This blog takes no position on the malpractice allegations by HSBC that its law firm, Troutman Sanders, dropped the ball on its due diligence of a borrower who ended up costing the bank $75 million when the borrower put fake securities up as collateral. You can read about the lawsuit here and here.

A key portion of the allegations is that Troutman was tipped off to some inconsistent information when it was checking into the faked collateral, but didn’t investigate further or tell its client about the red flag waving brightly before its eyes.

Whatever really happened in this case, we find it’s worth reminding clients and those who may become clients that if something doesn’t seem right during due diligence, you have to assume that it isn’t right.

This can take some doing. We’ve written before about how the smarter you are, the easier it will be to convince yourself that it’s OK to do what you want to do, in our entry  JPM, Feynman and Investigations. We’ve also written about need to be on guard regarding people who come well recommended from third parties, in Due Diligence on Expert Witnesses: Assume the Worst.

Due diligence shouldn’t be about digging for dirt that you hope will be there – as in litigation – or that you hope won’t be there – because you want your client to close the deal.

It’s about being on guard for the unexpected and reporting exactly what you find. It should never be “good news” or “bad news.” Never mind that your client will be angry that you’re wrecking a deal, or that the major witness on the other side appears to have no skeletons in his closet. All a good investigator is doing is presenting findings. Whatever you think your client wants, in the end telling the truth about what you find is the only way to go.

For a good starting checklist on a solid approach to due diligence, see our entries In Plain Sight: Corporations and Public Records and Scratching the Surface: Due Diligence and Public Record Searches.