a referral that people would think would be good for you, but really isn’t good?”

My answer was: “People who want me to break the law.” By far the most common request is to get information on how much money someone has in the bank, and where that bank is.

A few years ago, we helped the Atlanta Journal Constitution do a great piece on the illegal trade in bank accounts. The story they wrote is here.

I also wrote about the issue in 2020 in the American Journal of Family Law.

If I Can Check on Your Opponent, I can Check on You Too

Think about it: If you call me and ask me to find out how much money your enemy has in the bank and you think that’s OK, is it OK if I look into your bank account to find out how rich you are? What about finding out how much you paid a competing investigator last year?

Of course, you don’t want me snooping into your private affairs, and that’s why I won’t snoop into your enemy’s either.

What do we mean by private? We mean things that are off-limits by law. The system in the U.S. is designed to make it hard to drill into someone’s bank account without the supervision of a court. That’s a good thing. Just like not being able to bug their home, wiretap their calls, and now, in many states, put a tracker on their car without their knowledge.

Just because the law is breakable doesn’t mean you should break it.

I can look at your enemy’s deeds, mortgages, his divorce settlement (depending on the state), professional licenses, SEC trading disclosures, old news releases still hanging around the internet that he wishes were scrubbed. If he’s Norwegian, I can look at his tax return. If he’s American and has a non-profit, I can look at the non-profit’s tax return.

The list goes on. Privacy means different things in different countries. In this one, it’s amazing what you can find out about people without invading their privacy as defined by the law.

 

Want to know more about how we work? Our website has a wide range of publications and videos. You can also read my book, The Art of Fact Investigation which is available at bookstores online and for order from independent book sellers. And check out our other blog, The Divorce Asset Hunter.

Investors in Madoff Securities and FTX were both warned, but by different sets of people.

If it turns out to be true that without customer knowledge FTX took billions of dollars of customer account money to invest in a risky company owned by FTX’s CEO, this will truly compare to the Madoff scheme for audacious fraud (though smaller in dollar size).

The major difference is that with Madoff, whistleblowers were trying to alert regulators that his stated returns didn’t make sense, not to mention his use of a tiny accounting firm and having no independent custodian for his funds.

Regulators on Madoff just missed it.

With FTX, regulators were the ones shrieking that this was a dangerous proposition, but many people didn’t listen.

In September, the UK’s financial market regulator warned consumers that FTX was operating without their approval, and that investors “may not be able to get their money back if things go wrong.” This followed previous warnings about other crypto platforms.

Before that, in March of this year, three European Union regulators for securities, banking, and insurance issued a joint statement warning consumers that they faced the very real possibility of losing all their invested money if they buy these assets. Consumers in crypto had no recourse to compensation under existing EU Financial Services law, the statement said.

The same month, Securities and Exchange Commission Chairman Gary Gensler, in a tussle with the U.S. commodities regulator and members of Congress over who gets to regulate crypto, stated: “If the platform goes down, guess what? You just have a counter-party relationship with the platform … Get in line at bankruptcy court.”[1]

Our modest contribution to pointing out the early days of Crypto regulation came in April, with When Too Few Regulatory Problems Add to Risk.

 

Who Gets Most of Our Sympathy?

Being in the due diligence business, I can be surly when people worth millions of dollars decide to forego a few thousand in due diligence and then complain they made an investment that was riskier than they thought it was. Many of the Madoff victims fell into this category.

The same goes with the richest people investing with FTX, as well as the insiders who willingly took FTX play money (FTT) instead of dollars, and then banked it all at FTX instead of in a “wallet” separated from the company.

I have a lot more sympathy for the small investor our investment laws are meant to protect – the “unaccredited” investor not worth that much money who perhaps can’t afford expensive due diligence and who depends on the government to watch over those taking in investments to make sure the money is properly segregated and invested appropriately based on the stated risk profile.

In this case, though, even the government was pretty clear that this was the Wild West: Crypto was a law unto itself and you risked fighting to get your money back in bankruptcy court.

Nobody can say they were not warned.

[1] A former Harvard Law School Professor co-wrote in yesterday’s Wall Street Journal that Gensler’s agency may be partly responsible for some of the FTX customer losses, because in March it discouraged banks and brokerages from keeping crypto assets in their custodial businesses without adding them to the bank’s balance sheets. That is not the requirement when keeping stocks and bonds in custody.

You want to invest $3 million into a real estate project. Time is tight because it’s closing in 12 days. The developer (51 years old) seems to have a decent track record and takes credit for billions of dollars of projects, but this project doesn’t yet have zoning approval and the previous owner dumped the property because his plans to develop it got tied up in court by angry neighbors.

  • Scenario one: You find the developer has no criminal record and no bad press. Your lawyer looks over the contract and you send the developer your $3 million because the return looks attractive. Four years go by and the project is mired in delays, cost overruns, and your guy gets the project into expensive litigation with another partner (something it turns out has happened in a prior project of his). In the end, as he considers selling the land, you are happy to have him buy you out at a loss.

Cost: $1.25 million. But you saved $3,500 by not paying for good due diligence.

  • Scenario two: You find the developer has a history of litigation against close associates, plus got into a loopy lawsuit over a $5,000 dispute that he says knocked down his credit rating. He has billions in past projects but he’s taking time to litigate over $5K. You see that the project doesn’t have approval and that he’s been unable to refinance his large mortgage even though rates have fallen. Maybe he’s too highly leveraged in his other projects. Maybe he hasn’t done those billions he claims he has. You pass on the project.

Cost: $3,500. And you have $3 million in dry powder to invest somewhere else.

$3,500 buys back your $1.25 million mistake, not to mention any excess returns a different project could earn.

 0.28 percent seems like a fair price to have paid.

Think of due diligence the way you think about car insurance above the minimum amount your state requires. In New York, you could get insured for just $50,000 in case the other person in an accident should die. But what happens if they die and you get sued for $2 million? Inadequate insurance could result in a lien on your house.

You will try your best to drive defensively, but if  you make a mistake you’ve prepurchased the cost of the mistake with a higher premium.

There is no state law anywhere in this country that says you have to spend a minimum amount of money in due diligence on a proposed business transaction. You are fee to lose millions on a bad deal.

But if you are insured for more than the minimum coverage allowed for a car accident, why are you risking big money with your investment by foregoing good due diligence?

 

Want to know more about how we work? Our website has a wide range of publications and videos. You can also read my book, The Art of Fact Investigation which is available at bookstores online and for order from independent book sellers. And check out our other blog, The Divorce Asset Hunter.

One indispensable part of due diligence is to check for regulatory sanctions. Was a company found by the SEC or FINRA to have misappropriated investor money? Put them in unsuitable investments? Lied on a filing to induce people to invest money under false pretenses?

While we never pronounce “Invest” or “Don’t Invest,” “Hire” or “Don’t Hire,” regulatory sanctions are something our clients can put into their personal mix that determines risk tolerance.

But what about when you don’t find any regulatory problems? That too can flag a problem. And the bigger the prospective deal, the more the complete absence of regulatory problems becomes. Two issues in the news today come to mind on this front: Cryptocurrency and ESG investing.

As we saw with the Bernard Madoff scam (and countless others), it’s what is not in evidence that should cause the greatest concern. In Madoff’s case these can’t-be-founds included an independent custodian, a Big Four auditor, reasonable variability in returns for equities, and in the last couple of years before he was caught, evidence of billions of dollars of equity holdings in his 13F SEC filings.

Bad, cheap, check-the-box due diligence, could and did robotically report to you that “No sanctions were found” for Madoff’s operation. Plenty of people refused to invest with him because of what they expected to see but did not. Still, a lot of the due diligence failed them. Even the SEC was unable to nail Madoff after repeated approaches by a whistleblower.

Unlike with Madoff, I am not suggesting any evidence of criminality with the examples below. It is just that there is a lack of what I would want to see in an investment that was not high risk: That they are governed by rules and that they follow those rules.

  1. Environmental, social and governmental (ESG) investing. What’s remarkable about the categorization for investors of ESG investing is that there is no accepted definition of what ESG is. While regulators can come down hard on companies for violating accounting standards, there are no ESG standards to violate. This was explained beautifully in a Bloomberg article, The ESG Mirage, last year.

If someone is selling you a bond fund, you would expect it to be full of bonds. A gold miner’s ETF should be about investing in gold miners. But investing in companies with good ESG scores is a matter of sorting through more than 160 different, competing standards for what makes a high ESG score – what Bloomberg calls “a foundational yet unregulated piece” of a multi-trillion dollar business.

If you have a business worth tens of trillions of dollars, you would expect some wrongdoing to pop up here and there, but it’s down to Bloomberg and other journalists to tell you that ESG can mean nearly anything Kick out Tesla, upgrade Exxon Mobil. How is an investor to tell the quality of the ESG product he’s considering?

  1. We are now seeing the early stages of litigation meant to determine what kind of regulatory regime will govern cryptocurrency in the U.S. The industry says it’s a commodity and should be governed by the Commodity and Futures Trading Commission (CFTC). But the Securities and Exchange Commission (SEC) is having none of that. Even though Congress hasn’t spoken specifically about which agency ought to regulate crypto, the SEC is proceeding as if there is a clear answer to what cryptocurrency is.

It’s not an absence of regulatory activity, as with ESG, just the very early days of it.

When the rules are unclear, risk goes up. At around $1 trillion, the crypto market (including cryptocurrencies and non-fungible tokens), presents a huge amount of regulatory risk.

None of this means you shouldn’t pay attention to ESG ratings or crypto. But the idea that these are well-settled concepts with anything like low risk is an idea a serious investor should dismiss.

 

When not at work, I like to do many things, and one of my favorites is to watch New York Mets baseball. Since moving to New York I’ve grown to love the team and I make common cause with the many Mets fans I run into (even in my Bronx neighborhood just a few stops from Yankee Stadium).[1]

Keith Hernandez, 1986: Barry Colla Photography, Public domain, via Wikimedia Commons

One benefit of watching the Mets is that our team has what many consider to be the finest broadcasters calling their games. The radio team led by Howie Rose is unmatched for its knowledge of the game and willingness to criticize the home team if that’s merited. Most of my intake is via the TV broadcasters, often rated the best in the game. Included in most of these games is Mets alumnus Keith Hernandez, who provides an education on hitting each and every time he sits down in the booth. [2]

Some of what I’ve learned watching Mets baseball turns out to be applicable to my work life.

  1. Not everything is under your control. If your umpire that day is a “pitcher’s umpire” (one who calls a generously-large strike zone), then some close pitches are, in the words of Hernandez, “too close to take.” You had better try to hit them or foul them off. Passivity can send you back to the dugout. Hernandez doesn’t criticize umpires for large or small strike zones, and goes out of his way to praise the umpires who keep their zones consistent. If an umpire is calling inside strikes all day long, shame on you for watching as a close one goes by you for strike three.

Our “umpires’ are the circumstances in which we find ourselves. If we are investigating on a tight deadline and need to get records in a county that does not permit on-site searching in the courthouse, we prefer to over-order any record that could be relevant so we can sort them out later. If someone is going to rule out a document as being irrelevant, we want control of that process. If we get too many documents and need to discard some as being of no use, that’s like a two-strike foul. Better that than to fail to order the document that could turn out to be the one we need. That would be looking at strike-three.

On the other hand, if we’re in a county that has a nice full set of records online, we can be much more selective up front because we can read the dockets ourselves and sometimes figure out whether the case relates to “our” John Smith or someone else with the same name.

Overseas, some countries have nice public record systems that permit searching and unambiguous reporting. Other nations have no concept of a public record. All the information you get in these places is unofficial, even if highly informative. It’s no good cursing your bad luck that the investigation takes you to a difficult location. You’re at bat and you make the best of it.

  1. You may need to change your approach a few pitches in. Hernandez talks all the time about “good two-strike hitting,” which means that you may need to change the way you want to swing when there is a much greater price to pay for being unsuccessful on the next pitch. Instead of trying to hit the ball in the most powerful way (“pulling” toward the right for left-handed hitters and vice-versa), many good hitters just “slap” or “poke” the ball through an opening the other way for a single.

In other words, if you’re not going to hit a home run, better to hit a single than to strike out.

We love investigations that turn out to be “home runs” right away. The million-dollar fraud we discovered being perpetrated by our client’s litigation opponents that forced them to drop their suit; the $60 million in traceable assets we found in even less time during a divorce asset search.

But what if you don’t find that kind of thing that quickly? Two strikes for us can mean we are running out of time (before a court-imposed deadline), running out of budget (you can’t afford to look everywhere); or both. We try to concentrate on the jurisdictions most likely to yield records about our person, rather than all thirty counties he may have lived or worked in over the past 20 years. This is what’s called Bayesian analysis – refining search terms based on what you learn as you go along to increase your odds of success.[3]

If we’re trying to impeach the credibility of a witness, we may find no prior conviction for fraud (a home run), but the omission of a job on his resume eight years ago could turn out to be valuable if it leads to evidence that he was fired for incompetence there (long single or double).

  1. Analytics are helpful, but you also have to trust your eye and what the pitcher is doing today. The data may tell you that with two strikes a pitcher is x% likely to throw a breaking ball, but what if the third time through the batting order you notice he has started “tipping” his pitches (involuntarily signaling what he will throw next)? That won’t be in the data, but it will be obvious if you’re watching.

We too have access to lots of data. Databases give us nice head starts on where people have lived, what companies they’ve associated with, some criminal convictions, and names of relatives. But we still subject all of that data to verification by checking it ourselves. It’s often right, but it’s wrong often enough that you can’t just trust it blindly.

One database thinks I still live in the home we sold 12 years ago, based on a grocery store discount card I obtained while living in the old house and which I continue to use today. The grocery store continues to sell my data to aggregators, who continue to report that I live where I don’t. Anyone checking the county record at the old place can see it was sold, but if they don’t check they’ll get it wrong.

Along with his equally brilliant commentators Ron Darling and Gary Cohen, Hernandez is also brimming with tips about fielding, especially regarding the placement of infielders given the situation (the hitter at bat, the score, the count). These tips also pertain to investigation. That article will be appearing before the Mets next win the World Series.[4]

[1] There are many Yankee fans around too, and I also count them among my friends. There is even, for some reason, a lifelong Bronx resident who roots for the Phillies. It only took him two years to admit it.

[2] Hernandez will have his number retired by the Mets on July 9. He has not been elected to the Baseball Hall of Fame, though his career on-base percentage of .384  is close to that of Detroit’s Miguel Cabrera, often referred to as a shoo-in for Cooperstown. His WAR (wins above replacement) of 60.3 is better than those of Yogi Berra, Willie Stargell or Vladimir Guerrero, and just 0.1 below Harmon Killebrew’s. He was also famous for revolutionizing play at first base, where he won eleven consecutive Gold Gloves.

[3] I discuss this further in Legal Jobs and the Age of Artificial Intelligence, Savannah Law Review Vol. 5, No. 1 (2018).

[4] Date to be determined.

Many of us love optical illusions. It’s a safe thrill to know we’re being tricked, and yet are still unable to tell our brains to “get real” and stop the illusion.

Bridget Riley, section of Blaze 4 (1964)

When you’re doing an investigation, the same kind of thing can take over your brain: You want to look at facts in one way, but your brain won’t let you. That can lead you to the wrong conclusions. There’s a great explanation for the evolutionary reasons optical illusions work on us, at the American Museum of Natural History site.

I wrote about illusions in my book, The Art of Fact Investigation, and was recently reminded again of their power when viewing a wonderful retrospective of the paintings of Bridget Riley, at the Yale Center for British Art.

Sometimes in Riley’s work, what you know to be a static picture looks as if it’s moving (scroll quickly as you look at the section of the work above). As the AMNH site explains, we evolved to focus attention on movement because it can be a sign of danger.

“Even when you stare at a still object, your eyes dart around. Normally, your brain can tell the difference between your eyes moving and an object moving. But because of the strong contrasts and shapes in the illusion, your brain gets confused. Your motion sensors switch on, and the image seems to turn.”

Or take a look at the picture to the left. It’s the famous “Duck-Rabbit” with a duck looking left and a rabbit to the right.

Even after we know that we are looking at something unusual, this image is fascinating. While the information on the page never changes, we can see only a duck or a rabbit, but not both at the same time. It’s very hard to take in simultaneously two facts that we know to be mutually exclusive.

Investigation can feel like that too. In forming theories as we investigate, we gather evidence that may end up supporting what appear to be incompatible or contradictory conclusions. Our instinct is to favor the evidence that supports the conclusion we think is more likely, but we must resist that tendency. We will not find a man who is/is not bankrupt at the same time in the same jurisdiction (impossible), but we may find someone who was extremely wealthy in January and is broke in March.

Looking at the duck-rabbit takes more energy than looking at a conventional picture of a duck or a rabbit, because it clashes with our understanding of what kinds of animals exist on earth. A man who goes from riches to rags in six weeks will, similarly, be harder to investigate because we will have to overcome our own skepticism before we can consider the entire picture of events.

The tendency to find evidence to confirm the case we are trying to win is called confirmation bias, and lawyers are bursting with it. Lawyers are competitive by nature. Evidence they need is something they will naturally want to believe they have uncovered.

Consider the scope of the investigation. Since we “know” Robert Jones is strictly a “New York guy,” we will not even look outside New York to see what else he may have done or acquired outside the state. That’s a mistake.

In screening witnesses, we see that an expert witness has testified dozens of times, so we “know” he has no embarrassing personal history that could affect his credibility since “someone” is bound to have found it by now. Wrong again. At least, wrong not to check.

Optical Illusions in Finance

As for a static picture that appears to be moving, think about Bernie Madoff’s scam. Talk about bold colors and contrasts: He was a leading light in finance, apparently very wealthy, and highly exclusive about who would be allowed to invest in his apparently successful funds.

Master Illusionist

The movement in the Madoff picture was something now known as FOMO (fear of missing out). So much was apparently going on in his universe that you were a fool to pass up a chance to give him money.

In the end, it was an illusion. An accountant in a shopping mall, no independent custodian, and SEC filings that showed just a few million (not billions) under management.

Bridget Riley’s illusions are enjoyable, thought provoking and sometimes disturbing, but the fact that they are illusions is not a secret.

They are worth keeping in mind the next time your investigator comes back with a “sure thing.”

Where do you start in deciding which investigator to hire for a sensitive job?

.

It should be a business of trust, just as it is when choosing someone to come up with an estate plan, to sue a former business partner, or to handle a complex tax situation. Despite the seriousness of the question, some people just do the electronic equivalent of calling the person with the big ad in the Yellow Pages. But many of us ask for recommendations.

What happens when nobody you know can recommend an investigator who not only delivers results, but does so in a way that doesn’t break the law or the rules of professional responsibility that bind lawyers and their agents?

Try these five screening questions on any investigator you are thinking of hiring:

  1. Can you get bank account information?

The answer you should hear is, “Not without a court order.” You could then ask them about the Gramm Leach Bliley Act (which protects bank secrecy) and what that federal law lets them see without the approval or a judge or a subpoena. If they tell you it’s all legal to find out where someone banks and what their balance is, think about this: Do you think anyone should be able to find out exactly what you have in the bank, just because they feel like it?

Not only should they not be able to do that. It’s illegal for them to do that unless you meet a tiny list of exceptions (such as being behind on child support payments).

I’ve written extensively about this issue for years and have called many investigators who claim that getting bank account information whenever they want is legal. The funny thing is, they can never explain how they do it. It’s always a  matter of “good contacts” with the right banks, as if banks don’t mind violating your privacy if they give the information to a friend who happens to be an investigator.

Of course, you can take your chances and participate in the violation of federal law. Just don’t be completely shocked if the other side finds out about it and gets the evidence excluded and, possibly, brings a professional responsibility claim against you the lawyer who approved this.

  1. With Google and all your databases, you can do your whole investigation remotely, correct?

Anyone who tells you they can always do everything electronically should be avoided. The United States contains more than 3,000 counties, and state court records are stored at the county level in most cases. Most counties do not have all their records on line. Some do, and some will show you the dockets (the list of documents in a court case) but not the documents themselves.

As for Google, it’s an indispensable tool but consider this: If you Google yourself, you will probably find one or two percent of all the information you know about yourself. You won’t find a complete list of former colleagues, of people you’ve tangled with, dated, done business with.

If there’s only a one or two percent hit rate for you, why should there be so much more for the person you want to investigate?

  1. What phone calls do you think you would make first?

The answer here need not be a deal-breaker, but if the investigator launches right in with a big list of people, beware. If you want to send an immediate signal to the other side that you are looking at them, then by all means, call up all their best friends (or even their worst enemies). The minute you call anyone, you create a chance that word of your investigation gets back to the subject.

Imagine you are doing an asset search for someone who is considering filing for divorce but hasn’t done so yet. Do you want to tip off the monied spouse that you’re looking around?

  1. Do you know what the no-contact rule is and how to make sure you don’t violate it?

They had better know exactly what this rule is (model rule 4.2 that deals with communications with people represented by counsel). The states vary somewhat in their interpretation of whom this rule covers, but your investigator ought to know the rules where he works. Get him to tell you what they are. If he just says something like, “Don’t worry, we’ve been doing this for years and we’ve never had any trouble,” run away and find someone else.

They may indeed have had trouble but even if not, do you want to be the client they use to break the mold?

We did an entire article on this issue last year here in talking about interviewing someone’s ex-employees. It’s got some helpful examples of other things you can ask about.

  1. When you interview someone, how will you introduce yourself?

It is of the utmost importance that your investigator does not lie about who she is or why she is calling. Beyond the obvious illegality of pretending to be the police, for instance, there are professional responsibility concerns at play. Lawyers are not allowed to tell lies (“make untrue statements”) according to the rules. Sure there is some “dissembling” allowed in contract negotiations, and you can be vague without being completely misleading.

But if you are caught telling an outright lie (or allowing your agent to do it), watch out.

In defending himself in an anti-trust case, Uber CEO Travis Kalanick hired an investigator. That investigator then mispresented the purpose of his calls while compiling background information about the plaintiff’s lawyer. Reuters reported on it in 2016. Instead of saying he was working against the lawyer, the investigator pretended he was compiling information for an article about excellent lawyers in the area.

The judge was not amused and ruled what had happened was enough to provide a reasonable basis to suspect that a fraud took place.[1]

Investigators should always use their real names and companies. If you don’t want them to reveal their client’s identity, that’s fine. Let them say they have a client who prefers to remain unidentified. Lots of people will agree to be interviewed even if they don’t know who the information is going to help.

Will all of these tests mean the investigator will do a great job? Not necessarily. You should still get recommendations if you can, but passing the test questions above will reduce the chances of getting into legal or ethical trouble, and who doesn’t want that?

 

A longer version of this article appeared in the American Bar Association’s Journal “Litigation” in 2017. Link for ABA members only.

Want to know more about how we work? Our website has a wide range of publications and videos. You can also read my book, The Art of Fact Investigation which is available at bookstores online and for order from independent book sellers. And check out our other blog, The Divorce Asset Hunter.

[1] Meyer v. Kalanick, U.S. District Court for the Southern District of New York, 1:15-cv-09796, document 76 filed Jun. 7, 2016.

Specializing in financial investigations as we do, I am always fascinated when new financial frauds come to light, and I always want to know how the person got caught.

In the case of the recent Yale School of Medicine fraud in which an administrator took more than $40 million in fake computer purchases (desbribed in The Washington Post) the end came down to an anonymous tip.

It should not have required a tip to catch this one. It needed someone who can do percentages. To do that going into an investigation, you need to make sure you know what sizes and distances you are talking about.

A percentage is the answer to the question, “Compared to what?” Is a million computers sold in a year a lot? We all intuitively know that a million computers sold in one year in China is a drop in the ocean among a billion people, but a million computers sold in Plattsburgh, New York in one year sounds far-fetched. [I thought Plattsburgh had maybe 50,000 people in it. The real answer is 19,500 – and a million units is nuts with either figure.]

 

The Yale Facts

Jamie Petrone-Codrington was an administrator at the Yale School of Medicine’s Department of Emergency Medicine. She bought equipment on behalf of the department, some of which would be extremely expensive. But she didn’t need higher approval to buy any lot of goods under $10,000. Since one X-ray machine or MRI costs a lot more than $10,000, she decided to fake purchases of things that cost less than that – computers.

According to the criminal complaint and plea agreement, Petrone bought some $30 million worth of goods for the medical school between 2018 and this year. Since January 2021, she bought 8,000 iPads and Surface Pro tablets for use by the department. She broke up all the purchases into lots of less than $10,000. Her fraudulent purchases (at least the ones she’s paying back) started in 2013 with a mere $82,825, but like most fraudsters she started taking increasingly as the years went by and she didn’t get caught.

[“But she’s been here for years!” is what co-workers often say when they learn that a colleague has been robbing the company under their noses for many years. That’s because it takes years to make sure the systems are so lax that you can start taking really big money.]

Petrone pleaded guilty to two counts of wire fraud and filing a false tax return. In addition to prison time, she agreed to make restitution of some $47 million.

The fraud was basic. Petrone would buy these thousands of unneeded computers for the medical school, and then would have them shipped to a company she controlled. The company would then sell the equipment on and she would keep the money.

 

The Crazy Percentage Nobody Noticed

While it’s true that Petrone broke up her thousands of computers into lots of $10,000 or less, at the end a certain period her department still had those thousands of machines on its books.

This made no sense. Just as a million computers for Plattsburgh is nonsense, so is the idea that this department needed 8,000 computers in a year.

If you work at the medical school as Petrone’s supervisors would, you know that for the 476 students enrolled there you have more than 11,000 faculty and staff. Is it remotely reasonable to be buying 8,000 computers a year? These things last 3-5 years, so maybe if you hadn’t bought any computers in years you might buy 8,000 for the entire medical school.  But Petrone was only buying for one department. The 8,000 number is bonkers.

 

All Size is Relative

I have seen suspect purchasing before, and there too it all turned on the size of the place being bought for.

We were hired by one of two warring unions, asked to examine the rival union’s LM-2 financial returns filed with the Department of Labor.

The first thing we did was to find out how big our target local was. How many members did they have? How big was their office and how many people worked there?

We then started looking at the financials and noticed something odd: For a really small local, they bought an awful lot of office furniture. Either they were buying for phantom members who didn’t work there, or they were buying top-of-the-line office furniture that had no place in a union local representing hard-working people doing dangerous work for less than what your average plumber charges.

It all turned on percentages: this many dollars compared to this many people.

A good investigator fills in the blanks. Not just the dollars on the page, but the number of people the dollars service.

Raw numbers mean nothing without context.

I’ve done a lot of interviews about people over the years, but you can always get better.

A fascinating conversation last week with an angel investor about what he looks for in a candidate to run a new company gave me a question I will always ask from now on, but not just about people running startups.

The word for this investor is coachability and it’s a big thing when you have a person running a company for the first time. The idea for more experienced managers might be expressed as open-mindedness, but it all comes from the same place: Can a person in charge admit he doesn’t know everything, and then work to get up to speed on that weak area?

First some definitions: Angel investment is the first-stage investment in a company, also known as seed capital. Often it’s family and friends that get the entrepreneur started – funding the equipment or employees working out of a garage, a WeWork space or, as was the case with Dell, Microsoft and Facebook, a dorm room.

All the rounds of fundraising after the angel stage, including when venture capital and private equity usually get involved, are explained at Crowdcrux. In the end, while some companies remain private, the usual goal is an initial public offering (“IPO”) when you sell shares to the public.

The angel investor I talked to said that ten percent of all of his investments provided his entire return over the past few years. In other words, nine out of ten are losers, but the others make him a lot of money. A typical angel investor would put in anywhere from $5,000 to $50,000, sometimes alone and sometimes in a pool of investors. Many then set aside two or three times that amount for the next round of funding. If they don’t, their initial stake gets diluted if the company moves forward toward profitability.

What is Coachability?

The exchange that provided me with my new great question about a CEO went this way:

Q: What do you look for most of all in someone who is going to run a company you’ll invest in?

A: The track record of running other companies. If they’ve done well with three or four companies before this one, we’re comfortable.

Q: What if there isn’t much of a track record, or no track record of being a CEO at all?

A: Coachability.

He explained that this means, “How open is the person to learning? Do they know what they don’t know?”

It struck me that coachability is a virtue many of us could stand to improve a little bit. There’s taking direction, but then there’s the ability to recognize that even though you think you know a lot about real estate, marketing or whatever it is, there is always something more to learn.

That may not mean just delegating. If you say, “I know semiconductors but I just don’t understand real estate” and hire someone to take care of the real estate end of the business, (warehouse, office and retail space), how will you know if that real estate person is doing  a good job?

As we’ve written before, including in Google is Not a Substitute for Thinking most of what you know about yourself is not available through a Google search, and that goes for everyone you are trying to evaluate before investing money. The qualities of a manager or entrepreneur won’t be a matter of public record. You will need to talk to people who have interacted with them.

The Value Proposition for Due Diligence

No service is free for long if it provides a great benefit. Either you pay for it, or someone is donating their time and money to bring the service to you or someone who can’t afford it.

If you can afford to put down $10,000 on a high risk investment, spending $1,800 to $2,400 on due diligence is a high fee, especially if you make ten such investments a year. On the other hand, many angel investors pool their money. Now you are talking about, for instance, eight investors each with $20,000, but they will be sharing that $2,000 check on an executive. A one percent charge

It makes sense for many angel investors, and at later rounds of investment, the $2,000 cost just keeps dropping as a percentage of the money at stake. Before a Series A investment of $8 million, don’t you want to know more than whether or not someone has been convicted of a crime? Good due diligence gets you there.

Strange then that Ycombinator’s Series A due diligence checklist makes no mention of looking into the people running the whole enterprise.

One hopes that can change. TechCrunch wrote last year about a stampede out of a company appearing at a Ycombinator event after easily discoverable things about one of the principals was, finally, discovered: “… it’s net positive to vet your future partner, back the right startups…”

The more carefully you hire, the less you may need to hit the ejector button on the candidate who probably shouldn’t have been hired in the first place.

 

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