Remember those law school exams that depended not as much on getting the right answer as on issue spotting? Usually you got a fact pattern and you had to look at all the ways those facts would present interesting legal questions for a judge to consider.

Investigation is something like this, but instead of legal issues, you are spotting factual issues. You don’t always get the entire answer, but sometimes, the very action of showing a looming factual issue means you’ve earned your fee.

Factual issue spotting often means that you are looking for the answer by figuring out first where to go to find the answer you want.

I learned the power of this way of thinking this the first week I worked as an investigator, when I was asked to find a lawyer our client could hire in Liberia. This was a shattered country with no working phone system. After a fruitless hour of looking up lawyers old lists on the internet, I pivoted.

I knew that a lot of the lawyers in Liberia had probably fled. I found a former president of Liberia on the faculty of a U.S. university, called his home number at lunchtime (he picked up with “Hello”), and asked him to recommend some lawyers. “They all carry cell phones from Ghana” he told me, and gave me three names and cell phone numbers. We had our Liberian attorney the next day.

Here the issue was dispersion. Knowing the lawyers and those who would know the lawyers were disbursed, I knew not to look in Liberia but rather elsewhere.

A few other examples:

In doing an asset search recently, I knew it would be impossible to look in each and every county all over the United States for property in the name of the subject (his name wasn’t John Smith, but nearly as common). Instead, I looked at property across the country by the address the tax bill was mailed to. That was a very specific query, but I was able to dig even deeper by looking at not only the subject’s current address, but the house he had until three years ago.

And there they were: Mineral rights for twelve pieces of property in Texas.

Here the issue was all known addresses of the subject not just the current one. He may not have updated his address with the tax authorities because his mineral properties were non-producing and so exempt from tax. They also remained nicely concealed from his soon-to-be former wife. These properties are like lottery tickets. Worth a few bucks today, and maybe much more next year if a company strikes oil or gas on them and needs to pay you royalties.

Finally, trying to figure out how much a husband makes as a financial advisor. On his FINRA report, I found that he was also a broker and an insurance salesman. He made money three different ways. A look at his company’s annual report revealed some 30 subsidiary companies that could have compensated him.

Here the issue was imagining a person’s tax return. If you want to hide money, using a secret company is a good way to do it because if taxed as a corporation, it stays off your tax return as long as it doesn’t pay you dividends. The only people who need to know about that company are the payer, the payee, and the person who perhaps prepares the company’s tax return.

For example, he could have had an arrangement this his insurance commissions were paid to a limited liability company he controls. If my client’s lawyer did not ask in discovery for all money paid by each of these subsidiaries to any company beneficially owned by the subject, the company may not report his full compensation.

Investigating is going from A to B to C to D to find what you need. If you want to plug in a person’s name and get everything there is to know about thanks to big data and artificial intelligence, you will need to do an investigation in a movie to TV show.

In real life, it usually isn’t so easy, even though your investigator should always be able to show you how it was done in order to prove he didn’t break the law or invade anyone’s privacy.

You are the Chief Investment Officer screening possible targets for a $5 million investment in a non-public asset. Whether you work at a family office, a private equity fund or somewhere else, the prospective deal flow should be coming at you good and hard.

The People: They can make or break an investment

If you are not seeing a flood of potential investment targets, you probably aren’t seeing enough. Last month at a gathering for family offices at UBS, one veteran, Mike Ryan of Bullet Point Network, told the assembly that if you aren’t looking at 100 deals for every one you take, you aren’t getting enough of a selection that will let you outperform your peers.[1]

[1] He also said you should always ask yourself, “Why am I being shown this particular deal?” Why now?

Maybe you can knock 50 or 60 of the deals out at first blush. But say later on you have five that are serious candidates for a $5 million investment. You and your money would be getting married to the founders/main shareholders, probably for five years until you can exit.

You will have to do the business valuation no matter what. You will need to figure out the rate of return on your money, and factor in various risks: competitive, regulatory, macro-economic, and so on. That can all cost quite a bit if done right.

But say the business looks pretty good. Now, you just need to make sure you’re not getting into a business marriage with a toxic individual. Someone who presents well and seems to have a solid business, but who ends up in litigation with most of his business partners. Oh, and maybe he oversold his past successes on his website and LinkedIn profile (submitted by the account holder and almost never fact checked by LinkedIn itself).

We have found all kinds of strange things out about prospective business partners:

  • A probably invented computer science degree.
  • A propensity to be traveling all the time (posing on camels and in rugged Icelandic scenery instead of running the business).
  • A weird obsession with suing his car’s manufacturer without a lawyer and over damages in low thousands, despite his being behind “billions” in past property deals. What high roller can’t just hire a lawyer for something like this? Someone who can’t afford a lawyer but wants your $5 million?
  • A prospective investee was accused by two other partners of pilfering their brands. He was fighting them both in court in active cases that we retrieved. Our client was thinking of doing a brand-sharing deal with this person, but wisely reconsidered.

None of the findings immediately above cost our clients more than $3,500 and more than ten days to track down.

You can spend the $3,500 first and knock bad eggs out of the basket, or you can wait until you’ve gone over the business and spent much more than that in time and money.

It’s your money (or that of your employers). Spend it wisely.

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.

For those of us who thought Jeffrey Epstein probably had a larger group of rich and powerful acquaintances than we had known about, the Wall Street Journal appears to have proven us right.

A story over the weekend says the following people spent a little (or quite a lot of time) with Epstein even after he was a registered sex offender:

The list goes on. What struck me about the story was that it entirely neutral in tone. It didn’t say these people had done anything illegal or even wrong. It just reported on the contacts and let the readers decide for themselves. Some of the meetings scheduled with Epstein couldn’t be confirmed. None of the meetings in the article took place on Epstein’s private island in the U.S. Virgin Islands.

This is exactly what our due diligence does. We never write,  “This is a bad person” or “This is a great person.” We don’t say “This looks like a low-risk investment.” We present all the facts and let our clients decide what to do with them.

For that reason, I have never testified as an expert witness about our findings, because they are drawn from sources that speak for themselves: Public records (which like ordinary business records not subject to the hearsay rule), and newspaper and other media records. We don’t assert that the newspaper got it right, or that the person’s allegations on his LinkedIn profile are correct.

We just report what we find, being careful to help our clients understand how they might want to weigh the evidence and how the evidence fits together. An SEC proxy filing that someone resides in a particular place or is a particular age is more reliable than an assertion on Instagram. People and companies do lie on SEC filings – just not that often. A drunk driving charge is something a lot of people get and recover from. A DUI around the time of a gap in a resume that covers up being fired for drinking on the job is more serious.

Not Just About Breaking the Law

Should these famous people have remained clear of Jeffrey Epstein after he pleaded guilty in 2008 to soliciting and procuring a minor for prostitution? They did nothing illegal in doing business with such a person.

But due diligence is often about more than just the question, “Did they break the law?” Many of the people who met with Epstein told the newspaper they regretted ever knowing him, probably because what has come out about Epstein since those meetings is many times worse than one charge of soliciting and procuring (which for many would have been enough to stay clear).

The meetings with Epstein noted in the article took place between 2013 and 2017. Epstein died in prison while facing charges brought in 2019 for sex trafficking between 2002 and 2005. The U.S. Attorney for the Southern District of New York alleged that Epstein “sexually exploited and abused dozens of underage girls by enticing them to engage in sex acts with him in exchange for money.”  Last year, Epstein’s longtime associate Ghislaine Maxwell was sentenced to 20 years in prison for conspiring with Epstein to sexually abuse minors.

The Felon Continuum

Many people would have looked at Epstein’s conviction from five years before and run for the hills. Others think it shameful to be penalized for losing a job or losing business for dealing with convicted felons.

Some people distinguish between associating with white collar criminals (say Michael Milken) and violent criminals (I certainly would include soliciting and procuring minors in the latter category).

On the other hand, New York actually favors people with criminal records in deciding who gets cannabis dispensary licenses. And as Leon Botstein said in the article, he met with Epstein knowing about the guilty plea because “we believe in rehabilitation.”

Many states require lawyers to report to authorities when they see evidence of an ongoing crime. If any of the people in the article had commissioned due diligence of Epstein, they would have found a past crime. Allegations in the media of more wrongdoing are certainly pertinent and reportable in the course of due diligence, but don’t amount to looking the other way when a crime is clearly being committed.

However I personally come down on the issue of Epstein or anyone else (and I am happy to give clients my views if asked), my due diligence just reports and lets the clients come to their own conclusions about whether to do business with the person in question. Sometimes their conclusions are not the ones I would have made.

But that is the client’s business, not mine.

Hiring good people is getting a lot harder, and not just because there are fewer candidates in a lot of industries. With AI-enabled cheating, grade inflation, and the shunning of standardized tests by colleges and graduate schools, how is a hiring manager supposed to know who’s a good fit?

My prediction: Good companies will have to think more like creative investigators to figure out who’s smart at their work, and who’s just smart at beating the system. They will have to rely less on outsourcing the evaluation of people through grades and school brands.

ChatGPT Makes. Stuff. Up.

Do you want candidates to write you an essay? I wrote recently on our other blog The Divorce Asset Hunter that when it comes to researching individual people or situations instead of something more general, ChatGPT just punts – it refuses to engage. ChatGPT doesn’t think – it mimics what others have written about a topic. If your topic is obscure (“What’s the reputation of this business owner in Maryland who wants to borrow $3 million?” or “What’s this 25 year old MBA student like?”) You are out of luck with ChatGPT.

And if the topic is a more general one that AI wants to try, look out. A respected litigator in New York I know named Stephen Brodsky reported last week that a client had sent him some legal research to incorporate into a brief. His report, posted on LinkedIn:

A few weeks ago, a client emailed me a list of case citations, asking me to include them in a brief I was writing for his litigation. When I checked them, they didn’t come up. Each time, I thought I mistyped the cite. One after the other. Then I realized – THEY DID NOT EXIST. When I asked my client who gave him the “citations,” he said he had tried out Chat GPT.

Brodsky concluded: “It. Made. The. Cases. Up. My. Client. Thought. They. Were. Real.”

WHAT YOU CAN DO: As Brodsky demonstrated and as I discovered as a financial journalist, the fun is in the footnotes. If someone hands you something they’ve written, query them on the footnotes. Do the citations exist? Did they really read the material they are citing? I would avoid take-home assignments and make people write something over the course of a couple of hours right there near you, minus an internet connection and phone of course. Give the candidate an hour to write up how they would approach a particular problem.

We All Live in Lake Wobegon Now

What about screening people to see who gets the in-person test above? What about their academic record?

Cheating is becoming increasingly common at universities, as detailed in this Free Press article recently. It’s easier than ever, both because of ChatGPT and lazy teachers who give the same exam for decades.

Standardized tests at many colleges are either optional or part of a “test blind” admissions process. By 2025, the LSAT may be optional for law schools admitting prospective lawyers.

Even before the elimination of standardized testing, there was a problem at universities in that they had inflated grades to such an extent that reality had caught up with Garrison Keillor’s made-up Lake Wobegon, where “all the children are above average.” Yale went from the place that John Kerry and George W. Bush got a lot of C’s and Kerry even got four D’s to a place where an A average was not far off the norm.

WHAT YOU CAN DO: If schools are handing out A’s like participation trophies, give the A’s the same weight an athletic recruiter would give a participation trophy. If they are going to be litigators, give them a tough evidence problem and see how they do. Whatever the position they’re up for, throw an ethical problem their way. If it looks like they would do the wrong thing if they could get away with it, find someone else. And whatever you do, use made-up names and places so that in the event they are allowed to bring the test home they can’t have the computer generate an answer.

A New Rigor for Checking References

If it’s not their first job, you can always call up former employers. I am not a big fan of calling just the references a prospect submits, because what are the chances you submit the name of someone who fired you or was happy to see the last of you in that office? If there are gaps in the resume (even just a month or two between jobs), find out whether there was another job in there that didn’t work out. Then find out why.

THE TAKEAWAY: You can’t depend on transcripts, school admission departments, and a lot of take-home or internet-assisted essays. Calling only the references a candidate submits is a rigged game. YOU the hirer need to devise the tests and the lists of people to call.

It’s that or get ready for even higher turnover in the years to come.

ChatGPT now comes up in most of the extended conversations I have with lawyers about how things are going. Many rave about how easy it is to have this robot whip up a simple motion or even, in one example, “a short speech about NATO defense capabilities.”

While it may be true that ChatGPT can do what an executive assistant or an inexperienced associate might be able to come up with, even its biggest proponents agree that you can’t just take what it gives you and put that out there as your product.

But what about for an investigator? Is ChatGPT helpful?

I wrote about this last month on our other blog, The Divorce Asset Hunter. In that article, Would an Artificial Intelligence Asset Search Help? I argued that ChatGPT’s own disclaimers made me skeptical about its usefulness, since it depends on lots of data and has what its creators call a “limited understanding” of the world. It’s all there at ChatGPT.pro

Leaving aside that computers don’t “understand” anything, but rather imitate prior examples of understanding, I think the bigger problem is the first one. You can get a pretty good short speech on NATO out of it because there are thousands of such speeches floating around on the internet.

After I wrote that blog last month, I eventually tried ChatGPT to see for myself how restrictive those potential limitations might be. My answer is, pretty darned restrictive.

A client asked this week to find out why an associate could have been visited by the FBI at his home, or whether perhaps these were process servers pretending to be FBI, since they had not been too keen to show ID up close as the Bureau requires.

I asked the chat bot, “Why would law enforcement be looking for Albert R. Jackson?” (not his real name).

ChatGPT’s answer was that it doesn’t deal with specific people or situations. That was the same answer I got when I asked whether nepotism was a problem at a particular public company (where people on chat boards had been complaining about just such an issue).

It’s not that ChatGPT gave me boilerplate on these two question. It gave me nothing.

Do not mistake this for a blanket dismissal of the power and potential of artificial intelligence. As I wrote last month,

The more I have looked at artificial intelligence, the more bullish I have been about the rosy future for investigation. AI and greater computing power will generate volumes of data we can only dream about right now. Automatic transcripts of every YouTube video, for example, would mark an explosive change in the amount of material you would have to work with in researching someone. So would the ability to do media searches in every language, not just the small number offered by LexisNexis. I wrote about this in a law review article a few years ago, Legal Jobs in the Age of Artificial Intelligence.

The future is bright for investigators using AI. More data will mean more things to research and interpret. But who will do the research and interpretation? Smart people will, as they do today.

In a financial investigation it’s easy to get buried under all the words and numbers and to forget about emotions – those of your client, the person you’re investigating, and your own.

It’s understandable but something to guard against.

Theballetspot.com
  1. If your client is particularly stressed on the day of your meeting, not thinking straight, or stubbornly sticking to a theory you can’t substantiate, have a bit of understanding. This can happen more in family law cases than anywhere else, but corporate struggles can get emotional too. Try to stand in your client’s shoes: it may make it easier to get your message across. And people generally prefer to deal with those they think understanding them.
  2. Good investigators sometimes have to weigh different possible theories regarding their subjects. In deciding where to start in filling in missing links in a chain of facts, it can help to try to guess what your subject might have been thinking. Was he motivated by greed? Revenge (stemming from disdain or hatred)? Guilt? Did he have an incentive to lie? What else was happening in his life that would have subjected him to stress?
  3. Our own emotions play a part. Do I have an instantaneous liking or disliking for the subject? Is that well grounded or the subject of prejudice (maybe an association with someone similar?) Too much affection for a theory can lead to ignoring competing theories that might be correct.

The Power of Dance

One reason I love to watch dance is that it provides a huge contrast to my everyday life that is filled with words and numbers. Not only am I reading, I am writing about what I’ve found, attempting to blend the words and numbers I have assembled into a coherent story about a person and that person’s business (and/or personal) activities.

Dance is wordless and numberless. There is music, of course, and that is based on rhythms that can be reduced to numbers, but the numbers are below the surface of the experience. Other than the title of the work, there are rarely any words at all (certainly at the New York City Ballet, which we have attended for years — see photo above).

Watching and listening during dance is a great reminder that emotions need not be affirmed by the written word to be real. But they are still there for us to recognize as we do our work.

Is it in poor taste to argue against leaning too hard on credentials when you post something on LinkedIn, a platform where people showcase their credentials for all to see? I don’t think so.

If you want a lawyer who will do a good job drafting a will, handling your divorce or making sure you’re signing a good employment contract, how important is it that she went to a top-five law school?

You want someone who, on recommendation from someone you trust, will get the job done and won’t be a jerk to deal with. A law school transcript from 25 years ago won’t tell you how that lawyer deals with clients, keeps up with recent changes in the law, reads a family law judge or the opposing lawyer to know how far to push things in a negotiation. Those, and hundreds more qualities, are acquired through experience building on good intuition.

I’m convinced that it’s nearly impossible to teach intuitive thinking. You’ve got it or you haven’t. It’s necessary for a lot of jobs, including being an investigator, but not sufficient. Good investigators know things, so that they can say to themselves, “That doesn’t seem right to me.”

Bernard Madoff with a tiny audit firm in a suburban shopping mall? Doesn’t seem right.

A guy telling his girlfriend about his high-end investment bank that has no website and only a LinkedIn page with a typo on the first line? Smells bad. True story: It was.

A law school professor of mine used to remark that there’s a reason there are no child-prodigy lawyers, and the same would go for top-notch investigators who are still in middle school. The number of permutations on a piano keyboard or a chessboard is miniscule compared to the number of permutations there are in life.

Analyzing those permutations takes practice but also a knowledge base we’re not born with.

Look at the wonderful surreal painting above by Morris Hirschfield (1872-1946). He was until 65 years old a tailor and then a designer of shoes. On retirement he began painting compelling figures like this one (it’s called “Girl in a Mirror,” but this can’t be a mirror).

Hirschfield was ridiculed by many in his day as an untrained bumpkin, but his lifelong experience of dealing with the human figure, his sense of color and balance plus his imagination produced marvelous works now owned by some of the world’s richest museums.

So by all means, look at where someone went to school if you want to. It’s a good conversation starter and you may know people in common. But schooling is a terrible way to decide whether or not they’re any good at what they do.

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.