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Welcome to the September 2026 edition of our newsletter!  In this issue, we’ll examine how “Internet crime” – from investment frauds to extortion attempts – surged in 2025, and what your company can do to defend against it.

New Types of Criminal Schemes Target Businesses as Old Standbys Get More Complex

The U.S. Federal Bureau of Investigation recently released its 2025 Internet Crime Report highlighting trends in online criminal activity.  Not surprisingly, cryptocurrencies were part of a number of frauds, either as part of a bogus investment vehicle, and also through crypto “kiosks” as the payment part of phony tech support or other scams.

While many of those scams targeted individuals, often older adults, businesses have also been targeted on a widespread basis.  Phishing and malware deployment via business email compromise – where fraudsters use social media and other publicly available sources to mimic phrasing and otherwise make a fake email seem legitimate – is on the rise, often targeting various ranks of employees at large companies.  “Costly tactics used by scammers also include compromised corporate e-mails, tech support fraud, and personal data breaches,” the FBI said in a statement about the report. “For the first time in its nearly 25-year history, the IC3 report features a section on artificial intelligence, which accounts for 22,364 complaints, costing Americans nearly $893 million. Scammers rely on pressure techniques to defraud Americans while deploying fake social profiles, voice clones, identification documents, and believable videos depicting public figures or loved ones.”

What can your company do to defend itself?  While advanced forensics are likely required to track down who is behind spoofed emails – and will likely require the assistance of the FBI and other law enforcement – if actual damages are sustained via a scheme, a certified fraud examiner can assist in asset tracing and recovery, mapping out how available clues about where the proceeds of a scheme went can help identify the perpetrators, and possibly their motives as well.  By developing profiles from public records and the tracing of internal company information, you can understand a criminal’s opportunity, motive and means to commit a fraud.

The landscape of digital fraud is evolving as rapidly as the artificial intelligence tools used to both conduct fraudulent schemes and to combat them.  Traditional fraud examination and due diligence techniques can complement digital forensics to act as a countermeasure if your company is attacked by cyber-criminals.

Welcome to the August 2026 edition of our newsletter!  In this issue, we’ll examine how fraudsters use micro-cap and small-cap stock offerings to defraud investors looking for outsized returns, and highlight steps that your clients can take to avoid being a victim.

Micro Cap, Big Dreams: The Risks of Investing “Over the Counter”

Many investors, especially retail day traders, like to swing for the fences, trying to predict “the next big thing” before larger investors see what’s coming.  This spirit pushes capital into newer, often underfunded, innovations and the companies which pursue them.  Yet it also makes hopeful, hungry investors a target for “pump and dump” fraud.

These schemes are nothing new: for several generations, stock promoters and incredulous company executives have promised both life-changing technologies, especially in biotechnology and other cutting-edge life sciences, and returns that could also be game-changing.  These schemes took on new life in the late 1990s, as the prevalence of online bulletin boards – and, later, both social media and finance related message boards —  made it easier for schemers to both spread their overly enthusiastic claims about companies in which they had invested, but also to know that their target audience was naturally drawn to such places, looking for investing ideas as eagerly as the schemers were ready to provide them.  Once the buying frenzy reaches its peak and drives valuations well above what fundamentals would justify, the perpetrators head for the exits, leaving the retail investors holding steep losses.

Enforcement Agencies Go After Easier Targets, but Risks Remain

In July 2026, the U.S. Securities and Exchange Commission reportedly ramped up efforts to police, and possibly eradicate, one part of this global scheme: international networks of “micro-cap” promoters in Asia, pushing everything from online travel agencies to restaurant chains, saw their listings of newly public U.S. offerings plummet from 2025 through the end of June in 2026, largely due to increased regulatory scrutiny.

Your clients, seeking to gain access to new ideas and greater returns, can be their own watchdog, scrutinizing the backgrounds of company leadership, especially in highly technical fields such as life sciences, to ascertain whether they have the capability to truly bring their ideas to market.  The viability of the company and its products are equally important, and can be determined by looking at corporate filings – and any gaps in filing, large scale and rapid management changes, or other red flags – as well as litigation histories and publicly available records of debt accumulation, which included in offering statements and are often a topic of business media interest.

Innovative technologies can pay off for everyone involved, but only if those driving across the new frontier are acting in good faith and taking appropriate actions to bring their innovations to market.

Welcome to the July 2026 edition of our newsletter!  In this issue, we’ll examine emerging issues around verifying information about potential hires, or business partners, in an era of artificial intelligence.

Executive and M&A Due Diligence: Why Identity and Reputation Verification Matter More Than Ever

When companies hire senior executives or evaluate a merger, acquisition, or strategic investment, the stakes are much higher than in ordinary hiring or vendor review.  A weak process can lead to reputational damage, regulatory issues, undisclosed conflicts, financial loss, or a deal that looks sound on paper but fails under closer scrutiny.

Today, that risk is amplified by fraud techniques that are more sophisticated than the classic résumé exaggeration.  Deepfakes, synthetic identities, fabricated references, impersonation emails, and polished but false professional histories can all make a candidate, advisor, or transaction counterpart look far more credible than they really are.

Executive hiring and dealmaking depend heavily on trust.  Boards, investors, and management teams often move quickly when they believe they have found the right leader or the right target, which can create blind spots around identity verification, credential validation, and adverse-information review.

In M&A, the same problem appears on the counterparty side: a seller, operator, adviser, or “key person” may present a clean public profile while important issues remain buried in litigation, financial distress, regulatory matters, undisclosed affiliations, or inconsistent ownership records,

In executive hiring, warning signs often appear in the details:

• Employment dates that do not align across multiple sources.
• Titles or roles that are difficult to verify independently.
• References that are unusually selective or cannot be confirmed.
• Identity details, addresses, or affiliations that do not match public records.
• Unexplained gaps or inconsistencies in career history.

In M&A and strategic transactions, similar concerns may arise through:

• Unclear ownership or control structures.
• Incomplete disclosure of litigation, liens, or regulatory matters.
• Entity changes that obscure continuity or prior activity.
• Counterparties that resist ordinary diligence requests.
• Public-record inconsistencies that do not match the representations in the deal file.

A thorough due diligence process helps decision-makers separate presentation from reality. Public-records analysis can confirm identity, map business relationships, identify adverse information, and test whether the narrative being presented is consistent with the available record. For executive hiring, that may mean validating past roles, board service, or business ownership. For M&A, it may mean reviewing ownership, litigation history, and the legal footprint of the target and its principals.

Practical Safeguards: What You Can Do

Clients can strengthen their process by:

• Verifying identity and credentials independently before final-stage decisions.
• Reviewing public records and adverse media for executives, owners, and key counterparties.
• Cross-checking employment history, affiliations, and legal records.
• Using reference checks that go beyond the contacts supplied by the subject.
• Escalating any inconsistency that cannot be explained quickly and clearly.

When the records match the narrative, confidence increases. When they do not, the discrepancy itself is often the most important finding.  In both executive hiring and M&A, the right question is not simply whether someone looks qualified or whether a deal looks attractive. The more important question is whether the available records support the representations being made.

That is where disciplined due diligence creates value: it helps clients make informed decisions, reduce avoidable risk, and move forward with greater confidence.

Welcome to the May 2026 edition of our newsletter!  In this issue, we’ll examine recent efforts by government agencies to encourage companies to “self-report” improper or illegal activity, and what your company can do to prepare in the event you need to make such a report.

Self-Policing of Illegal and Fraudulent Activity in a Corporate Environment

In May 2026, three former senior executives of a Malaysian telecommunications company’s United States-based subsidiary were charged in New York federal court with wire fraud, identity theft, and other allegations related to a scheme where they were accused of diverting company revenues from broadband contract sales into their own pockets.  “The charges in the Indictment arise from an alleged scheme by the defendants to divert more than $20 million of company funds through four interconnected frauds,” a U.S. Justice Department statement about the indictment said.  “The defendants used false statements, forged records, fictitious transactions, and corporate and individual impersonations to deceive counterparties, suppliers, auditors, and supervisors.”

The Justice Department statement said later: “Telekom Malaysia initiated an internal investigation of the American Subsidiary and the defendants.  Upon discovering the fraud, Telekom Malaysia self-reported the conduct to the United States Attorney’s Office and received a conditional declination of charges against the company based on the company’s commitment to full cooperation, restitution, remediation of harm caused by the misconduct, and its agreement to report criminal conduct for a three-year period.  Today’s action reflects the Office’s commitment to using self-reports as a means to quickly and effectively bring cases that hold individual executives accountable for their misconduct.”

In April 2026, the Southern District of New York – the primary jurisdiction for many cross-border financial crime cases —  adopted a voluntary self-reporting program for financial crimes meant to encourage corporate cooperation in cases where employees pay bribes to foreign officials and other misconduct.  “The purpose of this program is to encourage early voluntary self-disclosure of criminal conduct, to promote timely and effective enforcement of criminal laws, to encourage repayment of victims, and to provide companies with greater certainty when reporting potential financial misconduct to federal prosecutors,” the Southern District’s statement said.  “Under this program, eligible companies that self-report qualifying illegal activity, cooperate fully, and remediate harm caused by misconduct will have a clear, agreed-upon path to a declination. Specifically, shortly after a company makes a self-report, the Office will issue a conditional declination letter stating its intent to decline prosecution against the company, conditioned on the company’s cooperation with the Office’s investigation and satisfaction of all eligibility requirements, including full restitution of victim losses.”

Cooperating with Corporate Self-Reporting Under the SDNY Guidelines

If your client determines that an employee has committed illegal fraudulent activity, the self-reporting process carries with it certain longer-term commitments.  “Under this program, eligible companies that self-report qualifying illegal activity, cooperate fully, commit to ongoing reporting of criminal conduct for three years, and remediate harm caused by misconduct will have a clear, agreed-upon path to a declination,” a statement said.  “Specifically, shortly after a company makes a self-report, the Office will issue a conditional declination letter stating its intent to decline prosecution against the company, conditioned on the company’s cooperation with the Office’s investigation and satisfaction of all eligibility requirements, including full restitution of victim losses. Upon a company’s fulfillment of its cooperation and remediation obligations and payment of restitution, the Office will issue a final declination notice, concluding the matter without criminal charges.”  Companies seeking this status must disclose “all relevant, non-privileged information known to the company relating to the illegal activity,” identifying parties involved in the fraud, and sharing all non-privileged, factual internal investigation materials.  Additionally, the program requires that, “subject to individuals’ Fifth Amendment rights,” companies must undertake “best efforts to make available for interviews or testimony present or former officers, directors, employees, agents, and consultants of the company located in the United States and overseas, including but not limited to sworn testimony before a federal grand jury or in federal trials.”

Thorough internal investigation of any alleged fraudulent conduct is a key component of the voluntary self-disclosure process.  This should include analysis of internal e-mails, telephone records and other materials, as well as asset profiles and other public records-driven investigations of relevant parties, which can help to understand a party’s motivations prior to and during involvement in a fraudulent scheme, and provide a fuller picture of a company’s potential and actual liability for an employee’s conduct.

Welcome to the April 2026 edition of our newsletter!  In this issue, we’ll examine how newly approved asset classes are making their way into the investment accounts of everyday investors, and highlight warning signs of fraud schemes.

Peril and Promise as Alternative Assets Enter Retirement Plans

As we’ve previously noted, rule changes allow more diverse asset classes to be invested into retirement plans, including private equity and private credit vehicles, cryptocurrency, and private real estate ventures.  Each presents an opportunity for higher returns in a market where publicly traded equities are routinely touching all-time highs.  Yet each carries risk, not only from the investment itself but of falling victim to fraud.

In real estate, for example, so-called “hard money” loans often carry higher than normal interest rates and specific terms such as “balloon” payments due at or before maturity.  If these loans are included in a fund in which your clients invest, the risk of default can be higher, and thus the returns could be at risk.  Although many hard money lenders can be smaller, privately-held operations, some public real estate investment trusts and other funds include them in portfolio assets.  Similar publicly traded vehicles, such as business development corporations, offer promises of a high yielding return, which they carry out by lending to riskier businesses and other customers.  Scrutiny of those public filings’ comments about litigation and default risk should be a key part of due diligence, as should an understanding of the backgrounds of key firms’ principals.

In a market with many fully valued opportunities, the hunt is on for the next big thing.  But focusing first on the prize may make you miss the target, so doing your homework as new opportunities emerge is always a wise approach.

Welcome to the February 2026 edition of our newsletter!  In this issue, we’ll examine why it’s important for bankers to know their customer, and for customers to know their banker.

Delegating Authority and Assuming Risks: Why You Need to Know Your Banker

As the world grew increasingly globalized over the past 40 years, banking relationships both became more complex and grew in importance.  Banks were often the most trusted representatives of a company, especially one doing business outside its home jurisdiction.  Copious regulations have been put in place to mandate that banks know their customer, including due diligence requirements including verification of an individual customer’s identity; any presence they may have on global and national sanction lists; and reviewing past activity for suspicious transactions.

Yet it is also important for a customer to know their bank and banker.  The viability of a bank is one concern, and the so-called “Texas ratio” of available capital to non-performing assets, like bad loans, can be a measure of the bank’s ability to go forward, with a ratio under 50 percent considered risky.

Because banking is largely a relationship-driven business, knowing an individual banker’s reputation matters greatly.  Regulatory records, including any sanctions; asset profiles including property ownership, UCC filings and liens against assets; as well as court records and outside activities like companies formed for purposes outside of the bank’s activities can all paint a picture of an individual’s reputation risk.   Over the years, bankers have been found guilty of aiding money laundering by organized crime outfits, knowingly preparing false loan documents, and other abuses.  Given how high the stakes are in terms of protecting your company’s assets and its reputation, the more you know about those you trust with those assets, the better the outcome.

Welcome to the January 2026 edition of our newsletter!  In this issue, we’ll examine efforts by state and local governments to destroy archived records; look at digitization versus destruction and offer tips for researchers to get information when the trend is against access and retaining records.

Disappearing Act:  Trends In Records Retention

In the last decade, many county governments have begun purging records from their systems – not just destroying files which had been warehoused, but deleting older records from electronic indices.  Another challenge is that many jurisdictions have migrated from older to newer systems, and often, records are lost in the process.  In one instance, after New Jersey was transitioning its systems, we found nearly 40 cases concerning an individual which were only on the old system – in the process of sunsetting – that did not migrate to the new system.

Sometimes, natural disasters are the culprit – for instance, after Hurricane Katrina, many of Orleans Parish’s criminal case records were housed, on paper, in one location, which was flooded out, destroying thousands of records, while others were inadvertently dumped into a landfill (and ultimately recovered, albeit likely in poor condition.)

Other changes are meant as well-intentioned reforms that can inhibit access to records, such as various “clean slate” laws that destroy, delete, or seal certain criminal records after a set period, although certain grave offenses, like sex crimes and domestic violence, remain as permanent records.

How researchers can track down older records that have been purged

When performing due diligence on a subject, if you suspect a record has been purged – such as seeing an arrest mentioned in a news article, but not finding a corresponding criminal case – researchers have a few options.  Database services like Lexis-Nexis and WestLaw act as archival sources, often including case records in their docket and pleading indices that have been destroyed; although the case information itself can often be outdated – such as saying a case is open when it closed after addition to the system – the information can act as proof that a case was filed, and also often contains information about attorneys and other parties, who can then be approached for interviews.

Another option, which is also in a state of flux, is to send an open record request to relevant agencies about the matter underlying a destroyed court case.  For example, prosecutors and police departments may have different record retention policies, and thus may still have police reports or other records pertaining to older cases. For civil actions, cross-referencing with judgment rolls (often kept by the county clerk, not the courts) and lien indices (kept by the county clerk or recorder) to find more information about certain destroyed civil cases.  Depending on the nature of the case, regulators such as a state insurance division or attorneys general may have certain oversight offices, such as a consumer protection division, which could yield useful information.

As time marches on and more jurisdictions purge records from their systems, especially older records, new challenges are created for the diligent researcher.  With creativity and tenacity, those challenges can be met.

Welcome to the December 2025 edition of our newsletter!  In this issue, we’ll look back on the year in fraud and see what lies ahead.

How Can I Miss You if You Never Leave?  Persistent Frauds in 2025

In the three years since artificial intelligence applications have become widely available, their impact on our civilization has continued to evolve.  While the tools are used to analyze massive amounts of data in real time, as when it is helping banks identify irregularities such as transfers made in rapid succession, the same tools are often used to help perpetrate frauds.  In 2025, the same tools were used to systematically gather personal data from the Internet for use in ever more sophisticated phishing campaigns, also integrating fake social media accounts and deepfake audio or video to craft realistic impersonation schemes, all meant to dupe victims into investing or donating.

As the Internet-fueled fraud bonanza carried on, federal government officials have changed enforcement of fraud and corruption measures in other areas.  In February, the White House announced a pause to enforcement of the Foreign Corrupt Practices Act, pausing any new actions for a six-month period and claiming that increasingly aggressive enforcement against the paying of bribes and gratuities by foreign officials had impeded America’s national security.  Meanwhile, as cryptocurrencies have proliferated as a supposed investment tool — even being allowed within 401(k) plans in certain limited ways – a U.S. Justice Department memo said the department would seek to end “regulation by prosecution,” saying in part that the department “will no longer target virtual currency exchanges, mixing and tumbling services, and offline wallets for the acts of their end users or unwitting violations of regulations-except to the extent the investigation is consistent with the priorities articulated in the following paragraphs,” outlining that “conduct victimizing investors, including embezzlement and misappropriation of customers’ funds on exchanges, digital asset investment scams, fake digital asset development projects such as rug pulls, hacking of exchanges and decentralized autonomous organizations resulting in the theft of funds, and exploiting vulnerabilities in smart contracts” would continue to be prosecuted, as would cryptocurrency’s use by drug cartels, terrorists, and human trafficking.  Bank Secrecy Act violations would no longer be prosecuted “unless there is evidence that the defendant knew of the licensing or registration requirement at issue and violated such a requirement willfully,” and the question of whether cryptocurrencies are commodities or securities would no longer be determined via litigation.  These reforms were announced in the name of less regulation and freer market operation, but may make detecting actual crimes more difficult.

A Look at Fraud’s Crystal Ball for 2026

Perhaps unsurprisingly, artificial intelligence and social media are both likely to play key roles in fraud schemes this coming year.  The increase in synthetic identity fraud – where real and fake information are blended to create convincing fake records – is likely to continue, and the use of artificial intelligence to create deepfake content – whether supposed grandchild kidnapping phone calls or political ads – may unleash a torrent of uncertainty.

For companies, some of the challenges are clear, and the best solutions remain a bit old fashioned.  In recent years, our work has found an increase in the use of “diploma mills,” often by accomplished professionals who wish they had a doctorate, but didn’t pursue the coursework.  The quality of the forgeries has been elevated as technology advances, but most of these operations use the names of long-dead university officials on the actual degree itself, so if your client has any doubts about the validity of a degree, license, or other credential, diligent efforts to uncover the truth are always the best option.

Truth itself continues to be under assault from politicians and social media, and examining claims a potential employee or vendor has made on social media, or posts about them made by others, may become an ever more relevant step in the years ahead, complementing the traditional public records-focused due diligence approach.

Welcome to the November 2025 edition of our newsletter!  In this issue, we’ll examine the financial disclosure process for federal officials and discuss its importance in identifying conflicts of interest.

Ethical Safeguards Against Conflicts of Interest

One of the key reforms of the post-Watergate 1970s political era was the requirement for federal elected officials and political appointees to disclose their personal investments.  The need for disclosure becomes obvious as policymakers gained ever greater regulatory influence over the markets in which they – and, importantly, their spouses – are invested.  The idea was that disclosure would be an impediment to self-serving legislative or executive branch actions – politicians, knowing that such conflicts would create a public outcry, would pre-emptively avoid taking actions that could be seen as inappropriate, or divest themselves of a conflicted asset before sponsoring a bill.

This system has held up, to varying degrees, although a recent strain of political nihilism shows its obvious weakness – how effective can it be if politicians lack shame, and thus don’t care about any consequence beyond their own enrichment?

Fortunately, some officials still hold themselves accountable: Federal Reserve Board Governor Adriana Kugler resigned in August 2025 after it was made public that she made investments during the Fed’s “quiet period” the year before.  Her final Form SF-278, the disclosure filed with the U.S. Office of Government Ethics (“OGE”), was not certified by anyone at the Federal Reserve, which is a highly unusual step – an agency’s ethics office personnel typically review a filing, then submit it to OGE on the filer’s behalf.  No agency official certified Kugler’s last filing, which she submitted on September 11, 2025, while her September 2024 filing did receive such an internal review prior to its OGE submission,

Financial disclosure is a critical firewall against outright corruption, and an important source of information regarding what might be motivating a public official’s position on an important policy issue.  Members of Congress are currently debating a bill that would amend the 2012 STOCK Act in various ways, including potentially banning lawmakers, their spouses, or children from owning stock at all (https://cha.house.gov/press-releases?id=FDF56AEC-1B06-48ED-A908-CB4705C0B746).   This comes several years after some of whom have profited handsomely from investments while giving favorable treatment to the same high-flying technology companies in which they or their spouses have invested.

Financial disclosures, such as those submitted to OGE, list any positions held outside of government (such as adjunct teaching roles), any speaking fees or other gifts received, and both the filer’s employment and investment income and assets, as well as those of their spouse.  Most importantly, the dates and amounts of specific transactions are also disclosed, which can help researchers, and the public, establish potential cause and effect scenarios between the transactions and any relevant policy decisions.

Welcome to the October 2025 edition of our newsletter! In this issue, we’ll examine types of financial fraud related to pandemic-era programs, and highlight ways loan information can be useful for general asset tracing.

Pandemics, Panics, and Profiteering: Paycheck Protection Program Loan Fraud

More than five years after the start of the coronavirus pandemic, the cost of relaxed underwriting standards to help prop up a suddenly shuttered economy have become clear. Headline-grabbing stories include the purchase of a Lamborghini with a portion of PPP loan funds, and the conviction of individuals who prepared fraudulent forms to get loans for others, often creating entirely fake business entities, or grossly inflating the supposed revenues of existing applicants.

Acting more aggressively in a retroactive fashion, prosecutors have been going after large-dollar frauds, armed with a statute of limitations that begins ten years after the offense was committed. Checking the status of the loans obtained by a prospective business partner or vendor should be key part of your due diligence toolkit for at least the rest of this decade. Verification of an address and other claimed information – including whether the nature of a business could feasibly be performed at a residential address – is an essential part of the due diligence process.

Additionally, when performing broader asset searches, PPP loans information can be helpful to identify banking relationships and other important business data. When applying, companies were required to state how many jobs they thought would be affected by the loan, which can provide insight into the scope of otherwise privately-held, smaller businesses. Also, because PPP loans were issued in two draws between 2020 and 2021, any discrepancies between the two draws could indicate changes in business activity.

Perhaps most importantly, databases which have aggregated PPP loan data also identify the lender, often down to the local branch level, and whether each loan has been forgiven. Should your client obtain a judgment, related to any kind of civil matter, identifying a banking relationship would be fruitful for subpoenaing records and ultimately seeking to attach assets.

PPP loan data ultimately present an opportunity for researchers to glean important information about smaller, private businesses, while also presenting a risk that should be managed when looking to do business with PPP loan recipients. Since some companies were sued by lenders, or the principals were prosecuted for fraud related to the PPP loan, loan information has become a key data point when researching businesses and individuals.

Welcome to the September 2025 edition of our newsletter!  In this issue, we’ll examine how fraudsters use non-profit groups, and less organized fundraising campaigns, to defraud others, and look at ways to be vigilant when making donations.

Preying on the Kindness of Strangers: Fundraising Fraud

For centuries, fraudsters have used charitable intentions and the bonds between like-minded groups of people, exploiting goodwill and trust to deceive caring people and organizations.  Social media has decentralized what was once a more narrowly focused scam: instead of falsely claiming to work with a legitimate group, such as a local firefighters’ association, scammers can now simply claim to have an incurable illness and use crowdfunding platforms to tug at the heartstrings of others.

Yet other fraudsters work to defraud government programs meant to serve the neediest populations, such as children with chronic health conditions, or those facing food insecurity and homelessness.  Spurred on in part by the coronavirus pandemic, state and county public health agencies increased their budgets to provide meals to elderly citizens who were no longer safe to go shopping, and other at-risk populations.  All of these changes created new opportunity sets for criminals who created bogus charities, delivery services, and other bogus firms to get contracts or charitable donations while providing few or no services.

If you have a client looking to donate, or an agency looking to enlist the services of a provider, the time and effort to thoroughly vet them will be well worth it.  Have the principals faced litigation from former partners or vendors?  If the service is in a regulated industry, is the agency (and often its principals) licensed and in good standing?  Scam artists prey on a willingness to trust and do good works, but the healthy skepticism of an investigator’s due diligence can often see past behaviors and problems that could be a sign of trouble ahead.

Welcome to the August 2025 edition of our newsletter!  In this issue, we’ll examine the importance of vetting various advisors, whether for legal matters or financial advice.

Guidance Through Stormy Waters: The Role of Advisers

As business transactions and financial markets develop increased complexity – private assets in 401(k) accounts, ever shifting regulatory landscapes – your clients’ need for sound advice has rarely been more paramount.  But how can they be sure they’ve found someone whose counsel they can trust?

Whether lawyers seeking to be consulted on an investment opportunity or financial advisors promising above average returns to a family office, expertise can be of immense value.  Making sure the professionals involved can deliver on their promises requires thorough due diligence, looking into their backgrounds with great detail.  Did they pass the bar, as they have claimed?  Do they have all of the degrees listed on their curriculum vitae?  Some of this verification would involve direct contact, such as with a university registrar, while other items can be verified by consulting directories like state bar records or other licensing bodies.  Verification of employment can involve needing a party’s consent, but many high-level positions can be verified by analyzing news articles, company statements, or litigation.   Financial advisors are also heavily regulated, and much detail about their pasts can be found in records from FINRA, the National Futures Association, and other self-regulatory groups.

Fraud in the advisor space is nothing new, and evolving with the times.  Parties can embellish their past experience and education, or simply lie altogether; other times, a person’s entire identity is a carefully curated fiction meant to gain trust and deceive others, and in other instances – such as the Bernie Madoff scheme – a fraudulent advisor preys on the trust placed among members of a common group, such as religious or civic organizations.

Traditional due diligence efforts offer redundancies which can detect fraud in a timely manner, whether an exaggeration or lies. Whether making a key hire or looking to close a deal, thorough review of a potential advisor’s background is an essential tool to operating in our increasingly interconnected world.

Welcome to the July 2025 edition of our newsletter!  In this issue, we’ll examine the risks of broader investor access to areas like fine art and wine – which have been a favorite avenue of scammers for decades.

Retirement Savings of the Rich and Famous?  Or Another Ponzi Scheme Opportunity?

A retirement savings crisis has been building in America for decades.  As the Trump administration plans to expand investment options within 401(k) plans to include private equity, alternative assets and cryptocurrencies, the bull case for such an action would be a way to beat public market returns and bolster savings amounts once retirement is a possibility.

Investing in alternatives, which could include fine art or wine collections, owning fractional shares of income-producing real estate, or “digital assets” like Bitcoin, each have value propositions which are not hard to find, and each are less tethered to public stock or bond markets, which can insulate them from broader shocks.  The other aspect they have in common is that each is a routine vehicle for fraud.

Art and wine collections, for instance, play upon an investor’s aspirations and desire to emulate high-flying lifestyles they see in television or social media.  Yet in past investigations, we’ve uncovered a variety of frauds in this area, including an art collector and dealer who pledged the same artworks as collateral for dozens of loans, hoping that none of the lenders would see, via due diligence, that a piece was already pledged to another lender.  We helped uncover the fraud, and one unfortunate downside for the harmed parties was that, even if they could recover the monies lent, the process of asset identification and litigation to collect was a costly and stressful experience.

The siren song of alternative assets pumping up a 401(k)’s returns, so that individual investors can match returns generated by large pensions or family offices, is indeed a tempting one.  If a  client inquires about placing their assets, or those of a charitable endeavor, in such ventures, they have a duty to thoroughly investigate the parties involved and to see the risks as they also see an opportunity to diversify and generate returns.

Welcome to the June 2025 edition of our newsletter!  In this issue, we’ll examine how traditional affinity fraud scams are being enhanced by artificial intelligence.

Broken Trust: The Evolution of Affinity Fraud Scams

Affinity fraud – where a fraudster targets members of a group because of a shared religious, educational, civic, or professional background – has been around as long as people have been, with Bernie Madoff being one key example.  Throw new technologies into the mix, and the traditional risks escalate considerably.  The opaque promise of riches via cryptocurrencies, for example, is a potentially fruitful avenue for anyone looking to bring their associates into the fold.  Such scammers often approach military service members or other groups of which they have been a part, simultaneously swaddling themselves in honor and tradition while using that as  a cloak to blind the victim to the scammer’s true intent.

Artificial intelligence can also be used to help a fraudster make claims of affinity seem more real, creating fake degrees or other records to “prove” someone is a member of a group, even when they’re not; and to more realistically insert them into photos, or create authentic-seeming video clips, to further gain a victim’s trust.

What can you do if a client, friend, or relative is approached by someone claiming to be from their college or another affiliation, and wanting to invest together?  First, ideally the potential victim needs to be aware enough to seek advice before committing any funds, then traditional due diligence can pierce even the most sophisticated fraud scheme.  We’ve encountered examples of parties claiming to have degrees which a university could not verify, and going so far as to send photographs of their phony degree as evidence, even when told the school had no record of them even attending.

Artificial intelligence adds a new wrinkle to such schemes, lowering barriers to entry for fraudsters and augmenting the types of fraud they can attempt.  But vigilance and diligence have also been around for most of human history, and in the right hands, they are powerful tools.

Welcome to the May 2025 edition of our newsletter!  In this issue, we’ll examine the evolving role of artificial intelligence both in fraud schemes and combating them.

Professionals and Conmen: Two Sides of the Technological Coin

Once upon a time, corded telephones, fax machines, and mail carriers were each the standard of innovation.  Now, their use is on the decline.  As we race through the 21^st century, will fundamental concepts of mutual trust and cooperation join them in the rear view mirror?

The confluence of artificial intelligence and very natural, human intentions may answer the question for us.  Unleashing technology that can replicate documents, human voices, idioms, and likenesses with eerie authenticity – a technology which, in itself, has no set of values beyond whatever its users intend – has created monumental opportunities for fraud.  Social media affinity scams from supposed relatives seeking money, a frenzied phone call from a grandchild supposedly in prison while on vacation overseas, a fake document purportedly from a real customer – all of these risks existed in years past, but the technology and time needed to execute them was a barrier to entry for criminals which no longer exists.

On the other side of this equation is artificial intelligence’s ability to help in combating fraud.  One area where artificial intelligence can be useful is in workplace fraud, where threats and other crimes are often made anonymously.  Humans are pattern seeking creatures, and they also fall into patterns which artificial intelligence, in particular, can detect and use as a fingerprint of sorts.  Does a threatening message use certain phrases which an employee might use in his everyday life (and company emails)?  Are questioned vendor invoices connected to a post office box used by an employee or her relatives?  Such issues can be analyzed by humans quite successfully, but using artificial intelligence can expedite the process without sacrificing the quality of analysis.

Maintaining trust in an era where many fundamental concepts of daily life can be manipulated will be one of the greatest challenges we face in this century.  In addition to the bedrock of thorough due diligence to assess the legitimacy of parties, vigilance is needed to understand and question the legitimacy of documents, correspondence, and other parts of the business world whose authenticity which we previously took for granted.

Welcome to the April 2025 edition of our newsletter!  In this issue, we’ll examine how antitrust enforcement trends can serve as an indicator of the deal-making climate.

Vox Populi, Vox Negotium?  How Supposedly Populist Policy Affects Business Transactions

As a new political administration attempts to establish its allegedly populist economic platform, the question of how this will affect corporate deal-making is high on the list of unresolved issues.  The U.S. Justice Department continued the Biden administration’s antitrust case against Google concerning its advertising practices, indicating that hopes for a less heavy regulatory hand from the new administration may have been premature, at least in some instances.

This raises some new concerns for client companies seeking to acquire other firms.  Perhaps more than in past years, federal lobbying activity becomes a relevant data point – does a target company have legislative affairs teams and/or outside lobbyists, and if so, how are they perceived as far as reputation and effectiveness?

Additionally, with tariff walls being erected in the name of supposedly unfair trade, cross-border mergers or acquisitions have become more complicated.  As a corollary to the domestic lobbying aspect, due diligence would also include a look at Justice Department Foreign Agent Registration Act filings, as well as any politically sensitive matters like those raised by the Committee on Foreign Investment in the United States, which has become a politicized weapon of the anti-free trade bloc of both political parties.  Finally, foreign corrupt practices – which can be used to rally public support against multinational deals  — should be scrutinized in advance, from the flimsiest accusation to legitimate enforcement actions.

After the new administration’s first 100 days, the climate for deal-making seems to be mostly what was promised, but not what was expected.  That disconnect can be a costly one, but diligence and preparation can help your clients avoid pitfalls and find paths to long-term profits via M&A in any environment.

Welcome to the February 2025 edition of our newsletter!  In this issue, we’ll examine how changes to anti-corruption enforcement could affect dealmaking.

 Ethics On “Pause”: The State of Anti-Corruption Measures In a New Era

On February 10, 2025, President Donald Trump issued an executive order “pausing” enforcement of the Foreign Corrupt Practices Act, arguing in part: “overexpansive and unpredictable FCPA enforcement against American citizens and businesses — by our own Government — for routine business practices in other nations not only wastes limited prosecutorial resources that could be dedicated to preserving American freedoms, but actively harms American economic competitiveness and, therefore, national security.”

Placing such a “pause” in place while myriad untraceable cryptocurrencies exist to easily facilitate bribery creates its own set of challenges – one in which companies which pursue cross- border transactions must now police themselves, at least in terms of the U.S. side of operations.  Each country’s anti-bribery and corruption laws remain in place, with Europe moving in a direction opposite of the Trump administration, increasing oversight and transparency demands.

This situation compels companies to oversee the executives involved in cross-border deals, and may raise privacy concerns if clandestine messaging apps are used, as a corollary to the secrecy of a digital wallet.  Such details can be very hard to obtain without the assistance of law enforcement, especially if conducted on a personal device.  Understanding an employee’s circumstances and reputation in advance becomes all the more vital to act as a bulwark against the possibility of future corruption.

Welcome to the January 2025 edition of our newsletter!  In this issue, we’ll examine how new technologies can be a front for old frauds.

Irrational Exuberance and Rational Exploitation: AI and Fraud

As artificial intelligence deployment has expanded over the last two years and driven much excitement in America’s capital markets, it has also become a cipher into which investors and businesses have placed their hopes and dreams for the dawn of a new age of innovation.  For every Edison, however, there is a P.T. Barnum ready to exploit the human capacity for growth and to look over each new horizon with optimism.

While the technologies are new, thus far many instances of fraudulent behavior by AI-related companies have relied upon old techniques.  For example, earlier this month the founder of a chatbot provider, GameOn Inc., was criminally charged with using investor funds to maintain a lavish lifestyle, including paying for a wedding and other personal expense.  Additionally, Alexander Beckman issued financial statements which “often described non-existent revenue, inflated cash balances, and fake and otherwise exaggerated customer relationships.  To further the scheme, Beckman allegedly used the names of at least seven real people—including fake emails and signatures—without their permission to distribute false and fraudulent GameOn financial and business information and documents with the intent to defraud GameOn and its investors.”  Beckman and his co-defendant, Valerie Lau Beckman, reportedly raised $60 million from investors, redirecting $4 million of that amount to personal expenses.

Potential investors, as well as potential partners, can protect themselves by tuning out the buzzwords around a new technology and focusing on the company’s fundamentals as well as the reputations of its principals.  This type of deep research-driven analysis can help identify potential problems before an engagement and provide either a sense of security to enter a deal or enough caution to rightfully walk away.

Welcome to the November 2024 edition of our newsletter!  In this issue, we’ll examine disclosure requirements for incoming White House officials.

Transparency Into Every Corner: the Price of Serving Your Country

With every changing Presidential administration, executives from varied fields jostle to gain influence and serve in the new Cabinet.  Many come from lucrative fields like finance and fast-paced, innovating industries, and may be surprised at what they’re required to disclose both as they begin the Senate confirmation process and after taking office.

Executive branch financial disclosures require items such as any corporate interests — including individual pass-through entities such as subchapter S corporations – to be disclosed, as well as equity investment and retirement accounts; any outside income exceeding $5,000 in a given year – speaking fees, book contracts, and the like – as well as sources of income from a filer’s spouse.

Nominees who are subject to U.S. Senate confirmation must file a similar disclosure with the U.S. Office of Government Ethics.  “When potential conflicts are identified, ethics officials identify steps that the nominee will need to take to avoid the conflicts and document those steps in an ethics agreement,” the agency said on its web site.  “Once the financial disclosure report and ethics agreement are finalized, OGE preclears (i.e., tentatively approves) the nominee financial disclosure report and ethics agreement and awaits the announcement of the President’s nomination or the President-elect’s intent to nominate the nominee.”  The correspondence issued during this process also becomes subject to the U.S. Freedom of Information Act, although certain information may fall under that act’s exemption regarding an “unwarranted invasion of personal privacy.”

Financial considerations are, of course, not the only aspect to consider when researching potential appointees and considering the impact their positions might have on your company or industry.  But a thorough review of these public records, and their utility as leads toward other research where warranted, can be helpful in identifying areas of concern and potential conflicts of interest concerning an incoming administration.

Welcome to the October 2024 edition of our newsletter!  In this issue, we’ll examine how the burgeoning field of artificial intelligence is affecting both fraud and fraud fighting efforts.

So Like Us: How Artificial Intelligence Is Used in Scams and in Scam Detection

Artificial intelligence, unlike most humans, has no moral center, no learned or inherent sense of right or wrong – its sole goal is to carry out the operations fed into its prompts.  As such, it has become a valuable tool for myriad types of fraudsters and other criminals, whether tasked with pursuing denial of service attacks or analyzing social media to compile more convincing phishing attempts.

Yet those charged with detecting and preventing fraud are also using this new tool.  For instance, the society which handles international wire transfers recently announced that it is rolling out a fraud detection tool to help banks detect fraud in real time.  The next iteration of threats which banks will face may be the “cloning” of voices used as an extra layer of authentication.

Potential fraud victims can look for certain cues as to whether something was written by artificial intelligence.  Many AI-generated news articles use overly formal language, like that which is used by non-native speakers seeking to both increase their understanding of a language and to impress the listener.  Other signs of fraud can be part of the prompt initiated by the AI’s user, such as urgency in a plea for money via a social media post or e-mail.

As with most human endeavors, we’re leaping into a new frontier before we’ve taken a measured look at the horizon.  Caution and vigilance are key, as is a mentality to evolve solutions to problems as the risks also evolve, possibly exponentially given AI’s ability to absorb and analyze information at a nearly infinite pace.

Welcome to the September 2024 edition of our newsletter!  In this issue, we’ll examine the increasing trend of applying liability for corporate crimes committed by individuals within their employ, and steps your company can take in an era of increasing compliance pressures.

On Our Best Behavior: Tips for Corporate Compliance With “Failure to Prevent” Fraud Rules

As U.S. regulators have strengthened a “carrot and stick” approach to corporate fraud enforcement — enhancing whistleblower programs while also giving greater credit for cooperation with corporate fraud probes – the United Kingdom is considering measures which are much more stick-focused.  As part of implementing its 2023 Economic Crime and Corporate Transparency Act, a “failure to prevent fraud” offense was codified which will hold a company liable if an individual commits fraud for its benefit.  The reach of the statute is broad in scope, and applies to multinational companies if they target victims within the United Kingdom or otherwise violate its laws.

The statute applies only to companies defined as “large” in scope – more than 250 employees, among other criteria.  Defenses offered in a statement by the UK government include proving that the company itself was a victim of the fraud, and not a beneficiary of it; and also that it had sufficient prevention policies in place prior to a crime being committed.

These measures, and others like them undertaken by regulators across the globe, heighten the need for vigilance and diligence when it comes to understanding an employee’s conduct.  Are there external factors beyond their work which could lead them to commit fraud, even if that fraud benefits the employer in some way?  What did the company do as part of its employee supervision process to understand the risks of fraud and abuse?  Both internal and external records, including financial profiles of subject individuals, will be essential in helping a company defend itself should its employees fall under scrutiny which could balloon into criminal prosecution and “unlimited” fines.

Welcome to the August 2024 edition of our newsletter!  In this issue, we’ll examine how a recent U.S. Supreme Court ruling could affect due diligence regarding investment professionals and companies.

Looking Through a Keyhole: Due Diligence After the Recent High Court Ruling

Near the end of its recent term, the Supreme Court found that persons accused of fraud in civil court have a right to trial by a jury of their peers before administrative courts, such as those at the SEC and CFTC, have their say.  The ruling affects other federal agencies as well, such as those concerning environmental protection, which like the SEC can only administer civil remedies.

Over time, the change will deplete the public record concerning relevant individuals, as administrative law judge rulings and case files can typically present a robust history of allegations.  The ruling at issue concerned antifraud provisions, and it remains open whether, and to what degree, the ruling will be interpreted more broadly.

From the perspective of performing due diligence, the ruling places greater importance on examination of the existing public record of persons in regulated industries, including examination of relevant professional licenses, complaints, adverse news articles and customer reviews, and any prior history of litigation.  While the ruling does not neuter the administrative courts altogether, giving priority to the federal trial court can make looking into a subject’s history more opaque than it had been previously.  Establishing an understanding of prior disputes is a critical part of pre-transaction due diligence, and in its ruling the high court not only limited the power and scope of the administrative courts, but also the public’s insight into the matters those courts oversee.

Welcome to the July 2024 edition of our newsletter!  In this issue, we’ll examine how regulatory changes in the United Kingdom might signal a broader shift in the treatment of high profile politicians, and look at what your company should do if considering working with someone in that orbit.

Access and Exposure: What to Know About Who You Know

Political races have been ramping up across the globe, as has scrutiny of politicians throughout much of the Western world.   In an effort to ensure that anti-money laundering regulations are applied properly to persons of political influence, the United Kingdom’s Financial Conduct Authority recently published guidance trying to balance the need to prevent public corruption while respecting an individual’s right to privacy.  The authority highlighted the increased risk of politically exposed persons “and those connected to them, may be at risk of being targeted for bribery and corruption, with the financial system used to launder the associated proceeds,” while also stressing that “more intrusive measures” of inquiry should only be taken if an initial review identifies areas of concern.

Current and former politicians, and also their families and network of friends, often leverage their proximity to power to join advisory boards, consult for private business or lobby on their behalf (hopefully while registering to do so, although the line between lobbying and consulting is a blurry one.)  If your company seeks access to persons close to seats of power, be vigilant in looking at their deficits as well as their beneficial attributes.  Who has this person associated with in the past?  What did they do, if anything, to gain their current status, and what was their professional and personal life like both before and after?  Various countries and international law enforcement bodies also maintain watch lists of politically exposed persons, often a few degrees of separation from an actual politician, such as family members and former spouses.

Context always matters, and in an increasingly inward looking world, it might matter even more.  Understanding who politically relevant persons have done business with, and had other relationships with, can help your company gain the perks of effective, high-level partners or representatives while minimizing the reputational risks they can bring if scandalous behavior comes to light.

Welcome to the June 2024 edition of our newsletter!  In this issue, we’ll examine the role asset tracing can play in family disputes such as matrimonial or probate actions.

Shades of Grey: Varying Levels of Disclosure for Family Related Assets

When interpersonal friction extends into litigation, or the prospect of litigation, the emotions of the parties involved adds another layer of difficulty.  Whether finalizing a divorce or mourning the passing of a loved one, the collision of passionate emotion and practical matters can be trying on all involved.  When it comes to adversarial components such as one spouse trying to find assets of another, a thorough and dispassionate approach is essential.

Every case varies in complexity and scope.  For example, a hedge fund manager likely will have numerous limited liability companies – or overseas equivalents – through which they manage assets for themselves and their clients.  Often, such high net worth individuals will also establish trusts for the benefit of family members or a favored charity.  In other instances, local laws and regulations will dictate the use of trusts to hold property, as is often the case in California due in part to its broad community property laws concerning marital assets.  Although real property held by such trusts is often a matter of public record, the existence of the trusts themselves often is not, unless they have previously been the subject of discovery in litigation.

Probate and estate actions also present asset-related challenges.  Although a last will and testament is typically drawn up prior to a person’s death – often many years before – in many cases such filings are not admitted to a probate or surrogate’s court until after a death, and then only if a creditor seeks repayment of a debt or otherwise contests part of an estate’s distribution.  The vendor seeking payment can be of any scope – in prior research we have seen an unpaid cable bill of less than $100 serve as the basis for a probate action petition.

Thorough due diligence is paramount in all such situations, as divorcing spouses may seek to transfer assets to friends, paramours or business associates temporarily as a means, however unsophisticated, or keeping assets out of their estranged spouse’s reach.  With respect to probate actions, once made public a review of the inventory — and understanding of who the party seeking to administer the estate is — are both key to helping clients assess the risks involved with collecting a debt.

Know Your Customer, Know Yourself: The Push for Greater KYC Oversight

Welcome to the May 2024 edition of our newsletter!  In this issue, we’ll examine how an increase in “know your customer” regulations are affecting finance and other industries.

The Importance of Vetting Potential and Existing Customers

With the adoption of cryptocurrencies and digital peer-to-peer payment services in the last decade-plus, regulators are to some degree playing catch up trying to oversee innovations moving much faster than their bureaucratic processes.  Recently, the U.S. Securities and Exchange Commission and the U.S. Treasury Department’s FinCEN Network issued a joint proposed rule that would create standards of due diligence which an investment adviser would have to undertake to verify the identity of its client.  The rule “would make it more difficult for criminal, corrupt, or illicit actors to establish customer relationships—including by using false identities—with investment advisers for the purposes of laundering money, financing terrorism, or engaging in other illicit finance activity,” FinCEN said in a statement about the proposal.

One flashpoint which spurred this rulemaking was the war between Russia and Ukraine, as law firms and investment advisers have been investigated for helping Russian “oligarchs” evade sanctions.  The proposed rule specifically mentions that, if adopted, advisers would have to maintain documentation of their efforts to verify a customer’s identity, including checking to determine if that person or company appears on any sanction or enforcement watch lists.

Use of risk management professionals to verify information submitted by a client seeking to open a new account has gained greater importance in an era where regulators are seeking to exercise greater oversight over finance and other industries.  Vetting potential customers, typically done by an adviser’s compliance department, can provide a strong measure of prevention to help your firm avoid blow-back from assisting bad actors.

Welcome to the April 2024 edition of our newsletter!  In this issue, we’ll examine how a growing protectionist trend in American politics is affecting foreign investment opportunities.

Working Together ir Standing Apart: Regulation of Foreign Direct Investment

As governments in many parts of the world retreat from the globalization boom that has fueled the past three decades of growth, the effects of this regression have become more pronounced when it comes to regulatory efforts.  The U.S. Congress, for instance, is seeking to compel the Chinese parent of TikTok to divest its stake and the Federal Trade Commission is blocking mergers like a hockey goalie in a shootout, involving U.S. companies and also multinational ones.  This mindset has always been present at the Committee on Foreign Investment in the United States, or CFIUS – and indeed was a driving force for its creation, to protect American businesses as well as trade and state secrets.  Now, CFIUS is turning up its efforts.

The Treasury Department is seeking to give the committee — which oversees foreign direct investment in United States companies —  authority ro increase its fines for making false statements to $5 million – a 20-fold increase from the current limit of $250,000.  The new proposed rules would also allow subpoenas by the committee to third parties, broadening its enforcement reach, with the stated reason being the identification of national security risks.

If your client is seekinbg investment from a state-owned entity controlled by a  foreign government which is looking to invest in U.S. assets, being aware of heightened penalties for false statements could be key – especially if any joint venture could be liable for them even if your party was not the one uttering them.  As skepticism about the intent of foreign actors essentially becomes policy in more parts of the globe, those who must operate under that framework are urged to use more caution and diligence if they want to see the world as a globe spinning with opportunities, not fueled by threats from abroad.

Welcome to the March 2024 edition of our newsletter!  In this issue, we’ll examine early results of federal voluntary disclosure programs and indicators of what those results could mean for your business.

Twice-Told Tales: Corporate Disclosure Can Lead To Prosecution Of Others

As noted in previous letters, the U.S Justice Department is promoting a “self-disclosure” program to police corporate wrongdoing, providing incentives for companies to cooperate and self-disclose bad conduct, such as bribes paid to regulators.  Such cooperation can result in a declination – a formal notice of intent not to prosecute.  Yet the other parties who carried out the bad acts – such as other companies that may have joined a voluntarily disclosing company in paying bribes — may not be provided with any such shield.

Especially relevant to multinational companies based in the United States, these disclosures can provide protection but also carry risk to others in the same industry – including areas like construction where coordination between competitors can occur more often.  Given that international bribery cases pose an inherent challenge given the differing ethical and legal standards in many countries, thorough awareness of what foreign agents, affiliates and oithers do on a U.S. company’s behalf is always critical – as is awareness of who else might be implicated should your company come forward to self-disclose various violations.

Welcome to the February 2024 edition of our newsletter!  In this issue, we’ll examine the recently implemented Beneficial Owner Information requirements and its effects, intended and otherwise.

Increased Transparency, But At a Cost?  New Ownership Reporting Rules May Change Business and Investing

Beginning on January 1, 2024, the U.S.Treasury Department’s Financial Crimes Enforcement Network, or FINCEN, began requiring “many companies” to disclose the beneficial owners who derive profit from, and exercise control over, previously opaque limited liability companies and other entities created to maximize secrecy referred to very generally by FINCEN as “entities created by the filing of a document with a secretary of state or any similar office in the United States.”

The implications of increased ownership disclosure – with which existing companies must comply by January1, 2025 – are considerable.  Many real estate purchase are made on behalf of owners directly by such companies (rather than by an individual who then transfers it to an entity.)  Whether to maintain privacy – as in the case of celebrities – or to maintain an additional layer between the owner of a rented townhouse and its tenants when a liability event occurs – these companies have served many legitimate purposes over the years.  They have also been used to launder illicit gains into hard assets like real estate, aircraft, or watercraft – thus explaining one of U.S. law enforcement’s motivations in seeking this authority under the 2022 Corporate Transparency Act.  As enacted, that act only allows authorized “requestors,” such as law enforcement agencies, to seek filing information once the grace period is over at the end of 2024.  It remains somewhat unclear how much of this information will be available to the public via the Freedom of Information Act in 2025 and beyond.

These new requirements are likely to be seen as an earthquake in secrecy havens such as Delaware and Nevada – seemingly gone are the days where an owner could hide behind nominees such as “authorized signatories,” who could simply be a paralegal at their retained law firm.  While that veil may remain in the public realm, for now, the true ownership will be known to law enforcement, which is likely to make the lives of bad actors much more difficult, as the law intended.  The rest of the business community is advised to exercise additional diligence in this new environment as well, and thorough due diligence can help avoid guilt by association when dealing with parties who might have reason to keep their ownership of assets a secret/

Welcome to the January 2024 edition of our newsletter!  In this issue, we’ll examine the trend toward self-reporting initiatives being promoted by various level of law enforcement.

Exercising Self-Discipline: the Trend Toward Voluntary Disclosure

After the U.S. Justice Department unveiled a voluntary disclosure program last year concerning corporate wrongdoing, the U.S. Attorney for the Southern Distroct of New York announced a new policy concerning self-dsclosure for criminal conduct.   The policy would give credit to the company “if it becomes aware of misconduct by employees or agents before that misconduct is publicly reported or otherwise known to the DOJ, and discloses all relevant facts known to the company about the misconduct to a USAO [U.S. Attorney’s Office] in a timely fashion prior to an imminent threat of disclosure or government investigation,” a statement about the program said in part.  “A company that voluntarily self-discloses as defined in the policy  and fully meets the other rquirements of the policy, by—in the absence of any aggravating factor—fully cooperating and timely and appropriately remediating the criminal conduct (including agreeing to pay all disgorgement, forfeiture, and restitution resulting from the misconduct), will receive significant benefits, including that the USAO will not seek a guilty plea; may choose not to impose any criminal penalty, and in any event will not impose a criminal penalty that is greater than 50% below the low end of the United States Sentencing Guidelines (USSG) fine range; and will not seek the imposition of an independent compliance monitor if the company demonstrates that it has implemented and tested an effective compliance program.”

This structure exists in addition to, and not in palce of, existing whistleblower protections.  Given the increasing trend toward, as the U.S, Attorney put it, “more predictable outcomes,” the old saying that an ounce of prevention beats a pound of cure has rarely been more accurate. Using external sources such as public records to complement and help fuel internal inquiries, your company can more holistically understand a problem, whether with an employee or vendor, before it escalates into asituation where self-disclosure of a bad act may be the best -or only – hand to play with regulators or law enforcement.

Welcome to the December 2023 edition of our newsletter!  In this issue, we’ll examine the trends that defined the year in fraud, and look ahead to what 2024 may bring.

The More Things Change: Top Fraud Trends of 2023

While 2023 was notable for the increase in personal fraud – from romance scams to cryptocurrency fraud and “pig butchering” – a nasty combination of the two – corporate fraud was also a growing concern, as regulators pursued aggressive strategies to police “non-bank” financial institutions, alleging that they misled investors or sold unregistered securities.  The proliferation of alternative financial technologies was always destined to bring with it bad actors seeking to exploit new technologies, and regulators have worked to both draft and refine regulations and to enforce those already on the books.  Even in the face of new and supposedly innovative technology, tried and true methods of cautious vetting remain the best defense against loss or unwitting culpability,

The Road Ahead: Trends to Watch in 2024

As interest rates have risen within the past 18 months, certain aspects of merger and acquisition activity have been curtailed or delayed.  As interest rates normalize to a lower level, as is expected, deal-making activity should pick up, which will require thorough research on a potential acquisition target and its principals.

Another rapidly evolving trend is the rise of artificial intelligence, both to perpetrate frauds and to help detect them.   Machine learning tools do not have ethical centers to guide them toward socially and legally acceptable behavior – making them easy tools for bad actors seeking to gain information via more sophisticated social engineering scams, or phony websites claiming to be tech or customer support chatbots which then solicit sensitive information.  Whether trying to prevent traditional fraud or its rapidly changing offspring, caution and diligence should be the guide for the year ahead,

Welcome to the November 2023 edition of our newsletter!  In this issue, we’ll examine how evolving scrutiny of transactions by federal regulators is affecting the need for due diligence.

Calm Before a Storm?  The Justice Department’s “Safe Harbor? Period and Due Diligence

As mentioned in last month’s newsletter, the U.S. Justice Department is implementing a program of heightened compliance for mergers and acquisitions.  As part of this effort, a one year “safe harbor” period may be implemented, which would encourage a flurry of deals before it expires.  Longer term, the policy may strain the appetite for more complex dealmaking, especially cross-0border transactions which can carry a wider array of risks.  Additionally, insurers and counsel could gain added importance, as deal terms also evolve to cover the new regulatory framework.

Potential acquirers will benefit from using the safe harbor period to conduct thorough due diligence in any likely acquisition target, including inquiries into foreign and domestic corruption allegations and any industry specific regulatory matters which could gain new relevance. thorough vetting a company and its management teams, both domestic and foreign, can provide considerable benefit once a regulatory review is underway.

Welcome to the October 2023 edition of our newsletter!  In this issue, we’ll examine increased regulatory efforts to root out fraud and corporate malfeasance during the merger and acquisition processes.

What’s The Deal? Justice Department Pursues Measures to Scrutinize Transactions

In recent years, regulators have increased efforts to oversee more business transactions in the name of preventing fraud which harms shareholders and consumers.  That trend has come to the mergers and acquisitions space, as the U.S. Justice Department announced a policy which incentivizes an acquiring company to report wrongdoing at an acquired company within six months of the deal closing.  If the acquirer “fully cooperates” with an investigation, the department said it will maintain a presumption that the acquirer would not be prosecuted.  The recently announced policy would only apply to criminal inquiries, not civil enforcement actions.

This creates an increased importance for pre-acquisition due diligence, including thorough checks on executives and interviews about key suppliers and other relationships.  Public records-driven checks can complement other avenues of investigation to help an acquiring company fully understand a target company’s history, and better prepare for the day when all the facts – known and unknown – could be called into question.

Welcome to the September 2023 edition of our newsletter!  In this issue, we’ll examine heightened scrutiny of deal facilitators as authorities seek to crack down on fraud, especially concerning international clients.

Wars of Attrition: How Foreign Policy Measures Influence Regulatory Scrutiny at Home

More than 18 months into the Russian war against Ukraine, the hunt for assets of Russian “oligarchs” has had a ripple effect across multiple industries.  As part of its task force seeking to sanction billionaires who may be funding, or otherwise benefiting from, Russia’s war effort, the U.S. Justice Department has begun to scrutinize attorneys and others who have worked to help such “oligarchs” set up businesses in recent years.

This extra layer of investigation requires greater effort by those seeking to work with potential targets of international investigations – either those which have begun or could commence in the future.  Does the party your firm is looking to work with have any exposure to assets, either in the U.S. or abroad, that could later be subject to inquiry or seizure because of their connection to a relevant individual or company?  Although investigations and the reasons for them can be very fluid, one constant need is that of fully understanding who you’re looking to do business with, and the risks involved, both present on the surface and likely to emerge in the future.

Welcome to the August 2023 edition of our newsletter!  In this issue, we’ll examine efforts to strengthen due diligence on clients in the face of increased regulatory pressure and a rise in financial crimes.

Homework Begins at Home: the Need to Perform Due Diligence on Clients

As new technologies create new opportunities for criminal activity, regulators and law enforcement have had to respond, leading due diligence professionals to increase scrutiny of their clients.  In an environment where cryptocurrency can create opaqueness concerning financial transfers – and where Congress is proposing legislation to hold lawyers, accountants and others liable if they fail in anti-money laundering efforts – the need for thorough due diligence has never been more acute.  Industry groups like the American Bar Association have changed their rules to require lawyers to consider various factors, including a potential client’s background, prior to representation.  This is an effort to stave off potentially more onerous requirements imposed via legislation, and also a response to international events which can compel sanctions on high net worth individuals.  Given the relative ease of using harder to trace decentralized finance methods, it is incumbent upon lawyers, their corporate clients, and the researchers they employ to understand a client’s public risk profile outside of “black box” payment methods like cryptocurrencies, if for no other reason than to show law enforcement or regulators that your priorities skew toward preventing fraud by all involved parties.

Welcome to the July 2023 edition of our newsletter!  In this issue, we’ll examine conflicts of interest among regulators and other government officials as efforts to rein in insider trading continue.

New Frontiers, Old Problems: Regulators Grapple With Conflicts While Monitoring New Technology

The momentum in recent years has been for government agencies, especially at the federal level, to assert themselves into, and often against, markets as new technologies become available at breakneck speed.  Against this increasingly robust regulatory effort are the details of the humans who carry out such policies.  Much has been made in recent months about stock trading by members of Congress or their spouses, often around the time of sensitive information being shared at committee hearings or other fact finding events.  In the executive branch, regulatory officials have come under scrutiny for recommending policy initiatives affecting companies whose stock they own.  The judicial branch, meanwhile, has only recently implemented financial disclosure rules which have brought to light what many see as unacceptable conflicts concerning the justices’ personal relationships, financial benefit, and matters before the court,

As the administrative state continues to encroach into private market activity, companies can best prepare to defend themselves by delving into the backgrounds of the regulators, legislators, and jurists whose decisions can affect their market outlook.  Does the deputy secretary at an oversight agency own any shares in a competitor?  Does their spouse work in a field that could cause a conflict?  Has this person had to be recused from certain matters in the past?

By understanding the histories of decision-makers who can affect your company’s future, you can also understand a nuanced part of the competitive landscape, and if necessary be prepared to make sure that your company does not suffer from conflicts of interest which would otherwise remain unmentioned below the surface.

Welcome to the June 2023 edition of our newsletter!  In this issue, we’ll examine new federal efforts to crack down on corporate crime, and what you can do to defend your clients.

Crime and Punishment: New Justice Department Efforts to Push Accountability

In the 20-plus years since the Enron scandal, regulatory efforts to prevent corporate fraud and other financial crimes have been an evolving movement, including the creation of new federal agencies like the Consumer Financial Protection Bureau, as well as the broadening of civil and criminal penalties for various malfeasance.  Most recently, the U.S. Justice Department has announced the creation of a database, not yet publicly available, detailing cases of “corporate wrongdoing.”  This database is part of a larger review of its corporate enforcement policies, and a signal that various bad behaviors, from bribery to price fixing, will be in focus.

Your clients can protect themselves by maintaining strong internal controls and a culture of transparency, but when bad acts are found, it is best to get ahead of them before a case is brought by an agency or law enforcement.  Investigating internal rumors and reports of bribery allegations, for example, is likely to expose embarrassing defects in corporate culture, but may also yield great benefits in terms of preparing for an eventual inquiry.  Thorough understanding of a bad actor’s motives, via public record checks and interviews, and the reason an opportunity to act has presented itself, can both help your company weather an investigative storm before it begins to pour down.

Welcome to the May 2023 edition of our newsletter!  In this issue, we’ll examine how to research banks in a time when instability and volatility have gripped the sector.

Stressed Out: Looking for Indicators of Trouble at Banks

In recent months, leverage concerns and other problems at banks once thought to be reliable stewards of customer assets have made much of the sector trade like meme stocks.  As investors or as clients seeking to conduct transactions, how can you protect yourself in times of increased risk?

As part of the Federal Reserve’s stress testing mechanism put in place after the 2008-2009 financial crisis, banks must publicly disclose the results of such tests, as must the Federal Reserve.  These results may be published on a bank’s web site, or may need to be specifically requested by an individual.

Additional due diligence an investor or customer can take is to have insider trading patterns of executives at publicly traded banks analyzed. Have insiders, such as those leading the company, been selling shares at an accelerated pace when compared to more sanguine periods?  Did they announce any results or action, such as withdrawing a planned merger, which might indicate a reason for concern – and thus a reason for their share transactions?

Volatility in the normally “safe” banking sector may persist for a while, and most customers and investors can’t simply sit back until the storm passes.  But with the right amount if due diligence, better decisions can be made and major risks possibly averted.

Welcome to the April 2023 edition of our newsletter!  In this issue, we’ll examine proposals to increase oversight of money-market and hedge funds, and what it could mean for investors and clients.

To bank or not to bank?  That is the question for regulators

Following the collapse earlier this month of multiple banks which had unbalanced interest rate exposure, or were tied into cryptocurrencies which failed, regulators have looked anew at the strength of the banking system.  As interest rates have skyrocketed, more consumers are seeking yield from high-yield savings accounts and money market funds, including some offering historically high rates.  Investors see opportunity while regulators see risks.  Many non-bank actors could eventually be considered systemically important” by regulators which would increase oversight of their holdings.

As such vehicles have grown in popularity, scrutiny of the assts they hold to generate such yield has also grown.  Investors, large or small, should look into how non-bank firms generate their often lofty returns, to better prepare against the risk of using too many esoteric instruments, or being too vulnerable to increased volatility in rates or other factors.  Also important is understanding the track record of managers at these firms, especially newer entities whose only proven track record lies in their personnel.  By doing homework before investing, even if only to obtain supposedly safe yields, your clients can be more confident in their decisions.

Welcome to the February 2023 edition of our newsletter!  In this issue, we’ll examine how to research the employment, educational and licensing histories of subjects.

Verify, then trust: Vetting job candidates and others

From Congress members to executives, resume embellishment and outright fabrications are a topic of great interest today.  How can a potential employer, or litigant soon to be adverse to another party, find the truth?

Many claims made on resumes, or on sites like LinkedIn, can be verified via public record searches such as news articles and third-party biographical sources.  These will often reference when an individual is featured in a company press release, for example, or tell you if they ever had a company e-mail address and title.  For employees whose position may be below an executive level, looking at trade association events and other industry-specific items can help verify whether someone was employed by a company, and possibly convey their role.  Litigation, as well, can be useful even if a party was not named in an action but was mentioned in another context, such as in an exhibit of e-mails between colleagues.

Professional licensing and industry affiliations are also an important item to research – is the person in good standing if working in a licensed field, and do they carry the recognition they’ve claimed?  This may require calling various industry groups and asking them to verify membership, as many of these groups do not make their rosters public, and are not required to do so.

Finally, while social media can be a catalyst for people to deceive others, reviewing a subject’s timeline can also be a useful snapshot of someone’s career path as it happened – for better and for worse.

As always, vigilance is the best course of action, whether looking to make a hire or complete a transaction.  Thorough verification of professional claims is an important tool in building and maintaining trustworthy business relationships.

Welcome to the January 2023 edition of our newsletter!  In this issue, we’ll examine the importance of properly vetting wealth advisors and estate planners.

Prey Circling Nest Eggs: The Need to Trust Retirement and Wealth Advisors

For most, retirement is a long-term goal which requires decades of planning – even for the wealthy, whose needs often scale with their fortunes.  From athletes and celebrities to lower profile individuals, stories abound about financial advisors or estate planning attorneys taking advantage of the trust placed in them to either siphon funds away from a client, or grant themselves excess power in the decision making process.  What can be done to prevent such malfeasance?

Both investment advisory and legal professions are tightly regulated, which aids in vetting individuals, even if it won’t deter true criminality.  Careful review of power of attorney filings is one way to make sure a client isn’t ceding too much authority, and a review of an advisor’s background can also be of use.  Was an estate attorney sued by a prior client’s family or estate after improper transactions came to light? Was a financial advisor sanctioned by FINRA or other relevant agencies, or taken to arbitration by a client, concerning improper investments on the estate’s behalf? A thorough check of litigation, regulatory filings and other public records would likely identify bad actors before they’re retained.

The same principle of due diligence applies to other personal wealth management, including family offices and trusts, as well as foundations.  Great success can often make an individual, or their family, a target for disreputable advisors.  As always, due diligence is a cost-effective preventative method against a host of bad actions.

Welcome to the December 2022 edition of our newsletter!  In this issue, we’ll examine the year that was, and look ahead to risks on the horizon for the year ahead.

Bubbles Bursting Before Bubbly Pours: Top Fraud Trends of 2022

2022 was a year of innovation and inflation, disruption and discontent.  Several newer asset classes – notably cryptocurrencies and special purpose acquisition companies, or SPACs – have faced a reckoning this year whose reverberations may have only begun.  While both have suffered as “free money” propelled by low interest rates has dried up, fraud has also played a role in the swift, painful decline of companies in each industry.  As a well-known, well-heeled cryptocurrency magnate begins to face fraud charges related to billions in losses for his clients, several SPACs have also faced increased scrutiny for failing to disclose required information in their offerings, and also failing to obtain necessary shareholder approval to proceed to a public listing.   How can investors protect themselves as emerging opportunities face the risk of collapse?

One way to gain more information is to carefully scrutinize the product or service’s terms and conditions.  If you need to bring a dispute, is it subject to arbitration?  If so, is that arbitration held within the United States, or elsewhere?  As painful as it can be to think preemptively of what to do should the situation turn sour, gaming out the steps is an essential exercise for anyone seeking to invest sums of money.

Another step to take is to look at any existing regulatory paper trail the service has provided to the U.S. Securities and Exchange Commission or other regulators (depending on the industry.)   Even though many SPACs, for example, have been criticized for missing filing deadlines or submitting incomplete disclosures, the filings they have submitted can be important. In the spring of 2022, the SEC proposed new disclosure rules for the SPAC and de-SPAC process, including disclosing conflicts of interest concerning the sponsor, and also requiring disclosure of the fairness opinion concerning the potential de-SPAC transaction.

The new rules are still not finalized and the agency was still accepting comments from the public earlier this month, but they highlight important risk management techniques as the new year awaits.  Learning all that you can about a new investment opportunity – especially one in a still uncertain regulatory framework, as broader economic uncertainties loom, including likely recession – is critical to not losing an investment or waiting in line as a creditor in a bankruptcy court, hoping to be made whole again one day.

Welcome to the November 2022 edition of our newsletter!  In this issue, we’ll examine the risks posed to companies by activist investors, and how best to understand both their motives and any weaknesses that may exist.

A Different Kind of Activism: Pushing Agendas for Profit

The activism of political and social justice movements born in the 1960s has, over the last decade, been interpolated into the activist investing movement, where agitating funds (or, sometimes, individual shareholders) seek to compel change at a portfolio company.  While the prior activism model used to be concerned with “unlocking value” – typically reducing employee headcount, increasing use of automation or spinning off divisions to drive growth, reduce costs or both – today’s activist investors seem to want more.  In addition to making companies “lean and mean,” they also want to make them … green.

Enter the ESG movement — environmental, social and governmental reforms, championed by what might be called the original wave of activists.  Large institutional investors and activist investors alike have begun to champion causes such as reducing a large manufacturer’s carbon footprint, improving employee working conditions or compensation, and changing supplier trade terms.  On their face, each is hard to argue against — who wouldn’t want to pay coffee growers more, or improve workplace safety?

Yet an activist investor’s other motives can be obscured by such noble sentiments, and if a company takes a small stake in a client firm, only to start making noise about needed change, it’s best to do your homework on them.  Many such investors can have shorter term investment horizons which may not comport with the longer-term vision of company executives.  An investor’s need for rapid change — realized over quarters, not years – can be driven by many factors, including shoring up portfolios which have suffered losses in other areas.  Ultimately, investors are responsible to their clients, not their portfolio holdings, and they will use ESG motivations as a means of justifying cost reductions which are driven by a far less noble agenda of meeting performance targets.  In addition to scrutinizing individual managers to learn about their background and any conflicts that may exist, placing their goals adverse to your company’s, a close review of a fund’s Schedule 13 holding reports can provide good insight into why they might be pushing so hard for change at your company.  As new rules make it easier for activist investors to nominate individual directors for public companies, vigilance about their motivations and ultimate goals is paramount to balancing a company’s long-term vision with both the short-term goals of investors and changing cultural and societal objectives.

Welcome to the October 2022 edition of our newsletter!  In this issue, we’ll examine the potential for conflicts of interest to arise among politicians and other public officials, and how to identify those conflicts.

Brightening Up Dark Corners: Shining Light on Official Finances

Officials at all levels of government wield significant power over the industries, and individuals, who they regulate.   Yet often, those parties have no insight into what agendas the regulators might bring to the table.  Whether an administrative law judge hearing an environmental regulatory dispute or a member of Congress sponsoring a bill about trade with China, human beings bring the entirety of their experience to a decision, not just the strictures of their official role.

Recently, reforms have been put in place to require greater disclosure from federal judges about their finances, those of their spouses, and other areas where conflicts of interest could arise.  Federal office holders have been required for nearly 50 years to report such information.   Yet when it pertains to the agency officials who are most often involved with crafting opinions or rulings that inform public policy, there is no central public record resources.  Recently, The Wall Street Journal compiled its own database concerning the federal executive branch, culled from records of more than 850,000 senior level federal agency employees, strengthening the trend of transparency about those who shape the decisions which affect everyone’s future.

Beyond the three branches of federal government, however, the picture is much murkier.  In many states, county or state court judges must file similar disclosures, to indicate whether they or their spouse have a business interest, investment, or paid affiliation which could skew their official judgment.   Given the patchwork nature of regulations about disclosures at this level, thorough research is required if your client needs to better understand an official’s history.  Did they ever represent someone in a manner that would be adverse to the situation before them?  Did they ever make comments publicly about an issue which could be inferred as creating bias in their judgment?  Understanding an official’s history, as well as the records you can obtain about their finances, can help you understand if their past dealings could affect their future actions.

Welcome to the September 2022 edition of our newsletter!  In this issue, we’ll examine the importance of thorough pre-employment background research.

Checking Things Out: Steps for Successful Background Inquiries

With apologies to William Faulkner, the saying “the past is never dead, it’s not even past” seems to ring truer each day.  Whether it’s C-suite executives or Congressional candidates, several high-profile people have been caught embellishing their backgrounds, or outright lying about their past.  How can you protect yourself from a similar deception when making a hire?

Ultimately, reference checks and interviews will be useful, but first a thorough dive into an applicant’s past is essential.  Did they obtain the degree they claimed to have?  Are they licensed, as they said on their LinkedIn profile or resume?  If they have claimed military service, will the records back them up?

The methods for obtaining answers to these questions can vary – some entities will require the subjects’ written consent before providing past employment or education verification, for example, while licensing information is generally a public record.  Another useful step is to consider past employers when searching for litigation, news articles and other adverse information concerning the subject – did they sue their past employer, or were they sued by it?  Were comments made to the media about the subject’s departure from the company?

When considering a hire, many factors come into play – what that person can bring to the company in the future if they come aboard, and also what they’ve done in the past.  A look back at their career, with a careful and skeptical eye, can help inform a better hiring decision in the future.

Welcome to the July 2022 edition of our newsletter!  In this issue, we’ll examine the patchwork of international laws surrounding decentralized finance and the risks posed in the evolving industry.

Decentralized Finance and Concentrated Risk: Global Aspects of Crypto Trading

As more financial institutions seek to make digital token trading part of their platforms, with some providers offering cryptocurrencies as part of 401(k) plans, the patchwork nature of international regulations regarding such trading is an issue.  For example, the Financial Action Task force recently surveyed 98 countries and found that only 29 had “travel rules” in place concerning the money-laundering implications of cryptocurrency. Such rules require businesses to share information about cryptocurrencies.  But the decentralized, digital nature of the tokens is in itself an issue, and the finance industry watchdog has urged member countries to implement their own rules.

As that process develops, some crypto holders have found themselves in a perilous spot, as some cryptocurrency “banks” and lenders have sought bankruptcy protection given the industry’s recent increased volatility.  Legal issues concerning ownership of tokens are also an emerging field of case law, as questions have arisen about who owns them once they are transferred to a lender.

One step a potential crypto investor can take before dealing with a lender is to carefully read the terms of use, which will spell out a holder’s rights in the event of a liquidation.  The burden to investigate a lender and any affiliates ultimately falls on the investor, as the process of regulating cryptocurrency continues to take shape in the United States and elsewhere.  Researching the background of lenders, especially with regard to their corporate structure and any cross-border risk exposure it might generate, is an important step for institutions and investors to take as the cryptocurrency market continues to fluctuate and evolve toward some semblance of a self-regulating marketplace.

Welcome to the June 2022 edition of our newsletter!  In this issue, we’ll examine frauds centering around cryptocurrencies, and how social media is used to proliferate such scams.

Social Media and Unproven Fintech Create Perfect Fraud Storm

Social networks, especially those focused on professional experience, are inherently built on trust.  Trust, of course, is what fraudsters feed on to exploit their marks.  As cryptocurrency investing has erupted in scope in the last few years, these two relatively new trends have converged to create a dangerous combination.

Platforms such as LinkedIn provide a certain veneer of credibility to their users, or at least the appearance of credibility.  But fraudsters have begun creating fake profiles on that service to reel in victims, first by making chit chat about a shared interest or supposed past employer, and then pitching dubious cryptocurrency ideas once a level of trust has been established.  In other instances, a fraudster may pose as an investment adviser and try to convince the victim to “invest” their savings, in a plot very much like a Ponzi scheme where “returns” are experienced at the outset, and then silence as funds are drained.

Due diligence before taking such risks is the best way to proceed.  For those claiming to be investment advisers, checking of self-regulatory records like FINRA is critical, as is a review of any litigation and other reputational risks.  If someone reaches out who claims to be in the same field, or to have attended the same school as a client, verifying such claims is key to determining their credibility, or lack thereof.  Finally, the potential investment should be thoroughly vetted, especially if it’s something which is relatively new, such as SPAC or a new cryptocurrency.

Welcome to the May 2022 edition of our newsletter!  In this issue, we’ll examine recently enacted law concerning financial disclosures by judicial officers, and steps you can take if researching a jurist.

New Law Creates Searchable Disclosure Database, Enacts Stricter Requirements

Previously, if a researcher wanted to determine if a jurist might have a financial conflict of interest, they often had to rely upon outdated financial disclosures — which often took years between when they were submitted and when they were released – in addition to public records research of a jurist, his spouse and other associates to identify potential conflicts around an investment, employment or civic affiliation.  While the research is still an essential component, the newly signed law will more readily help researchers, litigators and members if the public determine if a conflict might exist due to a stock held by the reporting party or their family members.  Under the new law, a searchable database will be created by the end of this year, and federal judges, including Supreme Court Justices, must submit a disclosure to that database within 90 days of its submission.  This could help identify conflicts in a timely enough manner that parties could seek recusal when such a move could actually matter.

Research concerning state and county judges remains a decentralized situation.  While several non-profit groups have compiled disclosures by such judges into databases – many having been only filed on paper – the sheer volume of records makes it difficult for any one source to be comprehensive.  While most states have judicial ethics commissions which require the filing of relevant financial disclosures, record-keeping varies widely and an open records request is often required, making that a more arduous process.  In those instances, primary research about a jurist and their family is especially critical if reasons for recusal are an area of concern.

Welcome to the April 2022 edition of our newsletter!  In this issue, we’ll examine the risks involved when investing in cryptocurrencies, and what may lie ahead.

As Cryptocurrencies Gain Popularity, Schemes Targeting It Do Too

People have an intrinsic eye toward the future, and that’s even more true for investors.  From decentralized finance to warehouse robots, humanity seeks to evolve not just itself, but differing aspects of the world around it.

Over the last decade, one item that has evolved is cryptocurrency, the digital nature of which lends itself to being an instrument for various related frauds.  Many of these involve some aspect of social media, such as promoting a version of a Ponzi scheme where a fraudster touts having made huge gains in a crypto asset, then seeks to bring others in to share in the great gains.  Because cryptocurrencies are somewhat opaque in nature, such promises are nearly impossible to verify, and while a target may receive some initial gains to build trust, eventually they’re cleaned out.

Cryptocurrencies also lend themselves to being vehicles for other traditional schemes, like “pump and dump” investment trades, especially given the volatile nature of investing in a new, still speculative asset class.

What can investors do to protect themselves, at least until the U.S. authorities create a government-backed token?  Traditional due diligence measures still apply, especially given any referrals from less well-known sources such as social media.  Additionally, while agencies like the Federal Trade Commission and Securities and Exchange Commission find themselves working in an ever-changing regulatory landscape, it is prudent to see if any parties have been the subject of complaints to those agencies, or investigations by them.

Welcome to the March 2022 edition of our newsletter!  In this issue, we’ll examine the risks posed by geopolitical instability when investing or conducting other business overseas.

Spillover Effects: How Political Instability Abroad Can Alter Plans at Home

An increasingly global corporate environment has created both opportunities and risks without borders.  When geopolitical events occur that can pose risks to an existing investment, or change the calculus for a potential one, how can you respond?

One due diligence measure your company can take is to look at a company’s contracts or other interactions with state actors or other parties that could be the subject of sanctions.  Are any customers or vendors on international watch lists, or is that possibility forthcoming?  If so, what is the nature of the business relationship with the sanctioned party, and what could prolonged sanctions mean for future expectations?

Concerning both individuals and entities that could be subject to sanction, extensive due diligence is recommended, especially if already engaged prior to sanctions.  Understanding how parties interact with a state government that may spur international condemnation, and what reputational risks those associations may carry, can be critical to transacting business in turbulent times – or deciding to walk away altogether.

Welcome to the February 2022 edition of our newsletter!  In this issue, we’ll examine risks to publicly-traded companies concerning the emerging field of environmental, sustainability and governance, or ESG, requirements.

Calls for Action May Lead SEC to Create New Climate Rules

Within the past decade, investors have joined climate activists in scrutinizing the effects of a company’s operations upon the climate.  Metrics like tons of greenhouse gases produced by companies, especially capital-intensive ones, have become a focus of large institutional investors, notably a handful of fund managers whose portfolios collectively contain trillions of dollars.  Those assets under management have given these investors leverage about which climate activists could only dream.

Those large funds have begun wielding their clout, and regulators are considering whether, and how, to create a policy response, most likely by requiring companies to disclose certain data tat some currently do voluntarily.  As with all nascent policy measures, the process will take time and evolve, but in the interim potential investors can take various steps to assess a company’s risk on their own.  Has a company’s operation been sued, at the county or federal levels in the United States in particular, for violation of local dumping or disposal rules, or other workplace conditions?  Have agencies like the U.S. Environmental Protection Agency and Occupational Safety and Health Administration, as well as their more local corollaries, cited the company for improper working conditions, inadequate cleanup measures of any hazardous waste produced, or other relevant violations?  News searches will also help gauge local, and perhaps broader, reaction to any identified transgressions.  This will help your clients determine the severity of any identified problems, and consider any longer-term risks posed.  Finally, although certainly not an objective measure, reading items about a company’s operations written by local or national climate activists can provide insight, albeit from a subjective viewpoint.

The power of activism in any field grows when capital is applied to it, and environmental, substantiality and governance matters are no exception.  Savvy investors can anticipate risks posed, especially in sensitive industries like energy and food production, to stay one step ahead of the trends.

Welcome to the January 2022 edition of our newsletter!  In this issue, we’ll examine the growth of private companies seeking access to public capital markets, including “unicorn” firms, and discuss ways to identify and manage risk.

Between Two Worlds: Private Companies Accessing Public Capital

Even with the proliferation of publicly-traded companies, including smaller companies going public via special purpose acquisition vehicles, many early-stage companies remain privately held, yet seek outside investment from the general public.  Companies with promising technological advancements or other unique market niches which can drive their valuation to $1 billion or more, so-called “unicorn” companies, are in many ways leading this effort. The U.S. Securities and Exchange Commission has noticed, and has begun discussing rules which would require such companies to report detailed information not typically disclosed by privately-held firms — information such as earnings, outlook for risks, and executive compensation.  The venture capital industry has, predictably, resisted such efforts, arguing that the capital needed to drive innovation would be stifled by greater transparency.

Such investments come not only from venture capital funds, but also wealthy individuals who may not want their involvement to be publicly known at any given stage of investment.  Yet those same potential investors would be well served to use the commission’s proposal as a guideline for their own due diligence.  What is known about the existing risks around a company’s product development, growth and efforts to obtain market share?  What other risks exist throughout their industry, and to their sources of funding?  How does the experience of the management team fit into that landscape, and how well positioned are they to grow?  While something akin to what the commission has proposed would help answer many of these questions, it also blurs the line between what it means to be a private company versus a public one.  As many disrupted, and disrupting, industries maintain something of a “wild west” feel, and as regulators try to catch up to emerging technological trends, the task falls to investors and their counsel to fill in gaps and seek answers for hard but necessary questions.

Welcome to the December 2021 edition of our newsletter!  In this issue, we’ll examine the potential for conflicts of interest among members of the judicial branch, and resources that exist to help identify them.

Calling Balls and Strikes?  The Tension Between Impartial Justice and Human Nature

A core principle of the American democratic system of justice is that judges impartially interpret the law, and in many instances this is what occurs.  But judges are also people, with vested interests, families and futures to plan.  This can create the opportunity for conflicts of interest to arise between a judge’s personal conduct and their professional approach.

Guardrails already exist, including recusal processes in which a judge will either identify a reason they should not hear a case, or counsel for one of the parties involved will bring it to their attention.  Yet media coverage of undisclosed conflicts, in which judges did not recuse themselves, has brought renewed attention – and Congress has taken notice.  One proposal has called for expediting publication of judicial financial disclosure forms, which are often made public many months after filing.  These forms typically detail any speaking fees or other honoraria received; any outside affiliations, such as professorships; and investment holdings.

Other, more controversial proposals, include establishing a “code of conduct” for judges, which some argue would violate the separation of powers between the legislative and judicial branches.  Yet if a client needs to determine if conflicts exist, tools are already in place.  For example, what does the judge’s spouse do for a living, and could that affect their decision-making?  Has the judge recused himself in prior circumstances because of it?  Judges also typically have long careers in other fields, such as law or political and civic advocacy, before obtaining a seat on the bench.  What do their prior positions identify about concerns that might affect future rulings?

All parties should seek impartial and fair treatment under the law, and in many cases that is what occurs.  Yet human nature can create gray areas in which even judges can operate, and if concerns arise, a thorough inquiry into a jurist’s history may be in order.

Welcome to the November 2021 edition of our newsletter!  In this issue, we’ll examine the fairly recent implementation of investment firm customer relationship summaries, and how they can be used to better inform investment decisions.

Mutually Beneficial Relationships or Conflicts of Interest

In June 2019, the U.S. Securities and Exchange Commission enacted Form CRS, the customer relationship summary, as an addendum to Form ADV – the latter being the most detailed public disclosure of an investment firms’ fund structure, custodian, assets under management and other important information.  Form CRS was intended to provide, in the commission’s words, “conversation starters” for potential clients to engage with potential advisers.  The commission, in its guidance about completing the Form, indicates that this conversation should begin with a candid discussion of an adviser’s disciplinary history – not the greatest icebreaker in human history, but one about which your client can educate themselves in advance.  In addition to the FINRA BrokerCheck service, which contains such a history for advisers, the National Futures Association’s BASIC service provides employment and registration histories – including regulatory and arbitration actions – for brokers engaged in the commodities space, including many types of hedge funds.

Form CRS is also meant to be a window into a firm’s other relationships, to be delivered to a new investor “to inform them about the relationships and services the firm offers, the standard of conduct and the fees and costs associated with those services, specified conflicts of interest, and whether the firm and its financial professionals currently have reportable legal or disciplinary events,” according to another commission filing.  On its face, this all sounds helpful, but caveats abound; the requirement to provide the latest Form CRS exists by default only when a new client relationship is being considered, leaving existing clients with the burden of requesting it from the firm directly (if they even know it exists.)  Currently there is no repository of Form CRS filings, only a requirement that a firm post the filing to its website, in addition to making it available to individual investors upon request.  It is unclear how strictly the online publication requirement has been or will be enforced.

To date, enforcement of detailed Form CRS disclosure has been wanting, and traditional public records due diligence remains a critical tool in evaluating an adviser or their firm.  Context matters more than ever, as investment options proliferate and grow in complexity.  Regulatory efforts to increase disclosure are often a welcome evolution for most investors, but they do not take the onus off of individuals or firms to do their own homework.

Welcome to the October 2021 edition of our newsletter!  In this issue, we’ll examine the need for due diligence before considering a transaction, especially mergers or acquisitions.

Getting in on the Ground Floor: Essentials of Looking Into New Companies

Supply chains frayed or broken.  Labor markets struggling under the effects of once-needed economic stimulus which is now among several reasons many aren’t returning to work. These twin crises, and others, present opportunities for companies, many of which have adapted nimbly in the last 18 months.  For those on strong financial footing, the chance also exists to grow and innovate by acquiring smaller players, who could hold innovations that would take years to develop in-house.

But risks remain to large companies swooping in to acquire promising new ventures and their technology.  In addition to corporate culture concerns and the viability of the target company’s products, the “who” of a company that you’re acquiring is as important as the “what.”  Especially among early-stage companies in complex fields like biotechnology, we’ve seen many instances where investors were burned after unproven executives made bold claims which, after belated due diligence, were found to be untrue.  In other instances, company executives have purposefully inflated revenue projections when soliciting investor capital, leading to profoundly overstated valuations.

All of which leads to an old adage which should be applied to new companies: character counts.  Assessing the feasibility of revenue projections is a daunting task which likely requires a team of forensic accountants and other experts.  But other due diligence is also required, including a thorough vetting of executives and, especially for young companies, their advisers and early investors.  What do their histories tell you about the likelihood of future success/ Are their interests aligned, or will some parties make a quick exit once their goals are met, leading to “brain drain” or a loss of financial backing?  By taking a deep dive into the people behind a new company, as well as understanding its technology and potential for success, your clients can be better positioned to make good long-term decisions, even in fields where “long term” is measured in months, not years.

Welcome to the September 2021 edition of our newsletter!  In this issue, we’ll examine the rewards, and the risks, when looking to invest in new companies and innovative, but potentially unproven, technology.

Reaching New Frontiers at Warp Speed: But What Lies Ahead?

Innovation abounds in today’s economy, as everything from non-bank digital payment services to on-demand delivery reshapes the ways in which consumers live. Young companies, some entirely new since the start of the pandemic, see opportunities to profit from what appears to be a lasting, fundamental change.  With the advent of direct listing and confidential initial public offerings and special-purpose acquisition vehicles, these companies can now also access public market capital more easily than ever before, the recipe for rapid growth is clearly spelled out.  But are the risks as clear?

In recent years, the leaders of startup companies have gained a higher media profile than any time in the last 20 years, thanks to the proliferation of SPACs and other means of quickly scaling up operations.  Some of this media glare has brought unwelcome attention from regulators and law enforcement — whether the accusation is of a biotechnology company misleading investors about its in-development products, or the founder of a software development company reportedly inflating revenues and altering internal documents to do so – necessitating greater scrutiny of companies and executives which are under increased pressure to outperform.

Fortunately for larger investors, due diligence can provide a measure of comfort, or caution, which can better inform investment decisions before they’re made.  With regard to emerging biotechnology companies, for example, one key indicator is to examine the backgrounds of not only the executive team and directors (if they have a board), but also outside advisors and retained experts, who are often more crucial to a startup’s success than within established companies.  How well do their credentials match what the company is actually trying to accomplish?  Are their backgrounds, as stated to the public, entirely accurate?  Have they had any past professional miscues or regulatory concerns?

By thoroughly researching a fledgling company and its extended orbit of leadership and advisors, your clients can better anticipate any concerns which lie ahead before making important investment decisions.

Welcome to the August 2021 edition of our newsletter!  In this issue, we’ll examine efforts by regulators to try to manage “decentralized finance” platforms, and the risks to both customers and the fledgling institutions.

Decentralized, but not unregulated?  Changing regulatory attitudes on DeFi entities

As we noted last month, the rapid use of non-bank “decentralized finance,” or DeFi, platforms has begun to gain the attention of regulators.  More recently, the U.S. Securities and Exchange Commission chair, Gary Gensler, has opined that such “peer to peer lending networks exhibit some features that may make them subject to oversight, arguing that such groups do not necessarily have “know your customer” safeguards in place at banks and other regulated lenders.  The risk is amplified by the digital nature of many DeFi transactions, which ultimately can involve cryptocurrencies held in digital wallets.  The commission has recently brought an enforcement action against one DeFi entity which sold digital tokens that purportedly gave holders voting rights, as with shares of stock.  This, the commission said, made them an investment which was subject to existing investor protection laws, violated when the entity did not file a registration statement.

Given that regulatory efforts continue to evolve – as they had with more traditional “lending club” entities more than decade ago – the onus is on investors to know their DeFi, until the DeFi tries to know their customers.  The opacity of digital tokens as assets is an obstacle, but the histories of the parties involved can always be instructive.  Have concerns arisen in any pre-DeFi ventures?  What can be learned about the entity’s other customers?  Have any brought civil actions against the entity in the past?

New frontiers always promise new opportunities, and many of those may actually materialize.  Yet until regulators can establish oversight of DeFi platforms and the technology that underpins them, blockchain technology, hope and faith may not be enough.  Investor due diligence is critical in rapidly evolving schemes.

Welcome to the July 2021 edition of our newsletter!  In this issue, we’ll examine how emerging technologies and services are spurring new layers of oversight for financial institutions.

Banking Regulators Try to Catch Up to Innovations

Spurred on in part by the pandemic, several disruptive industries have grown tremendously in the past few years, from “fintech” companies innovating to compete with traditional banking to an expansion of third-party vendors used for accounting and other functions that were once kept in-house.  The outsourcing of these functions can reduce costs and create efficiency, but financial regulators have begun to be concerned that their rapid growth may create gaps in oversight.

Several federal banking regulators recently issued a nearly 90-page guidance document on this topic also addresses issues like data privacy and security among such vendors, and will be open for public comments before more formal adoption.  “The use of third parties by banking organizations does not remove the need for sound risk management,” the guidance said in part.  “On the contrary, the use of third parties may present elevated risks to banking organizations and their customers.  Banking organizations’ expanded use of third parties, especially those with new or innovative technologies, may also add complexity, including in managing consumer compliance risks, and otherwise heighten risk management considerations.  A prudent banking organization appropriately manages its third-party relationships, including addressing consumer protection, information security, and other operational risks.  The proposed supervisory guidance is intended to assist banking organizations in identifying and addressing these risks and in complying with applicable statutes and regulations. … The proposed guidance provides examples of third-party relationships, including use of independent consultants, networking arrangements, merchant payment processing services, services provided by affiliates and subsidiaries, joint ventures, and other business arrangements in which a banking organization has an ongoing relationship or may have responsibility for the associated records. The proposed guidance also describes additional risk management considerations when a banking organization entertains the use of foreign-based third parties.”

As with many compliance-related endeavors, knowing your vendor is as key as knowing your customer.  For financial institutions and other industries within the space, understanding the history of a vendor is critical.  What is their track record and reputation within the industry?  Although newer companies may lack such a history, their principals likely will not.  In some ways, the guidance is an effort akin to European data protection regulations, calling for increased security of sensitive information.  With that context in mind, a thorough vetting of potential new vendors – and perhaps of existing vendor relationships — will serve companies in all industries well, as an interconnected business environment responds to an equally evolving regulatory regime.

Welcome to the June 2021 edition of our newsletter!  In this issue, we’ll examine how the ability to hold financial-sector compliance officers personally liable for their professional conduct has affected regulations around that conduct.

Eyes on the Inside Guys: Scrutiny of Compliance Officers Grows in Manic Markets

The SEC has often used civil litigation as a means of providing accountability for bad actors as a means of deterrent to prevent others from engaging in similar conduct.  The New York City Bar Association, whose firms include many of the largest financial services firms, recently issued a framework, developed with input from securities industry trade groups, to recommend guidance for holding compliance officers accountable.  The group warned that without proper context, “[t]hese career-ending enforcement actions discourage individuals from becoming or remaining compliance officers and performing vital functions that regulators stretched too thin would otherwise be unable to perform, particularly when other options, such as providing legal advice or becoming an outside compliance service provider or businessperson, involve less personal risk.”  The group added that one of the commissions main goals, deterrence of future bad conduct, may not be accomplished by holding compliance officers personally liable, stating in part: “[t]he system designates CCOs as personally responsible for something –securities law compliance at their firms – that is ultimately determined by other human beings whom the CCO cannot control and, as a cost center, is poorly suited to do so.  CCOs do not have any special anti-retaliation protection beyond standard whistleblower laws available to everyone and that do not apply to internal reporting, and the system does not provide for any minimum number of resources required to be provided to the CCO.  Despite this structure, CCOs must still make yes or no decisions, frequently in real time with limited guidance from regulators and relatively limited factual clarity.  We believe that these constraints, directly or indirectly, result in many of the errors in judgment or even purposeful or neglectful conduct that enforcement actions are brought against. The most efficient way to deter problematic practices by CCOs is to devise mechanisms to eliminate or at least mitigate these constraints.”

The report is careful to separate errors that result in material harm from intentional fraud, urging the SEC to prove that the conduct of a compliance officer that aided others in committing fraud before making a fraud allegation part of a conduct charge.  Another means by which the officer could be charged, the report adds, is by obstructing an inquiry, and the framework sought to establish credit for cooperating with an inquiry versus hindering it.

From the perspective of the accused company – and perhaps its compliance officers as well – one key component to such inquiries is understanding context and relationships.  How long have the relevant parties worked at the company, and in their relevant functions?  What are their working relationships like?  What are their personal lives like, and do stressors exist there which could be used to rationalize bad conduct?  As regulators become more concerned about policing the conduct of large firms, especially in financial services, it is in their interest to obtain an outside perspective that holistically examines issues raised in such conduct charges, and the context of the situation, which may provide evidence of mitigating circumstances.

Welcome to the May 2021 edition of our newsletter!  In this issue, we’ll examine how fraudsters exploited coronavirus-related emergency loan programs, and what their schemes may say about vigilance in lending, even in more normal times.

Banks, Bailouts and Bonanzas: What Emergency Loan Fraud Can Teach Us

Slightly more than a year ago, as public health-driven lockdowns shuttered many businesses – some temporarily, others for good – many sought lifelines to survive, and government programs both old and new sought to fill the void created as the risk modeling of traditional lenders was paralyzed.  When the new normal of business operations was “zero for a few months, maybe longer,” who could credibly trust that they could lend money and ever see it repaid?

Yet while the Paycheck Protection Program and other federally and state funded programs were essential to the survival of many businesses, the hurried and harried environment in which they existed created ample opportunities for fraud.  Loan processors relied on considerable technological advancements to streamline the application and documentation processes, which allowed them to maintain some semblance of traditional underwriting requirements.  But despite these efforts, fraudsters were able to lie about the number of employees they had, their revenue, and even the very existence of their business, and receive funding.

Such stories may be seen as outliers of what everyone hopes is a once in a lifetime crisis, but lessons still remain.  Some of the banks’ traditional tools, such as suspicious activity reports, can catch many frauds in nearly real time, and other straightforward methods also help when reviewing an application (for a loan or for its forgiveness.)  Is the cost of goods sold consistent with the nature of the business? Are other costs also within industry standards?  If not, the applicant may be inflating the company’s paper losses in order to increase the amount of loan eligibility – sometimes by running up credit card expenses they may never intend to pay, especially if the business itself is a sham.

This also reiterates the need for traditional due diligence about a business principal: what is his track record, personally and with any prior businesses?  Has he been sued for loan, mortgage or other promissory fraud in the past?

Also worth considering is the growing role of non-bank lenders as a result of this crisis, whether emerging “fintech” companies or family members helping out someone in a tight spot.  The needs may be unique and the timing urgent, but if anything, those circumstances call for greater deliberation and consideration, even in an emergency, to avoid transferring one entity’s financial hardships into another’s legal ones.

Welcome to the April 2021 edition of our newsletter! In this issue, we’ll examine increased regulatory scrutiny of so-called “blank check” companies, and how your clients can prepare themselves to invest in a rapidly evolving landscape.

Speed Kills: the Potential Downside of SPACs

For young companies seeking access to public markets, special purpose acquisition companies, also known as SPACs or “blank check” companies, present an obvious opportunity. Under current rules, the process of taking a company public is much more streamlined than a traditional initial public offering, which typically involves numerous layers of due diligence and compliance work.
As hundreds of such “blank check” companies file paperwork to acquire companies of all types, regulators are taking notice, and are concerned that investors could get burned in the frenzy. The U.S. Securities and Exchange Commission recently issued guidance that warrants – typically issued as part of an acquisition – may need to considered by the SPAC as a liability, not an asset as they typically have been reported. This change would also compel the company to report changes in their value, as it would with loans and other liabilities – which in turn could cause many SPACs to have to restate their prior results.
All of this could add a layer of complexity that SPACs, their investors and the target acquisition would seek to avoid. For investors, a careful reading of various offering documents is essential to determine if the SPAC is seeking to enrich itself at the expense of the shareholders from whom it seeks capital. Additionally, the track record of those behind the SPAC becomes even more critical: have they used this technique, or others, to take companies public before? How were those deals structured, who profited most and what became of the company over the longer term? As they say, past performance is not a guarantee of future results, but it certainly can be a strong indicator.

Welcome to the March 2021 edition of our newsletter!  In this issue, we’ll examine the increase in companies going public via special purpose acquisition companies, and identify some risks involved for would-be investors.

When SPACs Attack: Differences Between SPAC Listings and Initial Public Offerings

Special purpose acquisition companies, or SPACs, have existed since the 1990s, but are gaining notoriety of late as they’re embraced by activist investors and celebrities alike.  This increased profile has made the entities, which can also act as “blank check” companies that do not have to initially define an acquisition target or investment objective, something about which much is known but perhaps less is understood.  Instead of filing a traditional initial public offering – or even a confidential version of such an offering — with a SPAC a privately held company that seeks to raise capital in public markets is acquired by a group of investors, who then can list the company or an exchange and raise capital via the offering of shares.

There are various rules governing “blank check” companies but not necessarily SPACs, most notably that an acquisition must be completed within 18 months after the agreement is signed; if no such deal is consummated the investors’ funds, held in escrow, must be returned to them.  Most SPACs can avoid this limitation via certain exemptions, although it must use at least 80 percent of funds raised for an acquisition, which must be completed within a slightly longer window of 24 months.  If these benchmarks are not met, a SPAC must dissolve and escrow funds are returned.

Unlike its IPO cousin, the underwriter of a SPC is not required to conduct due diligence on the investment or its leadership team.  Once an acquisition target is identified, a proxy is required to be sent to investors, and this is where such investors – even if they’re retired basketball stars – should do their due diligence.  What is the track record of the existing management?  Have they tried to raise capital before, for this company or others, and what were the results of those efforts?  What is the market for the company’s product, either in development or already on the market, and what is the regulatory landscape?  Have the executives of the target company – or the backers of the SPAC – faced any reputational concerns in the past?

Given that SPACs have most often been the domain of “penny stock” companies whose credibility can be a concern, investors are wise to ignore much of the current hype around the use of this vehicle to bring companies to public markets.  But if investors do decide to move forward with investing in a SPAC, it is largely left to them to do their own homework.

Welcome to the February 2021 edition of our newsletter!  In this issue, we’ll examine the Securities and Exchange Commission’s proposed rules concerning disclosures by companies during market volatility.

Time Flies and So Does Cash: Research Companies as New Ways to Market Emerge

As the prices of many asset classes soar to new all-time highs, more companies are seeking to raise capital in public markets.  With automated high-frequency trading and an increase in bulletin-board fueled day trading, issuing shares or debt in the current environment can change quickly.  Many companies have issued “shelf registrations,” indicating that they plan to issue shares in the coming years without expressly stating the intent of doing so.  Yet the first public disclosure such a company must file, a Form S-3, is only required to be filed within the first year of trading on the public market.

The SEC recently disclosed a draft letter which it may send to companies already on the market to inquire about risks related to any volatility in trading of their shares, which in turn could lead to instructions from the agency that the company revise its disclosures.

Investors can take steps to inform and protect themselves in such fast-paced and opaque situations.  Although the SEC’s letters have yet to be finalized and circulated, at some point they’re likely to be available under the Freedom of Information Act.  Additionally, companies seeking to provide products or services that are regulated by state or federal authorities will have a track record with the relevant oversight bodies.  Additionally, companies still seek to raise capital via private placements of their shares, for which a prospectus and other disclosures should be available.  Finally, even if a product is entirely new the people who develop it often are not, and thus their track records, as established by news articles, court filings and other public records, can offer insight.

Welcome to the January 2021 edition of our newsletter!  In this issue, we’ll examine how social media posts by employees and vendors can affect a company’s reputation, and steps to help mitigate any possible damage.

Free Speech or Brand Damage?  Researching Employee Comments

For much of the 20^th century, executives were loath to wade into social or political issues, most often simply making political donations to causes or candidates they supported, perhaps serving on an advisory commission or other non-governmental group.  The first two decades of the 21^st century have seen an evolution of this philosophy, as more chief executives assert positions related to environmental standards, workplace conditions and other causes which often, by virtue of an individual’s leadership, tie their company to those positions.

Often, the linkage between a leader’s position and his company’s is intentional, obvious, and expected – a path being charted in which a marker is laid down by a leader for his employees to follow.  In other instances, however, an executive or employee engages in speech or actions that are less visible – possibly meant to be private, or at least not directly connected to the actions of their employer.  These types of comments are often made on various social media platforms, including some that were accused in recent months of inciting violence spurred by conspiracy theories.

What can a company do to gird itself for any potential fallout from an employee’s possible incendiary comments, and – as was seen at the U.S. Capitol earlier this month – the unlikely, but very real, possibility that those words manifest into actions?  Although developing a social media policy for the company and its employees may seem obvious, a 2016 Pew Research Center study found that 51 percent of employers had such a policy in place.  That study also found that workers who were aware of such a policy were less likely to use social media while on the job.

Regulations currently vary by state as to what an employer can compel an employee to do regarding their social media, but many states allow an employer to request that they be added to an employee’s friends or contacts, but most do not allow compulsory compliance.   The balance of an employee’s right to speak their mind, and to the privacy of their personal account, is often in tension with an employer’s need to manage its image and that of its employees.  Labor laws provide various protections for employee speech, but in many other cases – from Hollywood directors to university professors – employees have been fired for their social media posts, often concerning posts made many years prior.  If an employee is believed to be engaging in speech that could be detrimental to your company, it is best to start with looking at what policies are in place – and possibly implementing and adopting some if none exist.  Then, a review of the employee’s posts and interviews with any co-workers who may also be among the person’s social media friends could be warranted, if internal policies and state or federal regulations permit.  It may be best, depending on the circumstances, to fully investigate the circumstances behind potentially controversial social media posts by employees before they become too inextricably linked to an employer’s broader image and reputation.

Welcome to the December 2020 edition of our newsletter!  In this issue, we’ll look back upon the year that was, and at how the events that transpired have affected fraud trends.

A Crisis of Health Becomes a Crisis of Trust: Exploiting Coronavirus

As the coronavirus pandemic upended the lives most of us knew, our foundational beliefs were also thrown off their axis, no more so than a fundamental sense of trust.  While fraudsters have always taken advantage of the human tendency to trust others, with the normal way of life suddenly in flux for so many, the opportunities for exploitation increased dramatically.

For some frauds, careful planning and targeting of individuals is required.  Such is the case with affinity fraud, where unscrupulous members of a civic or religious group will prey upon their fellow members and the trust built in their community.  Whether peddling phony questionable investments in a time where finances are uncertain, or a bogus charity when the need to give is most great, these fraudsters will use what they know of their fellow members to gain esteem and then siphon the victims’ assets.  Whether via Ponzi schemes or the sale of unregistered and possibly fake securities, these fraudsters will also exploit the perception, especially as markets crashed in the spring, that fewer places exist to make your dollars grow.  Researching an individual’s background, and that of the product they’re selling can help protect yourself and fellow members from such exploitation.

In other frauds, volume is the key – simply reaching as many people as possible and hoping a few unsuspecting marks will take the bait.  This can be the case with promises of “work from home” opportunities, likely targeting people who find themselves suddenly, and with great difficulty, having to generate income while also home-schooling one or more children over the Internet.  The promise of being able to do marketing or editing work, or filling out surveys, in the little spare time one has in these circumstances has obvious appeal.  Many editing and research jobs are quite legitimate, but for each of those, many phony ones also exist.  One means of caution is to look for spelling, typographical or grammatical errors, and also to research the telephone number.  If the advertisement claims to be from a company, does looking into the telephone number bolster that claim, or refute it?  Another red flag, albeit an obvious one, is that no legitimate company is going to ask for money at the start of a job application process.

As with most things, caution and prudence are warranted.  But in times of emotional distress, when circumstances largely seem out of our control, we tend to act reflexively and impulsively.  By thinking of the right way to vet opportunities, and if need be hiring someone to do the research work for you, organizations and individuals can better protect themselves.  If 2020 has shown us anything, it’s that fraudsters thrive in times of crisis, and will seek any opportunity to use that crisis to their advantage.

Welcome to the November 2020 edition of our newsletter!  In this issue, we’ll examine a recent proposal to allow “gig” workers to be compensated in stock by privately-held companies they work for.

Gig Workers Stock and Trade: A Look at a Recent Proposal to Compensate Gig Workers with Stock

In the years prior to the pandemic, the development of “gig work” – where independent contractors provide services from meal delivery to various “on call” services – changed several aspects of the economy, making it easier for more remote areas to have access to various goods and services.  During the spring 2020 lockdown and in the months since, demand for these types of services has skyrocketed.  Critics of this type of work complain that workers are pushed to extreme limits in the name of productivity, without enjoying the benefits and protections of typical employees,

A recent U.S. Securities and Exchange Commission proposal seeks to change that balance in some ways.  Specifically, a rule was proposed that would allow privately-held companies to compensate gig workers with stock amounting to 15 percent of their compensation, up to $75,000.

Although the change of political administrations may imperil the advance of this specific proposal, it highlights risks for employers and employees.  It is somewhat reminiscent of employees being paid in stock options by various “dot com” technology companies at the turn of last century.  The risk for employees hinges on the financial viability of the company and its stock – though the reward may come if that company later goes public.  If policies such as the recent SEC proposal become part of the gig economy, it is incumbent upon workers to educate themselves about the company’s prospects before they decide to opt for a portion of their compensation being paid in its stock.  Researching a company’s executive team and analyzing its recent track record can be difficult regarding privately-held companies, but policies meant to incentivize “gig work” may drive such workers to form groups (if not actual unions), which would then be wise to educate their members about the risks that could accompany the rewards.

Welcome to the October 2020 edition of our newsletter!  In this issue, we’ll examine how vetting of employees and key account customers can help banks and other businesses avoid regulatory headaches.

Service Provider or Fraud Abettor?  Precautions to Prevent Becoming an Accessory to Fraud

For more than 40 years, banks and other financial institutions have relied upon “know your customer” protocols to vet prospective and existing customers and better ensure that their motives are toward legitimate, legal ends.  As we have seen with recent high-profile settlements, these efforts are not always as exhaustive or effective as perhaps they should be.

Human nature, as is often the case, is one impediment.  If an executive has been with the company for 20 years and his performance has been satisfactory or better, do you really need to re-examine his personal financial situation?  In short, yes.  Although not feasible for every transaction and every executive, it is prudent to establish – and maintain – a threshold for reviewing the financial and personal situation of key persons involved in a proposed transaction as part of that process.  Has the executive experienced any recent financial or personal strains that could make him susceptible to bribery or motivate him toward other unwelcome behavior?  A review of public records, likely coupled with discreet interviews of co-workers and other sources, may provide an indication if any vulnerabilities exist which could be exploited to compromise an employee’s role to act on behalf of the company.

The other side of this equation is, of course, the customer.  A thorough analysis of a potential – or existing – customer’s known business dealings, litigation and regulatory history, and media footprint can provide indicators as to whether he may have an incentive to use your firm to engage in fraudulent activity.  Has he recently sought bankruptcy protection, or dissolved a company?  Have liens or other judgments been filed against him, and has he satisfied them or are they outstanding?  Is he looking to open an account for a newly formed company with no track record?  If the latter, its aims may be legitimate, but as it hasn’t existed for very long the focus should be on its principals, suppliers and its industry in general.  Are there difficulties in the supply chain, or other industry-specific risks, that could create problems later?

Although this level of due diligence is more typical in cross-border accounts – requiring an understanding of another country’s regulatory and legal landscape as well as your own – many of the principles apply to domestic customers as well.  Vigilance prior to or during a transaction is not a panacea, but it is a much more effective preventative measure than having to answer to authorities after a fraud has been exposed.

Welcome to the September 2020 edition of our newsletter!  In this issue, we’ll examine how activist investors can take advantage of the bankruptcy process, and identify warning signs of trouble ahead.

Beware of Vultures Overhead: Distressed Investing and Bankruptcy Fraud

The bankruptcies of once great companies, especially in the retail space, have become commonplace in the last six months, as traffic has been slowed or halted due to the pandemic.  While some companies seek to liquidate, many – especially those which are publicly traded – are looking to reorganize and restructure debts in order to survive and rebound at a later date.  This latter group of bankruptcies provide a tremendous opportunity for distressed investors – one which unscrupulous firms can exploit.

Hedge funds that invest in distressed companies often seek leverage for their investment, often in the form of board seats and committee chairs.  This provides the firm the ability, despite often being a new investor in the company, to steer its direction and align the investment’s objectives with their own.  Most often, the goals are intrinsically aligned, as shareholders, management and employees all seek to chart a path of recovery to eventual sustained profitability.   In bankruptcy, however, distressed investors can seek a larger prize – chairing the official committee of unsecured creditors.  The committee works to develop a reorganization plan, and is also bound by the by-laws agreed to during the bankruptcy process.  In recent months, examples have surfaced of committee chairs seeking to block a higher bid for the assets of a company whose unsecured creditors the chair was leading through reorganization.

Signs of abuse or fraud by the unsecured creditors committee can vary.  For instance, in many cases removal of some existing management is warranted as part pf the reorganization process.  But is a committee member pushing aggressively for certain actions?  If so, might they have motives other than upholding the committee by-laws?    While it can be difficult for other unsecured creditors to peer into that process, a review of the public record regarding the committee chair, or other key committee members, can provide great insight, especially if that person or their firm has drawn regulatory scrutiny in the past.  By thoroughly understanding their prior actions, you and your client may be able to anticipate and understand future actions, and act accordingly to ensure that your interests are protected.

Welcome to the July 2020 edition of our newsletter!  In this issue, we’ll examine the signs of bankruptcy fraud and how to protect yourself if a client enters bankruptcy.

 Here today, gone tomorrow: Signs of Bankruptcy Fraud

A wave of corporate and personal bankruptcies has begun to wash over the country in the wake of the onset of coronavirus, most notably by major retailers but also encompassing other companies and individuals.  The human toll of these filings is significant, even for those companies that are seeking to reorganize and ultimately return to operation in some form.  In this crisis, as with all others, there will be those seeking to exploit the panic.  Here are some signs to watch out for if your client suddenly stops paying their bills or alters their behavior in other ways that suggest financial stress – such as suddenly not returning telephone calls.

One area of concern is the use of personal loan guarantees by officers or members to backstop loans made to the company.  In a recent case involving a restaurant chain, we saw that an executive personally guaranteed millions of dollars in loans with the single-purpose limited liability company set up to manage each individual restaurant.  After the companies entered bankruptcy, the individual did as well, leaving the lenders and other creditors to sort out who was responsible – and how they would pay – via the bankruptcy court, which often moves at a deliberate pace.  For lenders, waiting months or years to get paid often isn’t feasible.  Similarly, companies that provide “factor” financing based on a borrower’s receivables may find themselves out of luck, especially since the receivables in a service company like a restaurant are items like sales of meals – difficult to achieve in the current environment of shutdowns and half-full, socially distant establishments.

Certain types of bankruptcy fraud can carry certain hallmarks.  In a “bust out” fraud, for instance, a company will suddenly appear and order large sums of inventory – we previously investigated such a company selling prepaid telephone minute cards, in the era before widespread cell phone use.  The company rented an office space – deciding not to pay rent after a short while – bought inventory on credit, including with the vendor, and began sales.  Within three months, the entire operation was shut down, leaving behind an entire office of records simply left by employees as they came in for their last day of work.  If you have a customer who appears suddenly, without any track record – even if they’re recommended by a legitimate client in good standing – proceed with caution and check the background of the individuals involved. The company itself may be meant to disappear as quickly as it came to be, with your unpaid-for inventory gone too.

In other instances, company insiders will lever a company up with debt and misuse that debt for their own personal gain – such as leasing or buying cars in the company’s name but for the sole use of its president, then failing to make payments.  While insider frauds are harder to detect, a strong customer relationship may be the best indicator that something is wrong.  If anyone involved in the business relationship notices lavish spending or other changes, it may be a sign that the company is being pillaged for the benefit of insiders.

When all sense of equilibrium is shattered, the natural reaction is to panic.  But as companies try to maintain as normal an operation as possible, they should be wary and proceed with caution while trying to remain optimistic about the longer term.  Being aware of some of the initial signs of a bankruptcy fraud can help avoid painful surprises later.

Welcome to the May 2020 edition of our newsletter!  In this issue, we’ll examine the opportunities presented by efforts to develop a coronavirus vaccine, and the risks posed to potential investors.

The Promise and Peril of Investing in Coronavirus Vaccine and Test Development

After tectonic shifts started when various government-imposed lockdowns took effect, a weary and wary world looks to see how life will be reorganized, and for how long.  This has led to profitable times for video streaming companies and retailers with robust delivery and distribution networks, as many people, quite prudently, attempt to leave home as little as possible.  The durability of these trends in years to come remains an open question, but one area in which there is sure to be a frantic amount of short-term interest is the next urgent step: development of accurate testing for the novel coronavirus, and of an effective and safe vaccine to combat it.

Both of these processes are essential to both get right and to deploy quickly – urges that often are in competition.  On the testing front, the reliability of the PCR nasal swab test and blood-based antibody test are both topics of great debate, while even the most optimistic scenario for a vaccine – one that may be sped up, but not helped, by easing of regulatory standards – calls for development by year end.  Time is of the essence in the most literal sense, yet proper science always takes time.

Into this void have stepped multitudes of biotechnology companies, from established drug developers to names known only to the most speculative trader of over the counter “pink sheet” issuers.  In this latter group, extreme caution is needed, as the low book value of shares, combined with the feverish hope for the test or vaccine some of these companies are trying to develop, can make them fertile ground for “pump and dump” operators who seize on news and hype it up to create momentum, or, worse yet, fabricate phony items to create momentum where none really exists.

The regulatory process for approval of tests and vaccines takes considerable time, and is also a good resource for checking out the viability of claims made by companies, especially those whose profile was far lower before the pandemic.  Records of the U.S. Food and Drug Administration will document what trials and approvals have been applied for, while the Federal Trade Commission may have records of past bogus claims by the company or its principals.  As with any potential investment, a full slate of due diligence is recommended, including looking into litigation histories, news articles and social media references about the company, its developed products and its people.

Investing during a time of crisis is, to some degree, an effort to monetize either fear or hope, or both.  Investing in vaccine or test development strikes directly at that notion, and thus the risk is heightened versus simply trying to profit from companies whose services have boomed since lockdowns began.  But with the right type of research and expertise, the high-risk, high-reward investment in the biotechnology that may shape the years to come can pay off handsomely.

Welcome to the April 2020 edition of our newsletter!  In this issue, we’ll examine the risks associated with charitable giving during the time of great need created by efforts to contain the coronavirus.

Greed in a Time of Need: How to Give Wisely and Avoid Scams

As millions of newly unemployed people adjust to that new reality – however temporary it may prove to be – the impulse of others to help remains strong.  While reports of fraudulent charities arose on pace with the virus itself, much like with natural disasters and terrorist attacks of years before there are steps individuals and corporations can take to protect themselves and inform their decisions.

Although it may prove safest to donate to the Coronavirus-specific efforts of a long-established charity, if a new group has arisen with a compelling message, there are steps you or your clients can take to investigate further.  Given that many states remain in “lockdown” status, fundraising via websites has proliferated.  One resource to check is the ICANN lookup tool (https://lookup.icann.org/), which will disclose when a web site was created and sometimes the registrant or other contacts, although it’s both easy and affordable to anonymize a domain.  As always, it’s best to be mindful of spoof web sites that use a similar name to an established charity or use “.net” or other domain types in lieu of the more standard (but no longer exclusively used) “.org.”

Researching individuals soliciting donations – whether on behalf of organizations or via individual crowdfunding efforts – is a sensible effort even in normal times.  The track record of an individual and/or the charity employing them is an important indicator of how funds may be used.  Has the state attorney general, U.S. Federal Trade Commission or other regulator every cited either for improper practices?  Have business partners, vendors or former employees ever sued them for breach of contract, improper hiring practices or other issues?  Finally, have they ever appeared in a negative light in news articles or on various Internet sites?

Especially for those considering large scale corporate or individual donations, thorough preparation and vigilance is key.  Opening your heart and wallet to those struggling in unprecedented difficulties is a natural and admirable response.  Doing so in a thoughtful and cautious manner can provide great rewards both to the donor and the recipient.

Welcome to the March 2020 edition of our newsletter!  In this issue, we’ll examine the importance of vetting new hires, or while promoting from within, during times of extreme uncertainty.

The Importance of Vetting Before Making Promotions

As a pandemic sweeps the globe, fundamentally disrupting livelihoods and business models alike, executives and board members are left with other grim considerations as well.  In addition to considering the welfare of their customers and the proper amount of capital expenditures going forward, officers and directors must now consider what to do if one of their own is incapacitated due to the pandemic.

For most companies, promoting from within, even if on a temporary basis, is the most efficient option: candidates with whom others already have existing relationships, whose skills and weaknesses are generally known to their peers.  But risks still remain.  If someone has spent decades at a firm in a middle management role, and is now considered for a higher position, it’s likely that the last time anyone looked into their background was at the time they were hired – not only were they a different person in many respects, but the technology and resources used to do such work was also very different.

While trust is a critical part of all relationships, understanding how someone’s life has evolved is also important.  Are there family tensions that could affect a person’s performance going forward?  Financial stresses?    Any conflicts that could result in negative press coverage now that this person is in a brighter spotlight?

Succession is an important principle to provide stability through chaos, and is relevant even when the leaders are not octogenarians.  By fully understanding the personal and professional picture of candidates – even those you think you know well – your organization can go forward with greater confidence in difficult times.

Welcome to the February 2020 edition of our newsletter!  In this issue, we’ll examine the risks present when investing in new, often under-regulated industries.

New Technology, New Promise, New Risk?

The first two decades of this century have proven to be a hotbed of innovation, as everything from smartphones or voice-controlled assistants has moved from the realm of science fiction to an everyday reality many take for granted.  The pace of innovation has not slowed, and in fact changes to rules concerning access to public market investor capital have spurred the growth of several nascent industries. But with this rapid innovation has arisen new opportunities for fraud.

Whether promoting cannabis oil as a medicinal cure-all or all-electric vehicles that save money and the environment, how new technologies come to market, and who is behind them, is as important as the promise they represent, if not more so.  In states where medical marijuana has been legalized, for example, legitimate dispensaries exist in the same space as companies that operate outside of the state permit process, likely also evading other regulations and standards in the process.  For a potential lender or investor, the risks are several: Is the other party seeking to operate a truly legitimate business?  What are their capabilities?  In addition to those standard types of due diligence queries, new industries pose additional risks.  If making a collateralized loan, for instance, where inventories are pledged as collateral, what can be done to adequately monitor that collateral in an industry that continues to have significant grey and black-market operations?

Other industries also pose risks, as we saw with a wave of solar panel installation companies defaulting in the last decade.  As new technologies come to market, investors are well served to focus on the people behind the product, and to understand their reputation and, by extension, their likelihood of long-term success.  Thorough due diligence efforts, including the inspection, documentation and occasional surveillance of any loan collateral, are key to a successful investment, as is a thorough understanding of the evolving regulations around many of these fledgling industries.  Paired with research to better understand the people behind a project, an investor or other business partner can make a more informed choice.

Welcome to the January 2020 edition of our newsletter!  In this issue, we’ll examine one of the top fraud trends of 2019 and look ahead to what may be on the horizon for 2020.

Social Engineering: It’s All About Who You Think You Know

An increasingly interconnected and global society has created great opportunities for millions of businesses, from coffee growers in Costa Rica to flat panel television manufacturers in China and points in between.  Yet as barriers to entering new markets have receded, risks of falling victim to fraud have grown.  In 2019, the use of alternative payment systems outside of, or as a corollary to, traditional banking methods exploded, and with that boom came reports of large scale frauds targeting smaller providers and, more importantly, a user’s tendency to use such systems for social media transactions, such as private fundraisers or private party purchases of used or new goods.

As with any new frontier, the understanding of risks involved is limited when compared to systems in place for decades.    The added aspect of social engineering – including fraudsters posing as friends or family members of targets on social media, often claiming to be in distress and thus in need of quick cash – will make such fraud even more critical.  Given that such fraud can often be organized by large, often multinational networks, anti-money laundering efforts will increasingly converge with more traditional fraud investigations to ferret out coordination between perpetrators.  At particular risk are high net worth clients, whose social media exploits have also led to more traditional crime, such as tipping off criminals as to when they’ll be away by flaunting a skiing trip abroad.

If one trend is likely to persist through time, it’s that people will not exercise due care and caution in their daily activities in order to avoid falling victim to fraud.  As a result, while more people and businesses offer greater details and information about themselves, equal or greater amounts of vigilance are also required to make sure commerce can proceed with limited risks.

Welcome to the December 2019 edition of our newsletter!  In this issue, we’ll examine the SEC’s continued push to grant certain groups other than accredited investors greater access to private companies and the risks that remain.

Early Stage Investing Gets a Boost from New SEC Rule: What to Know

In recent months, the SEC has been finalizing proposals that would increase the ability of investors to access private securities offerings and certain hedge funds beyond the existing definition of “accredited investors” – those with at least $1 million in assets and $200,000 in annual income.  A proposal recently approved by the commission would broaden that group to include persons who recently obtained entry-level securities registrations, including completion of Series 7 or Series 65 exams.  The proposal also left the thresholds for accredited investors as not adjusted for inflation, which makes it likely that more people will qualify over time, while also allowing spouses to jointly state their assets when qualifying as an accredited investor.  The rule will also lower the threshold for certain other groups to qualify as accredited investors, including “limited liability companies that meet certain conditions, registered investment advisers and rural business investment companies (RBICs.)”

The upside of greater access to early-stage companies, especially in dynamic technology categories, remains as obvious as it was months ago when the SEC first proposed this rule.  Yet so do the risks, as we’ve seen with “unicorns” which had planned public offerings that failed to come to fruition.  The proposed rule is currently open to a 60-day public comment period, and left unclear – from public statements, at least – is whether newly-minted brokers will be able to invest in the offerings only for themselves, or for clients, and if the latter whether any further requirements or limits will be imposed.  The recent failure of various tech “unicorns” should be a cautionary tale in granting greater access to markets, emphasizing that vetting processes and understanding of risks involved must be an equal part of the rule’s implementation.

Welcome to the November 2019 edition of our newsletter!  In this issue, we’ll examine changes to enforcement of the Foreign Corrupt Practices Act, or FCPA, specifically the leniency provision.

Just Most of the Facts: Recent Changes to FCPA Enforcement Create Flexibility for Companies

Since 2016, the U.S. Justice Department has been adapting its enforcement of the FCPA to foster more cooperation from companies and bring about improvements to their internal compliance programs.  Among those provisions was an assumption that the department would decline to prosecute if the company cooperates and “self-discloses” information about the violations.  But while earlier revisions to the leniency  program emphasized that the company must disclose “all relevant facts known to it,” the more recent revisions note that “the department recognizes that a company may not be in a position to know all relevant facts at the time of a voluntary self-disclosure, especially where only preliminary investigative efforts have been possible.”

This seemingly minor change has significant implications for both internal investigators and those called in to assist from the outside when appropriate.  Another recent change, from this past March, was the allowance of so-called disappearing message applications by employees of subject companies, which were previously prohibited if companies wanted to be eligible for leniency consideration.  The department did, however, suggest that companies implement internal controls over the use of such applications.

Taken together, these changes have affected the investigative landscape for FCPA compliance, allowing greater time for the subject company to collect facts on its end – whether from within the company or elsewhere – while also freeing up a lane in which technologically savvy fraudsters can continue to operate.  In attempting to create an environment of greater cooperation and less confrontation, the Justice Department is shifting the sands of FCPA compliance, and clients are better prepared when they are made aware of these changes so they can respond accordingly.

Welcome to the October 2019 edition of our newsletter!  In this issue, we’ll examine the risks and rewards of investing in “unicorns”, and look at some ways to better understand the risks in advance.

The Danger of Unicorns: When Entrepreneurial Spirit Can Haunt Investors

A recent trend in private equity is the growth of so-called “unicorns” – technology companies seen to have a disruptive product or service, or some other distinctive niche, which could lead to market dominance for that sphere over time.  Typically, these startups have valuations over $1 billion, and recent examples include several ride- and office or home-sharing companies.

The temptation for investors is obvious: who wouldn’t want to ride a decade-long (or longer) wave of dominance in a sector before others inevitably caught up to the disruptor’s model?  The risks are usually less obvious, although headlines about the failed initial public offerings of some unicorns have made them more pronounced.  Valuation as a private company can be very different than when a company seeks to enter a public market, and often Wall Street estimates of what a company is worth can be less than sound, as conventional actors (Wall Street analysts) try to fully understand unconventional goods or services.   Additionally, investing in a pre-IPO unicorn ties up an investor’s money for a longer period of time, and as importantly minority investors are not empowered, generally speaking, to challenge the existing leadership, which often includes a founder (or founders) who has a vision which they are seeking to execute – and which they may resist altering in the face of changing circumstances.

One way to research the viability of a unicorn is to take a close look at the company’s management.  Sure, the technology may be new and innovative, but what are the track records of the people who are embracing it?  Did they innovate in similar ways at prior employers, and if so, what results did they achieve, or fail to achieve?  Do they have a record of litigation and public comments that might herald difficulty working with larger group as a company hopefully grows, or did they have a record of getting the best work out of subordinates?  If they have started other companies in the past, what was their track record, both in terms of obtaining financing and bringing products to market?

Another aspect to consider is where they’re obtaining their existing financing from.  If a large institutional investor has made an investment, they’re likely to have commented about in some form, and those comments should be parsed carefully for red flags couched as cautionary statements – risk that may be “cautionary” to a billion-dollar investor could be devastating to your client.   By thoroughly evaluating the potential risks in the business model, market and personnel, you can help your client reach mythical heights instead of seeing returns vanish as if they never really existed.

Welcome to the September 2019 edition of our newsletter!  In this issue, we’ll examine the Committee for Foreign Investment in the United States and the quiet but important role it plays in global investment.

Keeping Watch in an Open World: The Role and Growth of CFIUS

Formed in 1975, as the United States remained engaged in a Cold War with Russia and related geopolitical concerns around the Vietnam War, the committee – known as CFIUS, and led by the Treasury Department with input from Defense, Justice, State and others – developed as an interagency safeguard against foreign companies acting as covert agents for their host governments, secretly collecting sensitive information from U.S. companies in which they invested.  The threshold for CFIUS review of, say, a German bank’s venture capital arm investing in a U.S. automaker was previously very high, consisting of any transaction which could result in a foreign entity having majority control of the relevant U.S. company.  In 2018, a law was enacted to broaden the scope to include non-controlling investments as well as the acquisition of real estate, with the logic being to limit foreign government access to U.S. bank account information, as well as the introduction of “mandatory declarations” to be made by the relevant foreign government when the target acquisition is involved in critical infrastructure or technology, or has access to sensitive data, each of which was left rather broadly defined, at least until the February 2020 deadline to implement the new rules.

The intent of CFIUS remains similar to its original goal from more than 40 years ago, to safeguard U.S. intellectual property and national security.  Yet as globalization and technology have connected nations and their peoples in ways undreamt of by lawmakers in the 1970s, the agency’s scope and duties have had to evolve.  The 2018 reforms could, in theory, be used as a tool to slow or stop proposed acquisitions under the same national security and intellectual property grounds.  CFIUS records are generally accessible via the U.S. Freedom of Information Act, although they are likely to be limited in scope and possibly heavily redacted.  Nonetheless, if researching a company known or believed to have been part of a prior CFIUS review, records may be available.  If working with a non-U.S. entity seeking a  CFIUS review, thorough due diligence profiles of the senior leadership is advisable, to determine as much as possible the risks their backgrounds may pose during a review.  If current or former military or intelligence officials serve on a company’s advisory board, for example, they may be asked to step down as part of an approval.  Similarly, a look at a company’s existing assets and investments is warranted, as the nature of these could provide grounds for divestiture.

The 2018 reforms gave CFIUS broadly expanded powers with somewhat limited restraints on those powers.  In an interconnected world, companies seeking to take advantage of opportunities would be best served by bringing the same level of scrutiny upon themselves that the quiet inter-agency regulator is likely to visit upon them.

Welcome to the August 2019 edition of our newsletter!  In this issue, we’ll examine how to research an expert witness, whether for your client or their opponent, and identify vulnerabilities in their background.

On the Record About Their Record: Finding Conflicts and Other Concerns

An expert witness is presented to the court as precisely that: an expert whose opinion in their given field of study is meant, by definition, to carry profound relevance.    Whether an architect, insolvency expert or in another field, the educational and professional background is meant, by the side who hires them, to be sacrosanct.

This notion, however, does not always fit with reality.  Sometimes an expert will embellish (or, more rarely, fabricate altogether) a degree, organizational affiliation, or license they claim to hold.  These can be verified fairly easily, with a call to a school registrar or state licensing board, or a check of an association’s membership directory (if that is made available to the public.)

Often, but not always, such experts have also testified previously. This testimony can prove valuable if a prior position contradicts their current stance, or if they were sanctioned by the court for their testimony, or had their analysis otherwise called into question by an impartial body such as a judge or jury.

Finally, a thorough background investigation consisting of public records analysis – and interviews if appropriate – can flesh out the picture further.  Does the expert have a history of changing jobs frequently, which could call into question their reliability?  Do they have any outside business relationships, or familial / spousal relationships, that could pose a conflict of interest or color their testimony beyond straightforward expert analysis?

Addressing each of these areas could help you identify and assess weak points about the expert or their testimony, and would also act as a good guideline for evaluating an expert before you hire them as well.    Skepticism of claims made and the background of the person making them is an effective mindset when seeking to undermine the credibility of an expert who is across the table from you in a conflict.

Welcome to the July 2019 edition of our newsletter!  In this issue, we’ll examine how government probes – whether federal antitrust officials or a state attorney general – can affect your firm, and how best to respond.

What To Do If Big Brother Comes Knocking

As “Big Tech” faces scrutiny from the U.S. Justice Department amid allegations of anti-competitive behavior, the situation serves as a reminder to companies of all sizes concerning how to respond when an agency comes calling.  Many industries face some measure of county, state or federal oversight, whether you’re an electrician operating a small business or a large insurance company that operates in a dozen states.

The notification process for the beginning of an inquiry can be daunting – typically arriving in the form of a subpoena – either issued by an agency or a grand jury, the latter if criminal conduct is suspected at the outset – or, more rarely, a search warrant.  Often, the agency issuing a subpoena has worked with related inspectors general or state agencies to build a case using other records or whistleblower tips, and if your company is the target of an investigation it is more likely at the end of a chain of inquiries than the beginning.

Depending on the circumstances, you may be advised by counsel not to cooperate with an inquiry, but conducting your internal investigation should be similar in any event.  Companies are large groups of people whose aims are hopefully aligned most of the time, so if an inquiry concentrates on allegations about a certain division – say, the billing to Medicare by a health care provider – a recommended course of action is to create profiles of relevant staff members, to determine if any could have worked together to pursue the alleged conduct, and if they had any financial or professional motives for doing so.   This can best be pursued by integrating internal records, such as e-mail communications, with publicly available records like liens or judgments, to better understand a person’s circumstances and mindset if they are in a position of responsibility when your firm is accused of wrongdoing.

Welcome to the June 2019 edition of our newsletter!  In this issue, we’ll examine the intricacies of how hedge funds operate and provide tips on how to research these opaque vehicles more effectively.

A Peek Behind the Curtain: How Hedge Funds Operate and How to Research Them

Hedge funds typically solicit investments from large, sophisticated money managers, such as pension funds or college endowments.  The reason for this on the funds’ side is simple: that’s where the most money is.  For the client, they look to the hedge fund to manage the risk and drive upside in ways that retail money managers can’t.  But do they always understand how a fund can attempt to do this?

The structure of most funds is designed to provide a layer of secrecy.  Although a company’s offices may be in New York, Boston or another major city, often the parent company is organized in Delaware – where taxes and business law generally favor the corporation over its customer.  As importantly, limited liability companies and partnerships only need to report their formation and any amendments or other changes, not to file any annual or biennial reports listing their members or officers, as is common in most other states.

Additionally, most U.S.-based hedge funds manage a portion – sometimes most – of their money offshore, in tax and secrecy havens ranging from the Cayman Islands to Switzerland.  Funds are typically divided into categories based on a specific goal – volatility- or opportunity-driven investment, for instance, or a dedicated short-selling fund – which can often be organized outside of the United States.

How can a large investor – or their clients, the retirees, educators, etc., who comprise the investor’s membership – vet such entities?  Fortunately, U.S. regulators offer some insight.  Most hedge funds are considered commodity pool operators, who must register with the National Futures Association.  The association’s BASIC service allows the public to look for any regulatory actions, arbitration awards or other actions taken against a fund, also requiring it to list basic information about its leadership and, crucially, other affiliated funds.

The U.S. Securities and Exchange Commission’ Investment Adviser Public Disclosure database, or IAPD, also often includes information about hedge funds.  The Form ADV such registrants must file is a fairly detailed record of a company’s assets under management – and, generally, on whose behalf they invest – as well as their leadership and their network of funds, both in the U.S. and offshore.  Taken with a look at any litigation as well as regulatory actions by state attorneys general or other agencies, these sources can help institutional investors better understand a potential investment beyond the complex illustrations used by funds to pitch their services, and better understand the people managing the funds and their approach to doing business.

Welcome to the May 2019 edition of our newsletter!  In this issue, we’ll examine how to research older subjects in an era of courts purging older records.

Researching Subjects in an Age of Purging Records

Most courts tend to be high-traffic places, with hundreds or thousands of cases transacted, in whole or in part, each day.  Cataloging all of this information is understandably daunting, and some jurisdictions have responded by streamlining the amount of information made available to the public.  The federal court’s online system, for example, only consistently indexes records from approximately 1988 or so (although older cases can still appear depending on the jurisdiction.)  The publicly accessible online systems of other states, such as Connecticut or New Jersey, include little to no archival information, instead limiting results to the last 20 or 25 years.  When researching a potential employee or board member who is in their 60’s or older, such limits will not suffice for a thorough result.

Many courts whose online information is limited, however, provide other, less efficient options, or market-based alternatives have been created to fill the void.  In New Jersey, although the system which once provided older case information is no longer online, it can still be accessed at the public access terminals at the archives themselves; in Connecticut, vendors have purchased the docketing information for older cases in order to provide that service,  although the courts do typically destroy cases within a few years if a civil complaint was later withdrawn.

Database services such as Lexis-Nexis or Westlaw provide historical information in most instances, but a recent comparison between New Jersey records housed there and those listed in the archive system found more than 30 cases in the court system that were not in the third-party database.

The trend is unlikely to improve any time soon, as courts continue to struggle against the enormity of the number of filings.  Intrepid researchers can often find ways to locate older cases, however – for example, many federal courts have an index card system for older files, and in one instance using this method we found a half dozen cases involving a subject, born in 1930, which pre-dated the online system.  In other jurisdictions, some vendors have purchased the rights to scan and index entire years of case filings, essentially outsourcing storage of and access to the data from the court.  But such initiative is the exception, not the norm, and as a result a thorough investigation full of redundant queries is the most effective way to find out all that is available about a subject.

Welcome to the April 2019 edition of our newsletter!  In this issue, we’ll examine concerns about a decades-old law that bars people with various criminal records from working in the financial services industry.

Does a Rap Sheet Equal a Bad Rap?  The Debate About Conduct-Based Finance Industry Bans

Although this would be hard to believe given various fraud headlines in recent years, since the 1950’s the financial services industry ahs been barred, by law, from hiring anyone with a criminal conviction for a crime deemed to be a breach of trust or another form of dishonest behavior.  The only means of working in banking with such a record is to obtain a waiver from the Federal Deposit Insurance Corporation – which, in the past decade, has granted slightly more than half of such requests.

The banking industry – having drawn criticism for a lack of diversity among its ranks – has sought to change the law, and in the last year it has had some success, with the FDIC exempting supposedly low-level offenses such as making a fake identification card, various drug-related offenses and theft below a certain dollar amount.  Critics continue to insist that the sweep of the law is overly broad, also noting that there is no statute of limitations, meaning that an offense from when someone was a young adult could affect their hiring prospects decades later.

Financial institutions are required to perform background checks that include criminal histories when considering a new hire, and have reportedly terminated some earlier hires after a past relevant conviction was later discovered.  The FDIC maintains a publicly accessible database of persons prohibited from the banking industry under Section 19 of the Federal Deposit Insurance Act, the relevant statute.  It is somewhat unclear if the agency will provide information about whether an individual with a relevant criminal history has applied for a waiver, but if your client is considering working with an adviser at an FDIC institution and a relevant criminal history is discovered, filing a Freedom of Information Act request with the FDIC would be a key step for any risk assessment.  Unlike FINRA and other self-regulatory groups, as a federal agency the FDIC must provide members of the public with most types of information, aside from certain exclusions.

Standards of conduct change over time, and the age of an offense – and offender – should certainly be taken into consideration when making a decision.  Yet the trust clients place in financial advisors, mortgage brokers and others is also paramount.  FDIC-insured institutions have many incentives to assure their clients that the people they hire can be trusted with client assets, but clients and their other advisers also have every incentive to do their homework and consider a potential adviser’s full background before making any decisions.

Welcome to the March 2019 edition of our newsletter!  In this issue, we’ll examine how corporate governance and reliance on internal oversight mechanisms may not enough to protect investors from fraud.

View from the Outside: The Value of Looking Into Closely Held Companies

As Silicon Valley assesses the fallout from some of the high-profile frauds among technology startups in recent years, including many headline-grabbing incidents, important lessons are coming into focus for potential investors, suppliers or others looking to do business with the “next big thing.”  Although an experienced board of directors can help – and is meant to serve as a check on an overly ambitious founder, as is often the case with startups – directors are people too, and thus subject to the same manipulations and misconceptions that can doom any of us.  The same can be said, to some degree, of outside regulators, whose oversight duties can vary wildly from industry to industry.

Yet the promise of astonishing potential – which can act as a siren song to all involved parties – should not be ignored, and various independent measures exist to help understand the risk, even in technically dense, opaque fields.  Examining the makeup of advisory boards or board of directors is a good start – did the founder stack it with early investors and supporters, more likely to have blinders on toward positive reinforcement and group think, or are there industry veterans who may be supportive but also skeptical if something doesn’t seem right?  Although young, closely held companies are often loath to provide detailed sales data and other internal information, they all have to compete somewhere, and with someone.  Calling competitors about a company’s reputation can be useful, although it should always be viewed skeptically since the competitor may seek to undercut a potential investment in its rival.  If themes and trends emerge after several conversations with competitors and other industry experts, however, it’s much harder to dismiss those as simply a perspective skewed by competitive bias.  Additionally, although regulators can be far from perfect – and may take excessive time to even begin oversight of a particularly new technology – their enforcement files and correspondence can be invaluable for identifying any red flags before funds are committed.

Nascent technologies – or those which don’t yet actually exist except as concepts – often represent promise and peril, a “black box” largely controlled by a company’s founder.  But the right amount of persistent due diligence — especially about the level of checks and balances that exist to keep a company from being tethered too closely to its founder and each of his or her human frailties – can create an environment where risks are better understood.

Welcome to the February 2019 edition of our newsletter!  In this issue, we’ll examine the potential impact of the SEC expanding its “test the waters” rules to smaller companies.

If Small Companies Test IPO Waters, Will Investors Get Bitten?

As part of the 2012 JOBS Act, companies with revenue under $1 billion were able to solicit feedback from investors – typically larger money managers – before considering an initial public offering, a process that came to be known as “testing the waters.”  A recent statement by the SEC has proposed lifting the revenue limit altogether, allowing “all issuers, including investment company issuers” to participate, not just “emerging growth companies” which meet the criteria laid out in the 2012 law.

In announcing the move, SEC Chairman Jay Clayton said expanding access would lower the cost of raising capital in public markets.  But the move also carries risks, even if those risks are diluted when large institutional investors are involved (thus limiting damage that could be done to, say, individual retirement accounts invested in those funds.)  The SEC acknowledged the risk posed to investors who relied on the earlier information, rather than later formal offering documents, to make an investment decision, and asserted with some measure of confidence that “We expect such potential adverse effects on investors to be mitigated by several factors, including the general applicability of anti-fraud provisions of the federal securities laws.”

Private Companies Seeking Public Capital – Equal to Trouble?

Creating further grey areas that could allow earlier stage growth companies to access public market capital without simply going public would seem to carry risks, which may or may not be mitigated as the commission asserts.  We have seen some companies raise millions via private placements, raising their public profile in the process, only to become embroiled in various scandals which, if they were publicly traded at the time, would have had an adverse effect on a broader range of investors.  In a way, such scandals have been a proxy for the pitfalls of the SEC’s push to expand access to capital.  While investors, when confronted when violent markets wings caused by actions of an “immature” company or its management, typically can only find recourse via litigation, will broadening access create other layers of liability?  Although the rule as proposed restricts access to “qualified institutional buyers” and “institutional accredited investors” – stating in part that “the Commission’s rules have long recognized that QIBs and accredited investors have a level of financial sophistication and ability to sustain investment losses that render the protections of the Securities Act’s registration process unnecessary” – it does not state what penalties, if any, would be imposed upon new issuers if they did include misleading information in “test the waters” communication.   This leaves the burden to perform due diligence on the investor, and presumably once again leaves litigation as the main recourse if fraud is suspected or other adverse events occur.  While growing companies developing innovative technologies or needed products that have yet to come to market are inherently appealing, investors seem obligated to rely on their own information to vet new issuer offerings, given that the rules differ from traditional public market communications.

Welcome to the January 2019 edition of our newsletter!  In this issue, we’ll examine a recent proposal by securities regulators to allow greater investment in private companies.

SEC Considers Effort to Bring Private Company Investments to the Investing Public

In recent remarks to The Wall Street Journal, U.S. Securities and Exchange Commission Chairman Jay Clayton said he wanted to change existing rules so smaller investors – typically ignored by private companies in favor of large private equity firms – could participate in, and be more attractive to the offerors of, private investment offerings.  Existing rules only allow persons with household income of $300,000 or more to participate, using this benchmark as a measure of financial sophistication and understanding of risk.  In the article, Clayton was described as wanting to change the rules to make such offerings more accessible, but didn’t detail exactly what he wanted, instead noting that the commission would issue a “concept release” on the topic in the coming months as a means of gaining public comment.

Caveat Emptor: Risks Abound in Private Investment Offerings

As the Journal article notes, the private investment market has exploded in the past five years – and with it, the risk to “mom and pop” investors whose retirement savings Clayton seeks to bolster with his proposal.  The Journal cited an earlier analysis it conducted which found that such offerings are typically brokered by smaller firms targeting older investors, which can be a recipe for fraud and abuse.  Although the burden may fall on investors or their families to vet advisers in such instances, perhaps an increased level of disclosure can be added to the offerings as part of expanding access, as a means of regulators mandating greater transparency of what the “less sophisticated” investors would be buying.  As the concept release comes out and comments made, investors and their advisers should be wary and proceed cautiously to take advantage of previously walled-off markets without risking their savings needlessly.

Welcome to the December 2018 edition of our newsletter!  In this issue, we’ll look back on the decade since Bernard Madoff’s Ponzi scheme was uncovered and what has – and has not – changed in the years since.

Billions Lost, But Was Anything Gained?  Ten Years Since The Madoff Scandal Broke

Although first described as a Ponzi scheme — where early investors get returns to bolster a fund’s credibility, only to have later investors get nothing and the fraudster take those investments – Madoff’s long-running operation also had other hallmarks, most notably of affinity fraud.  Madoff approached various non-profit groups, particularly those prominent among the Jewish faith, to which he also belonged, marketing his investments as a means of garnering astonishing returns.   After that outcome failed to materialize, some groups had to scale back their operations or shut down altogether.  While the bankruptcy trustee has worked diligently to recover, and return, as much of the looted billions as possible, in some instances relief simply did not arrive quickly enough.

Efforts to Regulate A Changing Landscape Against Affinity Fraud and Other Scams

While useful reforms were put into place after the Madoff case gained international attention, so too have new avenues cropped up for fraudsters to exploit many of the same traits Madoff did.  Although the U.S. Securities and Exchange Commission implemented an enhanced system for the reporting of anonymous tips and whistle-blowing, and also required many funds to hire independent auditors to conduct “surprise exams,” most of these enforcement improvements exist on the back end of a transaction.  When it comes to soliciting clients and marketing investments, the proliferation of largely unregulated social media has made it easier, many would argue, for fraudsters to draw would-be investors into Ponzi schemes and other scams that prey on greed or need, especially among closely-knit groups as Madoff had done.  In addition to fundraising events and the like which Madoff used to identify and solicit clients, today’s fraudsters use Facebook and Twitter to present an often unchallenged perspective of their can’t-miss investments.

Detecting such affinity fraud rests largely with individuals and the community in which they interact – by the time law enforcement or regulators are involved it’s often too late.  Some old maxims will always apply – if it sounds too good to be true, it probably is – but new techniques are also needed.  If a client is approached about a new investment that sounds too fantastic, ask questions about the marketer’s history.  How long has their firm been in existence?  When was their web site created, and by whom?  Also analyze their social media presence and look for any instances of litigation against them, even small claims cases (as some victims may have invested amounts too modest for higher courts.)  Also, researching their background thoroughly is an important if obvious step – if a purveyor’s background indicates little to no financial experience prior to launching an investment, especially if they had been active in relevant communities in other roles and were now looking to exploit the trust they had built.  Prevention and early detection is difficult but essential in such situations, and a skeptical investigator can help your clients avoid heartbreak and financial ruin, especially during the holiday season.

Welcome to the November 2018 edition of our newsletter!  In this issue, we’ll examine how changes to the records held by securities regulators could affect due diligence efforts.

Quieted Alarms: Recordkeeping Changes Dampen Ability to Vet Financial Professionals

For most of the last 30 years, researching financial services professionals involved checking with various state agencies and NASD (now FINRA), a self-regulatory group funded in large part by fees paid by the professionals themselves.  This patchwork regulatory system, complemented by litigation and media reviews, could typically help consumers, or their counsel, ascertain the risks involved in hiring someone – or the history to be introduced when litigating against them.

Eventually, many state financial regulators integrated their records into the FINRA database, which then worked them into its own retention procedures (which, in some cases, were not as encompassing as the state regulators whose records they inherited.)  This caused some prior adverse events to essentially be purged from regulatory records.

In addition, FINRA has procedures for expungement of certain records – a practice which recent news articles have said has been on the rise in the last decade, with one study finding that up to 70 percent of such requests were granted.  The threshold for expungement is meant to be very high – an allegation on record being “factually impossible” to prove, or a regulator being accused as part of a group in which he could prove he wasn’t a part, for example.  In practice, a study found that expungements are used much more frequently, sometimes allowing disciplined actors to boast of “unblemished” records because expungement requests are not part of a public record.  Although rule making efforts are underway to make expungement more difficult – and financial representatives can no longer insist on undisputed expungement as part of a settlement – the system as currently constituted allows gaps in a broker’s history to go undetected if expunged.  One possible recourse, — in addition to media searches, litigation checks and interviews with former partners – could be an open records request to the securities regulators (and insurance regulators if appropriate) in each state where someone has lived or conducted business, in the event that they have retained archived records even after integrating with FINRA.  A similar request with a state’s attorney general; could also yield information if an action was taken outside the scope of FINRA arbitration. (FINRA, not being a government agency, does not have to honor records requests made by the public.)  The procedural idiosyncrasies in the self-reported FINRA system create an additional challenge for a diligent researcher and their clients, but one that can be met with an extra effort.

Welcome to the October 2018 edition of our newsletter!  In this issue, we’ll examine how a recent ruling about foreign bribery allegations could change the way in which they’re investigated.

Cross-Border Changes: Recent Ruling Narrows Scope of Prosecution Under Foreign Corrupt Practices Act

As noted in this space before, the U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits executives of U.S. companies from bribing foreign officials.  The parties on the receiving end of the bribery scheme have also been subject to prosecution if the act occurred in the United States, but a recent U.S. Court of Appeals ruling found that a defendant in one such case was not subject to the FCPA because he was not an employee of the U.S.-based unit of his French employer, nor was he within the United States when the alleged crime occurred.  In its ruling, the appellate court found that prosecutors could make the case that the defendant conspired with others in furtherance of that crime.

Researching Multinational Financial Crimes

The ruling was described in news articles as possibly being narrowly implemented, as most multinational companies have a U.S. component, and an increasingly global business environment reduces the likelihood that a party would have no interaction whatsoever with such an office.  Yet the ruling may present another nuance to investigations, specifically determining where a crime is said to have occurred.  This can be done via analysis of internal records such as e-mails and other correspondence, but also indicates that corporate records may be of greater importance, in part to determine if common management and control of entities exists between U.S. and non-U.S. based groups within the same company.

After at least 20 years of increased globalization of markets and businesses, the environment continues to evolve, and with it the laws governing participation in the global marketplace.  As a result, the tools and rules used by investigators looking into such offenses must also grow to understand and address such changes.

Welcome to the September 2018 edition of our newsletter!  In this issue, we’ll examine the importance of thorough vetting for senior-level positions.

Know Your Candidate: The Need for Thorough Background Research

Headlines are rife with examples of various types of fraud among job candidates, whether those who seek to be a chief financial officer, or member of Congress.  Some claim to have degrees they never received, others invented positions they never held, or embellished low- to mid-level positions into something of greater significance. Yet all pose a risk to the unwitting employer who doesn’t do their homework.

A perhaps more current reason to carefully vet candidates is the increased scrutiny of personal behavior as part of a professional review.  Whether looking into social media behavior or older allegations of improper conduct, questionable prior activities by a candidate, should they come on board, can leave your company with considerable public relations problems.

Just the Facts: Digging Into a Candidate’s Background

Many claims can be verified by publicly available records and interviews, but allegations of a sensitive, and possibly criminal, nature can be difficult to vet if charges were not filed.  If interviews or other sources indicate the possibility of criminal activity that was not carried to prosecution, one avenue to consider is using an open records request of the city, county or state police to determine if logs or reports exist for any calls to a specific address, typically within a certain time frame.  Although often heavily redacted, these records can still establish valuable fact patterns and possibly the names of other witnesses.

By thoroughly examining a candidate’s past via public records and other sources, your company can better understand the person you’re considering hiring, and have a greater awareness of any pitfalls that may present themselves at a later time.  With a little tenacity and creativity, surprises can be avoided and risks can properly be understood.

Welcome to the August 2018 edition of our newsletter!  In this issue, we’ll examine some ways that fraudsters lie on applications for financing, and how researchers can spot the lies and learn the truth.

Too Good to be True: Signs of Loan Application Fraud

Recent headlines have placed a renewed focus on the prevalence of loan application fraud. Within the last decade, various studies have found that as many as 70 percent of loan applications contained some form of fraudulent information.  Whether your client is looking to make a loan to an individual or business, or to transact other business with one, knowing how to spot the red flags is key.

In some instances, with regard to individuals, it can be something as simple as an applicant using a different Social Security number – something a licensed investigator can check quickly – or more complicated, such as over-reporting income or under-reporting liabilities.  Although not all such information can be checked against public records, some liabilities – such as child support obligations – are often part of public records, as are tax liens an are other debts.  If these items are incorrect or omitted altogether, that is likely a sign of fraudulent intent.

Similarly, businesses are subject to tax liens and other obligations as well and – while credit reporting for businesses differs somewhat from that of individuals – analysis of a company’s payment history from a service such as Dun & Bradstreet can provide valuable insight into the creditworthiness of a business.  If trends are negative or moving in that direction, it may be reason for a would-be lender to ask for more information, such as a list of the largest vendors with which the company does business, to determine if the information provided by the business legitimately reflects its position with its vendors.

Getting to the Truth: Researching Application Fraud

Publicly available records can help identify whether an applicant is lying or being selective about the information they report, such as excluding a bankruptcy that was within the scope of what an application sought (many ask if any adverse activity has occurred within a certain time frame, such as the last 10 years.)  Additionally, certain types of cases, such as petitions to the U.S. Tax Court, are not often requested on loan applications and should be considered if fraud is suspected, as petitioners often volunteer detailed financial information when protesting a tax ruling.  Together with a list of counter-parties – in the case of an individual, former business partners or spouses might be relevant, while former employees may shed light on business practices – who could be good sources of human intelligence, a strong public records analysis can help determine if an applicant is a greater risk than they have presented themselves to be.

Welcome to the July 2018 edition of our newsletter!  In this issue, we’ll examine the importance of researching connections between a party to whom your client is adverse and others involved in an inquiry.

All About Who You Know: The Importance of Connections Between Parties

In every situation between parties, whether litigation or negotiation, there is often more involved than the persons sitting across the table from one another.  Each party brings their experience, which often includes a lifetime of accumulated contacts.  While these contacts may not be relevant at all times, if a deal goes sour or fraud is suspected, such linkages can be of great relevance.

Social media have become a valuable tool for identifying, and often in proving, ties between parties. Did your business partner go to college with the vendor suspected of inflating invoices?  Were they in the same fraternity?  By documenting such ties, especially after fraud is suspected, a network can be developed to conduct interviews and obtain records that can help bolster a fraud case, whether the connections are from the subject’s educational, business or personal background.

Hitting the Links: Examining Business and Social Ties

Determining if a subject has an undisclosed business relationship can be of vital importance as well.  Using various databases, a researcher can cross-reference relevant company data – such as P.O. boxes listed for new or suddenly popular vendors – with personal identifier information to determine if an employee, their spouse or another party in their network created a sham vendor.  Also of note in such instances are charitable organization memberships, as these can provide an innocuous seeming reason for two parties to meet and conduct other business.

If fraud is suspected, by developing a thorough profile of a subject’s personal, business and social or charitable ties, your client will be that much closer to identifying who that subject enlisted to help carry out the fraud, and that much closer to figuring out how they did it.

Welcome to the June 2018 edition of our newsletter! In this issue, we’ll examine the importance of vetting parties connected to your business in secondary ways, from award recipients to advisory board members.

Trusted Advisors: Researching the People Who Will Help Guide Your Company’s Growth

Companies of every size and type, especially growing privately-held companies, often rely on a cadre of industry experts, business mentors and investors to help shape the company’s vision of its future. Such resources are vital to thorough discussion of a company’s strengths, weaknesses, opportunities and threats. Yet while executives feel comfortable calling upon former professors, supervisors or industry peers, that level of comfort can also blind them to possible public relations headaches. An impartial and thorough due diligence — focused on a candidate’s reputation and background relating to litigation, any employment disputes or personal issues — is a necessary part of considering whether to ask someone to accept a board position. Although not as high-profile a part of your company’s business, advisory board members can often be referenced as such in news articles about them in other contexts, some of which may not be flattering. By understanding as much as you can about their life, and not just their expertise in your field, you can prepare for any issues that may arise later, or decide not to make an offer in order to avoid having difficult issues raised in connection to your company, however tangentially.

Advisory board members are to a certain degree, similar to employees in the sense that they represent your company, if only part of the time. Others who fall into this category could include award recipients, whose biography and likeness would appear connected with your company if it sponsors an award or is part of an industry group that does so. These recipients are often lower profile than C-suite executives, which can present a different set of challenges since they may only be well-known within a smaller context. Yet researching the details of their lives — from the admirable to the difficult — is the best way to ensure that they present the perspective your company is seeking to convey.

Welcome to the May 2018 edition of our newsletter!  In this issue, we’ll examine how rapidly evolving technologies present new investment opportunities – and chances for fraud.

The Limitless Potential of Invention and Desire for Gains May Not Always Mix

In many ways, we are currently experiencing an age of technological advancement that may, upon reflection, rival the industrial revolution of centuries ago.  New companies are tackling daunting problems, such as curing cancer, which creates an opportunity for life-saving drugs or therapies to come to market.  Other companies are perfecting environmentally safe, potentially driverless cars.  These types of advances, once considered science fiction, are increasingly becoming part of everyday life.

Many of the companies fueling this progress are not large, well established conglomerates, although some are pushing those more well-known companies to innovate.  Instead, these are often privately held companies, or ones raising capital in public markets via newer methods we’ve discussed before, like “mini-IPOs” and methods of crowdfunding.  Old norms of transparency for newly public offerings won’t evaporate altogether, but they are being changed as regulators balance creating greater access to capital while maintaining investor and consumer protections.

Late Homework is Unacceptable: Researching Risky New Ventures

The shifting regulatory landscape has placed more of the information gathering component on investors and their advisers.  Recently, certain executives of companies promising great medical advancements have been charged with massive “years long” frauds which could serve as a clarion call for increased vigilance.   While not every investor, no matter how great their net worth, would hire an expert to evaluate a company’s claims, due diligence on new technologies should include a thorough analysis in industry journals not only of the company and its reputation but also challenges facing whatever niche or market the company is trying to enter.  Did regulators elsewhere try to block that technology, and if so, why?  Could existing intellectual property holders make a case for infringement at some point?  More fundamentally, do the claims made in private placement memoranda and other offering materials make sense and seem feasible?  Evaluating the individuals involved is key as well, since many such companies rely on founder-driven corporate cultures for much of their early life cycle.  By doing the necessary research you can protect clients from investing in a too-good-to-be-true fraud and help them identify the legitimate companies that could empower a generation of improvements.

Welcome to the April 2018 edition of our newsletter!  In this issue, we’ll examine the evolution of investment frauds which rely on increased complexity of financial instruments to prey upon investors.

It’s Complicated: Intricate Financial Investment Choices Lead to Increase Risks

Within the last decade, mathematics has become an increasingly important part of investing, both for large institutional holders and smaller investors.  While puts, calls and options have existed for decades prior, the use of these instruments in markets where newer technologies – high-frequency trading, cryptocurrencies and the like — also exist poses new types of risks.

As a result, various iterations of old scams have gained new contours.  For example, one fraud that is on the rise is binary options, which bets on whether an asset’s price fluctuation within a set time frame, where an investor can reap a pre-set gain or lose the entire investment, depending on whether certain conditions are met.  While currently legal within the United States, many firms offering this strategy are outside of the United States, which can create both greater opportunities for fraud and greater difficulties in pursuing remedies if a fraud is discovered.

Another type of emerging fraud is the rise of phony offerings in legitimate initial public offerings.  As markets embrace a new technology boom, investors are salivating at the prospect of getting in on the ground floor of the next Facebook or Google.  Many of these scams use social media to build word of mouth and excitement for an offering that may not have actually happened, or have happened years earlier for companies that are already publicly traded.

Getting Ahead of the Curve: Evaluating Ever-Changing Risks

U.S. regulators do offer some information that can be helpful in evaluating risk for newer types of investments, often even if the investment is held outside the United States.  The Securities and Exchange Commission has records about offerings, while the Commodity Futures Trading Commission regulates the contracts involved, if the trading platform is within a contract market, concerning more complex instruments like binary options.  For new twists on old scams, like fake pre-IPO offerings, seeking other sources, like SEC filings and news articles, to determine if a company is actually going to go public – or already has – can help identify scenarios that are too good to be true.  Markets and technology seemingly will always evolve more quickly than most investors’ understanding of them, and in that gap fraudsters will lie in wait.  By doing proper due diligence about investment brokers are other providers, your clients can see the risks before they pursue the next big investment trend.

Welcome to the March 2018 edition of our newsletter!  In this issue, we’ll examine the growth of multinational transactions, the risks posed by them and how to protect yourself while seizing opportunities.

A Balancing Act: Doing Business Overseas While Complying with U.S. Laws

Tariffs.  Sanctions.  Regulations concerning solicitation of foreign officials.  As commerce becomes ever more global in scope, both new risks and old arise to potentially confound business opportunities.  For U.S.-based clients, while each country has its own set of customs, values and laws, adhering to U.S. anti-bribery and honest services laws when conducting business overseas is critical.  The Foreign Corrupt Practices Act, now 40 years old, remains a key standard in conduct of business with foreign officials, and makes knowing your potential on the ground business partner, or consultants and the like, all the more essential.  Can they be trusted to handle sensitive information confidentially?  What is their reputation in the business community?  Are they close – perhaps too close – to government officials?  Is there a chance they could break U.S. laws, if not their own, while representing you by promising something in return for favorable treatment?

Knowing Your Partner: a Guide to Researching Foreign Businesspersons

Knowing the reputation of customs officials, defense ministers, or other relevant government parties can be an important step in deciding whether to do business overseas, but if using a broker, or partnering with a local businessman, knowing their history is even more essential.  A thorough public records check (including their local media to the extent possible) is an important first step before any deals are struck.  If they have a history of being sued in their country – or in U.S. federal courts which can be used to litigate cross-border transactions – that must be taken into account, as well as negative media citations and any administrative sanctions.  Bearing in mind that in some countries the state acts as a politically motivated tool of its leader, not as an objective enforcer of laws, a party’s reputation and history – to the extent discerned from public records – is an important part of any decision-making process.  If red flags arise, a potentially sound second step would be to interview former employees or colleagues of the subject party, to better understand if any other context exists that may not have been fleshed out in litigation or news reports.

A wealth of information exists about parties doing business in a variety of industries across the globe.  While the challenges may be many, so too are the resources, and with the right preparation you can seize business opportunities while minimizing the risks of potentially dealing with an unscrupulous actor.

Welcome to the February 2018 edition of our newsletter!  In this issue, we’ll examine how the meteoric rise of cryptocurrencies has created a market less understood than traditional currencies or other investments – and how fraudsters have begun to exploit this situation.

The Digital Wild West: Investing in Cryptocurrencies

Few investments have shown the volatility that Bitcoin, Ethereum and other cryptocurrencies have demonstrated within the last year, despite Bitcoin having been used for almost a decade.  Cryptocurrencies are used as an alternative to traditional currency and the value of each is maintained in a ledger within an ever-evolving accounting finance system known as blockchain.  Yet for many investors, all they needed to understand was that Bitcoin, and other cryptocurrencies were a new frontier where parties with enough fortitude and foresight could strike it rich.

Scammers Seize Upon Investor Insecurity, Greed to Promote Cryptocurrency Fraud

Although many individual investors have seen the complex, highly computerized nature of cryptocurrency transactions and deemed them too risky, fraudsters have learned how to exploit the tension between caution about the unknown and the desire for big investment gains.  Some purported investment advisers have offered schemes to solicit investments in cryptocurrencies that would then be pooled and later invested in fiat currency as a means of providing upside gains and managing downside risk.  In at least one instance, prosecutors have alleged that such schemes, designed to play upon both the fear and greed of investors, were used to fund a more traditional fraud: a Ponzi scheme.

In other instances, nascent cryptocurrencies appear out of nowhere and may vanish – with an investor’s monies – just as quickly.  Regulators are starting to catch up, with the U.S. Securities & Exchange Commission investigating cryptocurrencies marketed as investments, and the U.S. Commodities & Futures Trading Commission investigating those traded as commodities.  As regulations – and both civil and criminal law – seek to impose conditions upon cryptocurrencies beyond market forces alone, potential investors and their advisers are best served by relying on tried and true tools of researching the persons beyond the investment and gauging their credibility and reputation.  No matter what new technology arrives, for now at least, humans are driving that engine, with all of their flaws and virtues steering this uncharted journey.  If clients insist upon exploring new and unproven areas of investment, an experienced researcher can help identify potential areas of concern before investments or other decisions are made.

Welcome to the January 2018 edition of our newsletter!  In this issue, we’ll examine how arbitration — most often private arbitration — can create disclosure hurdles when researching an individual’s background, and offer some tips for filling in some of the gaps.

Employment and Contract Arbitration and its Effect on Due Diligence

Arbitration of disputes between parties are gaining greater levels of prominence, in part due to changes in rules for consumers seeking to dispute claims with banks and credit card companies, and in part because of the role arbitration can play in workplace issues, such as sexual harassment or discrimination claims.  In each instance, on its face, the private nature of arbitration filings would seem to shield the respondent from disclosure of unflattering information.  Generally speaking, the large private arbitration entities, like the American Arbitration Association, have strict rules about the confidentiality of proceedings.  Various state laws also complicate the matter of arbitration confidentiality, such as New York’s Article 75, which does not explicitly provide confidentiality to parties, but for which case-law has created precedent that a state agency that is subject to an Article 75 proceeding can make exceptions to open records requests to maintain the private nature of arbitration.

Putting the Pieces Together: Assembling Fact Patterns When Records Are Kept Private

Depending on the industry, certain exceptions exist within the United States that can help a researcher assemble a portrait of issues raised in arbitration.  Participants in various regulated industries, such as securities dealers and insurance brokers, are subject to self-regulatory organizations which, although not government entities subject to open records laws, maintain records of customer disputes and arbitration matters – in the securities industry, for example, FINRA (formerly NASD) and the National Futures Association (for commodities dealers) each keep fairly detailed records of such disputes, although the level of detail varies due to factors like the age of the dispute.  Other industries, like the legal and medical professions, do not explicitly identify arbitration actions in records of the relevant state regulators, but information about complaints or disciplinary actions – which are subject to open records disclosure – may contain such references.  Additionally, if parties fail to satisfy the terms of arbitration, or if new claims arise outside of arbitration, past agreements can often be referenced in civil litigation case files.

As economies, and the businesses that drive them, have become more global in nature however, one bright spot has emerged for identifying details about disputes in arbitration: other countries.  While the rules around disclosure in the United States are onerous, most other countries – tax havens like Switzerland being an exception – are far less restrictive when it comes to disclosure of information in arbitration actions.  Certain legal information aggregators contain information about various non-U.S., and in some cases multinational, arbitration bodies, from the London Court of International Arbitration to those issued by the World Intellectual Property Organization.

Although arbitration provides a level of opacity when compared with traditional civil litigation, it is not necessarily a “black box” from which no information can be obtained.  It can present a challenging effort for a researcher, but can also be one that reaps rewards for clients seeking information originally meant to be hidden from view.

Welcome to the December 2017 edition of our newsletter!  In this issue, we’ll examine issues that arise during bankruptcy, including fraudulent conveyances, and discuss methods for recovering funds lost to bankruptcy fraud.

Here and Gone: Common Types of Bankruptcy Fraud

Bankruptcy fraud is a difficult field simply because the forms it can take are nearly limitless – any transaction undertaken by a business or individual who later seeks bankruptcy protection or reorganization can be susceptible to fraud.  In one prior instance, we helped identify recoverable assets after a family-owned business, having grown for more than 50 years, agreed to be sold, only to have the patriarch siphon its assets to various entities and trusts he created after receiving a sizable down-payment on the ultimately compromised sale.

On other occasions, the fraud occurs simply when an entity’s leadership declares bankruptcy after using remaining assets to pay themselves, or certain vendors but not others.  This leaves unpaid parties to bring adversary proceedings before the bankruptcy court, to argue that when the assets were in the company’s coffers that they, not others, were the proper parties to be paid.  These fraudulent conveyance actions are a more common form of bankruptcy fraud.  One variant on that theme is a “bust out” scheme, where a company buys a large amount of inventory on credit – say, prepaid gift cards – and sells them quickly, only to declare bankruptcy, and often shuttering their entire operation, when the bill from the creditor comes due.

How to Make Your Client More Whole After Bankruptcy Fraud

Recovering assets after a bankruptcy fraud has been committed can be a time consuming endeavor.  In the first example above, numerous companies were created by family members in the months after the sale was announced, before the bankruptcy petition was filed.  In that time, several of those companies were used in fictitious vendor schemes, billing the company for goods or services never received.  In another example from that case, we learned that one principal had diverted substantial sums to subsidize an expensive hobby – and were able to trace those funds when he made a down payment on a transaction with a merchant but failed to pay the balance, leading to litigation – including the person’s bank account set up to fund his hobby, via transfers from his soon-to-be-bankrupt company.  There are often multiple layers to such frauds, and they often include a circle of relatives, friends or other trusted associates.  By establishing a framework of involved parties via public records, a seasoned investigator can then look at various records, either submitted to the bankruptcy court or identified via discovery in an adversary proceeding, to create  time line of events and ideally how a pattern and practice between principals and their associates used to perpetrate a fraud.

Welcome to the November 2017 edition of our newsletter!  In this issue, we’ll examine the recent enforcement trend of emphasizing cooperation versus prosecution, and how this trend could affect your preparation efforts.

The Push Toward Cooperation: Working Together, With Caution

As a more pro-business regulatory regime takes the reins in the nation’s capital, many industries and executives who felt burdened by the Obama administration’s regulatory pursuits have breathed a little easier.  While some public comments have indicated a new, more business-friendly approach by regulators, preparation and a thorough approach to understanding your own company’s potential misdeeds remains essential, and may pay greater dividends than in years past.

At a speech delivered in late September to an audience at New York University, James McDonald, the enforcement director of the U.S. Commodities and Futures Commission – which regulates some of the most complex financial instruments available in markets today – emphasized the need for cooperation with regulated entities, comparing the effort to community policing.  “[W]e recognize that enforcement actions alone aren’t enough to prevent misconduct in our markets,” McDonald said in part.  “It’s not enough for us to wait for violations to occur, detect as many as we can, and then prosecute as many of those as we’re able.  That’s like playing a game of whack-a-mole—as soon as we bat down one violation, others just keep popping up.  Instead, to achieve optimal deterrence, we in law enforcement need the buy-in from the communities we police.  This is a reality that isn’t limited to the financial arena.  It’s a fact that applies across the board—from white collar crime in a company to violent crime on the street.  And law enforcement officials across the spectrum have to be thoughtful about how to meet their goals while keeping this reality in mind.  This is part of what our cooperation and self-reporting program is designed to achieve.”

The Right Kinds of Cooperation: Preparing to Aid an Inquiry Into Your Company

In his speech, McDonald noted that many corporate cultures emphasize a need to “get along,” which can be an impediment to investigating one (or more) of your own.  Yet the reward to a company for best efforts in cooperation can be substantial: in later remarks, McDonald and his colleagues said penalties for wrongdoing could be “significantly reduced”, although he stepped back from earlier remarks, reportedly included in a draft copy of his speech, that said the penalty reduction could be as much as 75 percent.

An essential part of cooperation is internal, particularly concerning retaining documents and answering regulator inquiries.  Yet companies answer to another audience, the markets and their public, and this is where an outside investigator can be of assistance.  Do relevant parties have any conflicts of interest that management may not have known about?  Are there any other facts which, if made public, could harm the company’s reputation as the inquiry is proceeding, even if it hasn’t been made public?  Once made aware of the area of inquiry, a good practice is to do your own investigation including, where relevant, background checks on relevant parties to develop financial profiles and identify where conflicts of interest or other areas of concern may exist.  It is best to work under the direction of counsel, who will also be likely to understand how best to cooperate with regulators and, hopefully, produce the best outcome for your company.

Welcome to the October 2017 edition of our newsletter!  In this issue, we’ll examine concerns that can arise when an expert’s history isn’t all that it seems, and how to prevent such situations, especially when preparing for trial.

Getting to Know the People with Knowledge

Expertise is an essential part of most transactions – making sure the accountant auditing your company’s books knows what he’s doing, or that the architect designing your new factory has all of the certifications and education to do her job well.  Yet the time when most people think of someone’s credentials is when they don’t check out, such as when someone lies about a license, a degree, military service or some other item meant to set them apart.

In a pre-transaction setting, verifying such credentials is essential to maintaining trust and confidence as the deal comes to a close.  An unprofessional consultant advising your company will reflect poorly to the party across the table.  Similarly, when hiring experts for litigation – whether using forensics in criminal settings, for example, or for internal harassment investigations – confidence in their claimed background will add confidence to their promised results.  If such experts are found by opposing parties, or enterprising media members, to not be all that they claim, the damage can be profound.

Putting the Pieces Together: Tips for Verifying Credentials

There are certain difficulties that typically arise when verifying credentials, but most can be overcome with tenacity and patience.  While verifying educational degrees can be as easy as calling a school’s registrar, and most state or county licenses can be checked via the relevant databases, other claims in a curriculum vitae can take some more digging to flesh out.  Did the expert really co-author an article? Did they perform military service or the dates claimed and achieve the rank they claimed?  In some instances, databases can help with these queries too, although verifying government service typically requires a written request to the appropriate agency, which can take a few weeks and is often redacted somewhat when results are received.

Perhaps more difficult to verify are the trade association memberships discussed by an expert, as record-keeping at these groups can be somewhat questionable, given that many purged older records when they upgraded to computerized systems.  In each instance, however, an essential component to vetting an expert’s history is asking about any disciplinary actions or complaints filed against that person’s membership or license – in addition to verifying what the expert told you, it’s of even greater importance to identify any acts they may have wanted to leave out.

By taking the time and effort to carefully re-assemble an expert’s history, to make sure it is at it appears you can give clients confidence that the person they’re dealing with is credible, and make them aware of any issues that could call that credibility into question.

Welcome to the September edition of our newsletter!  In this issue we’ll examine registration of individuals as lobbyists on behalf of foreign governments, and look at how to research issues around such registrations further.

The U.S. Foreign Agents Registration Act: Evolving From Anti-German Propaganda Tool to Global Disclosure Device

First enacted in 1938, the Foreign Agents Registration Act, or FARA, is described by the agency which enforces it, the U.S Justice Department, as being intended to ensure that “the people of the United States are informed of the source of information (propaganda) and the identity of persons attempting to influence U.S. public opinion, policy, and laws.  In 1938, FARA was Congress’ response to the large number of German propaganda agents in the pre-WWII U.S.”  Today, as lobbying by companies and foreign governments has grown to become a sophisticated multi-billion dollar business in its own right, FARA’s importance in helping the public understand who is disseminating information, or influencing policy, on behalf of foreign governments has seldom been greater.

Following reports in the mid-2000s that the Justice Department’s FARA record-keeping section was in disarray – a condition to which we can personally attest – an effort was made to modernize the agency’s records, resulting in searchable databases that can be queried by registrant – the agent hired to work in the United States – or by the foreign country which retained him.  Although the scope of the historical records on the site is unclear, we have seen records dating from 1963 to the present.  The main registration statement requires disclosure of a registrant’s employing country, basic corporate formation information and principals, including all persons seeking to act as a lobbyist under FARA.  Also required to be reported are the compensation paid to the registrant and disbursements made by the registrant to other parties as part of their work, including “things of value” and political contributions.  Finally, the issues about which an agent is disseminating information, and the method of dissemination – television, Internet advertising, etc. – is also required.

The importance of FARA in an era of increased foreign influence

In an era where “fake news” is both an epithet and an actual concern, FARA registration and enforcement has gained increased importance.  Although foreign governments constitute many of the parties hiring agents, political parties and private companies located outside the United States can and do retain such agents as well.  FARA does not restrict the nature of lobbying or “propaganda” that can be disseminated, only requiring the disclosure of such efforts.  Certain exemptions from registration exist for religious charities and other entities; additionally, persons engaged solely in the lobbying of public officials, who do not disseminate advertising or other information, may file under the Lobbying Disclosure Act of 1995, which is reported to the U.S. Senate.  Failure to register, or to disclose activities once registered under FARA, can carry criminal penalties.

When combined with research culled from news articles, litigation and other public records, FARA filings can be an essential tool in learning more about a foreign company or government’s aim to influence policy or public opinion within the United States, and provide a fuller picture of reputational concerns that may arise before doing business with a foreign government, foreign company or an agent hired on their behalf.

Welcome to the August edition of our newsletter!  In this issue, after another insider information case was decided by the nation’s highest court, we’ll examine the role of friendships in such schemes, and how to understand and identify those networks of connections.

Friends in All the Right Places: How Parties Profit From Inside Information

Numerous inside information cases have been prosecuted in the last decade or more, typically involving some variant of the same basic scheme: an investor or hedge fund analyst meets an expert involved in a clinical trial, a senior executive at a company, or someone else in a position to know high-level information about a company’s operations or forecasts. In many instances, the insider is an acquaintance or friend of the person receiving the tip, although in an increasing number of cases the insider was recruited to provide information as part of an “expert network.”  We’ll focus on the former group, of more informal connections.

Although more informal in nature than retained experts, the social network of insiders and information recipients can be even more important.  The possibilities for connection are vast: In-laws, college roommates, fraternity brothers, parent-teacher association members.  By examining a person’s social network as closely as possible, via social media, alumni newsletters, corporate affiliations and other publicly available sources, a researcher can better understand who a  subject knows, and begin to infer how and why they may know a relevant information source.  Then we can understand how that source can help someone benefit from the information.

Gray Areas: What Constitutes Inside Information

The aforementioned court case did not establish clearly what information is considered a “tip”, with prosecutors in that case arguing that a “gift of confidential information” should be enough to constitute insider activity.  As the existing cases, including appeals of previously obtained convictions, work their way through the courts, one issue to be resolved is the role of casual relationships – how strongly must the prosecution prove the connections between an insider and the recipient of the information.  Whether investigating internally after law enforcement make such allegations, or conducting a review to determine how susceptible your company may be to such conduct, it may pay to understand who your company’s senior executives know – and the risks those relationships may pose at a later time.

Welcome to the July edition of our newsletter! In this issue we’ll examine steps companies can take to protect themselves when being investigated by authorities, and research initiatives that can assist in that effort.

Best Foot Forward: Cooperating With Investigative Inquiries

At its best, compliance is a necessary burden for most companies, ensuring that their clients receive the proper standards of service, or that the products produced are safe and meet quality control metrics. In heavily regulated industries, self-reported information and routine audits by state or federal regulators are meant to provide layers of accountability and transparency which help consumers make choices and help companies market themselves confidently.

Sometimes this process goes awry, and improprieties are discovered, either via such routine measures or via whistle-blowers or other sources who communicate, often anonymously, with regulators or news outlets. In such instances, if fraud or other improper practices are discovered, a strong culture of accountability is required in response – a difficult proposition on occasion, as such offenses likely would not have occurred if such a culture was in place throughout.

Although some executives may feel a need to double-down on defensive measures in the face of scrutiny, especially if that scrutiny moves from a private matter to a public one, the best course of action is often to admit any sins that have occurred, preserve all necessary records and cooperate. Since corporations are simply groups of people, whose goals hopefully align, another worthwhile measure is to conduct internal reviews of relevant people and policies, often supplemented by public records research. For example, if a long-time purchasing manager is accused of creating phony vendors to defraud a government agency your company supplies,, it may be worthwhile to create an updated financial profile on that person, to identify any new and relevant stressors that could help explain his motives – also helping to determine where the money went.

A corollary to cooperating with investigators, and identifying any relevant information about parties alleged to be culpable, is to understand as much about the source of investigators’ information as possible. As we’ve noted before, the majority of corporate fraud schemes are discovered via a hotline or other method for anonymous tips. The identity of such persons may never surface, but if it becomes known a thorough investigation of that person is in order, as a defensive measure to identify any character issues or past practices that could undermine the whistle-blower’s credibility, and also to better understand what their motivations may be.

Oversight can be a difficult process for companies of all sizes, and investigations into business activities can be especially difficult. By combining an attitude of cooperation with a deeper understanding of the risks posed both internally and externally to your company, even the most difficult circumstances can be navigated with confidence.

Welcome to the June 2017 edition of our newsletter!  In this issue, we’ll examine the intricacies of multi-national asset searches, and look at some of the strange things fraudsters will buy with their ill-gotten gains.

Catch Me If You Can: Tracing Assets Across The Globe

As fraud schemes have grown more sophisticated, so too have the ways in which fraudsters will try to protect the proceeds from being detected.  40 years ago, the most common ideas were to buy real estate in an offshore tax haven, typically using a company, spouse or other relative to do so.  As time has progressed, some areas of the world have increased the level of secrecy available to those willing to pay for it, such as in Bermuda, where companies must maintain publicly available registers of officers and directors, but are not required to disclose shareholders.  This can be made further opaque by having a shareholder be a company from another haven jurisdiction – thus, if a fraudster’s company is compelled to provide information during litigation in one jurisdiction, investigators then having to contend with the rules of a second jurisdiction (or more – we’ve traced a network of companies across 13 countries) to properly identify the individual at the end of the trail.

Strange Toys: The Unusual Places That Fraudster Funds Occasionally Go

Also of note are some of the more unconventional assets fraudsters will acquire with the proceeds of their schemes.  Recent news articles, often citing forfeiture orders issued once prosecutors have succeeded in following the money, have found what amounts to a very strange storage locker of items: awards given to celebrities in the past, which were then auctioned and won by the fraudster; artwork and even proceeds used to finance feature films.  Although some of these records are non-public, and thus only obtainable via discovery proceedings, other items often merit a mention in an article or database, such as when a limited liability company no one has ever heard of – but of which you’ve been made aware during an asset search – suddenly appears in Variety as providing millions in financing for a screwball comedy.

Database records have improved in recent years in terms of providing leads in identifying non-US company officers or directors in many jurisdictions and, while it is possible that all of these persons can be fronts for the true, “silent” owner, most people have to work with someone eventually, and most also only trust a small network of associates.  By following people and their connections around the world, you are likely to find the items they are trying fervently to keep secret.

Welcome to the May 2017 edition of our newsletter!  In this issue we’ll examine key differences between administrative courts, including self-regulatory administrative boards, and traditional courts.

Public Only to a Point: Limits of Publicly Available Information from Administrative Courts

The administrative court system serves an important purpose, whether adjudicating a military personnel proceeding or a self-regulatory group mediating a customer dispute with a financial adviser.  Yet whereas most federal or state court cases make their entire case file a public record (with notable exceptions), administrative courts vary in their requirements to allow public review of their actions.

Limitations within the traditional court system are often narrow in scope, such as redacting the name of a witness in a criminal proceeding to protect that person from harm, or sealing disputed designs which could be considered trade secrets, so that no one could simply copy the ideas contained therein.  In self-regulatory organizations, however, in many instances the entire case file is not available for public review: FINRA, for example, will publish decisions and selected other case materials after a case has been decided, but such groups are non-governmental entities that do not have to copy with open records or Freedom of Information laws.  Similarly, actions that enter arbitration cease to become matters of public record at that point, unless one of the parties later includes arbitration materials in an appeal to another court of competent jurisdiction.  Similarly, administrative courts such as the one maintained by the U.S Securities and Exchange Commission make decisions or orders matters of public record, but additional pleadings are not readily available.  As an arm of a federal agency, however, such records may be accessible under the U.S. Freedom of Information Act.

Administrative courts and self-regulatory organizations can be a valuable source of information when researching an individual or a company, often acting as a complementary piece to research on other litigation, or to references in news articles.  While there are greater limitations on the scope of information available to the public, these records can help identify material issues, or potential interviewees, to help bolster an investigative effort.

Welcome to the April 2017 edition of our newsletter! In this issue, we’ll look at the importance of thorough background checks.

GETTING TO KNOW YOU: THE IMPORTANCE OF BACKGROUND CHECKS

Background checks have become a routine and essential part of several types of transactions, whether hiring an employee or pursuing an acquisition. Recently, six incoming members of the new Presidential administration were either terminated or reassigned due to the results of their background checks. Parties who don’t have the resources of federal law enforcement can also be thorough in their efforts and make more informed decisions.

There is a tendency in researching an employee’s background to give more weight to more recent events, but we’ve found that more historical information can prove very useful. If a subject had financial indiscretions in his twenties, for example, it may indicate a pattern of behavior, or possibly a measure of growth if those activities ceased when he got older. These kinds of data points can help inform interviews of former colleagues, supervisors and associates, which can provide insight into a person’s character and management style.

BACKGROUND CHECKS AS AN INDICATION OF CHARACTER

Another reason for a deeper dig into a person’s background is to gauge truthfulness if they’ve submitted responses to a questionnaire or made claims in an interview. In the past, we’ve found instances where subjects said they had never been charged with a crime, nor convicted of one, only to find that they had either lied or omitted the relevant facts. By assembling disparate facts into a cohesive picture of a person’s history, we can not only better understand their experiences but also use the information as a barometer for potential performance in the future.

Welcome to the March 2017 edition of our newsletter! In this issue, we’ll examine the limitations of databases in conducting thorough research, and offer suggestions for how to complete a thoroughly researched project.

KNOW YOUR LIMITS: THE FLAWS OF DATABASE-DRIVEN RESEARCH

As information technology has advanced, the ability to conduct probing and deep research has also grown tremendously. Yet several limitations remain, particularly with regard to older subjects, whose early histories may reside in archive books, not computer databases. The same limitations can apply to various regulatory organizations — FINRA, for instance, contains thorough records on an individual broker’s history of complaints, but settlements reached with a brokerage firm are not included, only client complaints that enter arbitration. Other database systems, like the federal court’s PACER service, typically only contain records from the mid-1980s to the present. The patchwork of county court systems are even more inconsistent, with some containing fairly exhaustive archives, while others simply have no online record services at all, especially in rural areas of southern states like Mississippi.

PATIENCE AND PERSISTENCE: COUNTERING TECHNOLOGICAL LIMITATIONS

The means of surmounting various limitations is a bit old-fashioned, and time-consuming. In the above example regarding a FINRA-registered brokerage, settlements with clients should be noted as a result of civil actions brought where the brokerage has done business; terms are often not disclosed, but the existence of the action can be confirmed. Both the federal courts and most county courts have paper-based archive searches, which usually entail thumbing through card indices, sometimes with hand-written notations. This research can take time and also relies heavily upon an on-site researcher’s efforts, which can introduce variables not present when dealing solely with databases. This will require patience and supervision, as well as cross-checking information contained in other sources — for example, if a federal criminal case accessed online references a defendant’s earlier criminal history in a county court where records are not online. By thoroughly analyzing online records and managing offline record research, a more complete portrait of a subject can be compiled via public records, providing valuable intelligence to your clients.

Welcome to the February 2017 edition of our newsletter! In this issue, we’ll examine the importance of thorough pre-employment due diligence, using a recent case study.

DOING HOMEWORK ON CANDIDATES: THE NEED FOR THOROUGH VETTING

Hiring candidates at all levels can be a time-consuming endeavor, and the due diligence required is no exception. While many firms have made scans of a candidate’s social media a routine part of this process, with good reason, traditional research methods still apply.

Take the recent example of businessman Wilbur Ross, recently confirmed as U.S. Commerce Secretary. Ross, an investor in distressed companies with decades of experience, has undoubtedly amassed a sizable portfolio of public records information to accompany his investment holdings. When submitting materials to the U.S. Senate Commerce Committee, Ross reportedly failed to disclose a civil suit filed by a former partner, with Ross’ attorney stating that it was confused for another action brought by the same plaintiff, also against Ross.

THE NEED FOR DIGGING DEEPLY WHEN EXAMINING A CANDIDATE’S PAST

While Ross’ attorney took the blame for the oversight, the committee itself did not have a perfect record on the matter, reportedly failing, in its own due diligence efforts, a second lawsuit, which Ross also reportedly didn’t disclose on his questionnaire, brought by investors against Ross. The purpose of the outside due diligence is to verify items disclosed by the candidate and, perhaps, identify other items which may have been omitted. In this instance, both the candidates and the committee overseeing his nomination bore some measure of culpability, and in turn each highlighted the need for a thorough examination of a candidate’s life and career, no matter how daunting a task that may seem to be.

Welcome to the January 2017 edition of our newsletter! In this issue, we’ll examine concerns about crowd-funded star-ups now that laws meant to encourage investment in them have taken effect.

In past editions, we discussed potential opportunities and risks related to the U.S. Securities and Exchange Commission’s rules, then in development, concerning crowd-funding of smaller companies. Now that those rules, under the 2012 JOBS Act, are in effect, we have the virtue of seeing theoretical ideas put into practice.

The opportunities for small companies to raise capital — and for investors to contribute to them — were described as the drivers behind that portion of the JOBS Act. Yet a “Wild West” feel remains in the marketplace, as at least one survey, by CrowdCheck, said as many as 40 percent of crowd-funded companies surveyed had not audited or certified their financial results. Checks are in place against massive investor losses — the amount a company can raise from “ordinary investors” cannot exceed $1 million, although accredited investors can contribute more — but risks remain, for both potential investors and companies seeking investment. Due diligence on a firm’s principals, including reputational interviews and, if possible, analysis of a firm’s books and records, are essential as investors consider navigating what is largely a new and untested environment.

Welcome to the December 2016 edition of our newsletter! In this issue, we’ll look ahead to 2017’s emerging trends in fraud.

2016 WAS A TUMULTUOUS YEAR. WHAT WILL 2017 BRING?

2016 can be described as a year of upheaval and change, yet some old threats remained, either evolving or greatly increasing in scope. 2016 saw greater numbers of companies being hacked, whether e-mail providers or large retailers, and also saw increased awareness of scams such as phony tax or law enforcement extortion pitches. Also gaining increased attention, if not visibility, was the dark web of anonymized servers acting as a marketplace for numerous types of illicit goods and activities. 2017 is likely to bring increased threats to finance and identity, including smarter malware and “ransomware” and ever more sophisticated telephone scams.

FRAUD PREVENTION EFFORTS FOR THE COMING YEAR

Efforts to guard against various types of fraud are also evolving, although probably not at the same rate of speed as the next generation o tools used to commit fraud, like telephone spoofing software and next generation “burner” devices. Better decryption tools are one step to ultimately identifying perpetrators, and increasing privacy options on client networks can help guard against hackers gaining necessary access, but there is no singular solution to fraud in the 21st century, especially as the technological aspect changes rapidly. Vigilance and diligence are the bulwarks against all types of fraud, and are especially essential tools in such rapidly moving times.

Welcome to the November 2016 edition of our newsletter! In this issue, we’ll examine how brokers with checkered histories can reappear as investment advisers, potentially leaving clients unaware of past conduct.

SECOND LIFE: DISCIPLINED BROKERS RESURFACE AS INVESTMENT ADVISERS

The U.S. financial regulatory system works as a patchwork of federal agencies (the U.S. Securities and Exchange Commission), state agencies (state departments of securities or banking), and self-regulatory groups (FINRA or the National Futures Association.) Sometimes these groups coordinate among one another, but often their interests are not aligned — self-regulatory groups, for example, can be as interested in protecting their members — broker-dealers and the firms employing them — as they are in protecting the public.

Because of this disparate oversight, brokers who have been disciplined by FINRA (previously NASD) can often register as investment advisers at a later date. Also a factor is the subjective nature of regulatory approval: a state securities regulator may look with more leniency upon violations which get a broker barred or suspended by FINRA, for example.

PROTECTING YOUR CLIENTS BOTTOM LINE: STEPS YOU CAN TAKE

If high net-worth clients have obtained a new investment adviser, typical due diligence procedures are always advisable. Given the nature of financial regulatory enforcement, however, it is additionally prudent that a thorough review of the adviser’s regulatory and litigation histories be conducted, as well as possibly interviews with former supervisors or business partners. Clients should not rely on regulators — often reviewing numerous parties with a minimum of staff examiners doing most of the work — to provide all of the answers needed to make an informed decision. Resources already exist, such as FINRA’s BrokerCheck system or the National Futures Associations BASIC system, to learn about an adviser’s employment history, any regulatory actions taken and other issues of concern. Yet additional research and resources are required to provide a fuller picture of an adviser’s history and reputation.

Welcome to the October 2016 edition of our newsletter! In this issue we’ll examine how new tools are allowing fraudsters to combine affinity fraud with phishing and other identity theft schemes, and what you can do to help your clients avoid becoming victims.

THE DEVIL YOU KNOW: HOW FRAUDSTERS USE SOCIAL MEDIA FOR AFFINITY FRAUD

Affinity fraud conjures images of a bygone era: a charming, flashy stock hustler wooing a room full of wealthy socialites, for example; in more recent times, a similar scheme was part of Bernie Madoff’s massive Ponzi scheme, professing to use his financial wizardry to help philanthropies thrive and reap fantastic investment gains. Yet a new type of fraudster preys upon a broader, if thinner, set of social bonds, stealing someone’s social media information to pose as that person, appealing to friends and family for financial help – all while the identity theft victim may not even know that they’ve been used to elicit empathy – and solicit funds – from loved ones.

PROTECTING YOURSELF FROM AFFINITY FRAUD SCHEMES

Whether in the form of a grandchild who has supposedly been arrested, or a friend who has had a sudden financial emergency about which few details are given, fraudsters typically rely upon emotional appeals more than specific details. If a client comes to you stating that someone they know is in trouble, or that they’ve already helped someone, ask several somewhat obvious but important questions: what did the caller say happened? Where did it happen? Did they give the names of any law enforcement personnel who are involved? Also, attempt to reach the person supposedly seeking assistance by multiple means: if they contacted someone via e-mail or chat, reach out via telephone, preferably at their work or home, or visit them in person if possible, to ascertain if any portion of the alleged scenario actually occurred. If a target noted any telephone numbers or other information during contact, an investigator can use resources to trace that information and provide assistance to law enforcement, who can then see to further prosecution and, hopefully, recover funds – and help the compromised person maintain their online identity. This manner of affinity fraud can be devastating to the victim and difficult to detect in real-time, but steps can be taken to mitigate the adverse impact on your clients.

August 2016

IN THIS ISSUE

— States Follow Federal Lead in Rewarding Whistle-blowers for Securities Fraud Tips
— Trust But Verify: Evaluating Sources and Their Motives

GREETINGS!

Welcome to the August edition of our newsletter! In this issue, we’ll examine steps various state governments are taking to increase the effectiveness of whistle-blowers in combating securities fraud on the state level.

STATES FOLLOW FEDERAL LEAD IN REWARDING WHISTLE-BLOWERS FOR SECURITIES FRAUD TIPS

Much has been written about the federal law enforcement system’s use of whistle-blowers for tips on everything from medicare billing fraud to penny stock scams. In recent years, two states – Indiana and Utah — have instituted programs to reward whistle-blowers for such tips, giving relatively lightly-staffed securities regulators another weapon in their securities fraud arsenal.

Some of the reported recipients of awards from the two programs thus far have been an employee at a company accused of fraud when it steered clients to affiliated fund groups without disclosing the affiliation; and an investment adviser who evaluated an elderly client’s portfolio which had been managed by another adviser, and alerted regulators to suspect transactions.

TRUST BUT VERIFY: EVALUATING SOURCES AND THEIR MOTIVES

While whistle-blowers can provide an invaluable perspective, often from the inside of a company or industry, they must also be scrutinized thoroughly Just as we have argued that federal “qui tam” relators’ backgrounds must be examined to determine if they have any other agenda or conflict of interest, so too must sources relied upon by state agencies, or private parties, in the midst of complex financial investigations. Have they had any other prior dealings with the party about whom they’re complaining? Could they benefit in other ways, beyond a whistle-blower’s reward, if the investigation leads to prosecution?

Human intelligence is a key part of the investigative process, and using public records and interviews to gauge the risks that may come with relying upon a whistle-blower can help determine if the benefit provided by their information and insight will outweigh any downside risks.

July 2016

IN THIS ISSUE

— No Good Deed Goes Unexploited: Types of Charity Fraud
— Detecting Fraudulent Activity in Non-Profit Groups

GREETINGS!

Welcome to the July 2016 edition of our newsletter! In this issue, we’ll examine fraud involving charitable organizations and look for ways to detect and prevent it.

NO GOOD DEED GOES UNEXPLOITED: TYPES OF CHARITY FRAUD

In recent months, numerous headlines have appeared alleging that different types of parties — from executives to member of Congress — have used seemingly innocuous, federally tax-exempt charitable organizations to launder money, or to support extravagant lifestyles, without making grants to actual recipients as required by federal law.

In some instances, non-profit groups have been alleged to be used as “slush funds” for the founders or officers, while soliciting donations for items such as scholarship funds which were never established. Other groups avoid complying with various Internal Revenue Service requirements, including routine audits of its finances by outside auditors. These audits can also reveal other information relevant to potential donors, including conflicts of interest between officers and donors or the groups to which the foundation contributes funds.

DETECTING FRAUDULENT ACTIVITY IN NON-PROFIT GROUPS

If a high-net worth client, or organization, is considering giving to a charity, some due diligence techniques can be effective in identifying “red flags” of concern. Has the group had its federal tax-exempt status revoked? Has it registered with the appropriate agency (often under the attorney general) in the state where it was formed? Were there any consumer complaints filed with the relevant state agency, and has it been sued in civil courts on any level? Also, groups that receive federal funding can be scrutinized by the inspector general of the federal agency which makes such a grant. Each of these avenue can lead to better understanding an entity’s operations, and could start to develop indicators of fraud.

If fraudulent activity is suspected based on research like that described above, several other steps should be considered. Former employees of a non-profit — often under-staffed and possibly using limited resources — can be a useful resource but care is also required as some such employees may have been parties to any improper activity. If a review of regulatory files identifies complaints, or litigation, interviews with opposing parties may also prove fruitful. In some instances, non-profit groups compete with one another for specific funds, and reaching out to a competitor – while remaining aware of that party’s own interest and agenda — could also be useful. If public records indicate that fraud may be present, but a contribution or other support is still being considered, careful interviews may help better inform a decision or change a client’s course of action altogether.

June 2016

IN THIS ISSUE

— High Court Limits Reach of Whistle-Blower Law
— The Impact of the Ruling For Companies

GREETINGS!

Welcome to the June edition of our newsletter! In this issue, we’ll examine the potential impact of the U.S. Supreme Court’s recent ruling in whistle-blower suits.

HIGH COURT LIMITS REACH OF WHISTLE-BLOWER LAW

In a unanimous ruling earlier this month, the U.S. Supreme Court ordered a lower court to revisit its ruling concerning a civil suit brought by the parents of a patient who died at a nursing care facility in Massachusetts. The family of the patient argued that the contractor, Universal Health Services — which sought reimbursement under Medicaid — used unlicensed or unsupervised staff at the facility, which would make it non-compliant with state regulations.

The family argued that it had a right to sue under the False Claims Act even though the violations were of state law, not of specific provisions of the heath care company’s contract with Medicaid. In the instance of the plaintiffs, they said their daughter had been dispensed prescription medications at the facility by persons not authorized to dispense them, without supervision, under Massachusetts law.

THE IMPACT OF THE RULING FOR COMPANIES

The court remanded the case on the basis that an omission or misrepresentation must reach a standard of materiality, with Justice Clarence Thomas commenting in part, in writing for the unanimous court, that the U.S. False Claims Act must not be seen as an “all-purpose fraud statute,” although he also said that “Half-truths — representations that state the truth only so far as it goes, while omitting critical qualifying information — can be actionable misrepresentations.” This nuance allowed each side to claim some measure of victory.

What does it mean for civil fraud actions under the False Claims Act? That has yet to be determined, but it may suggest that the “high bar” of materiality Thomas referred to in the opinion would create a standard of proof that exceeds anonymous tips and questioned documents provided by interested parties. This may make the researcher’s role, to round out the picture using litigation and other public records, even more critical in future false claim allegations.

May 2016

IN THIS ISSUE

— Investigating Bankruptcy Fraud and Piercing its Defenses
— High Court Ruling May Tip Scales Toward Creditors

GREETINGS!

Welcome to the May edition of our newsletter! In this issue we’ll examine bankruptcy fraud and how a recent U.S. Supreme Court ruling affects criminal prosecution and civil asset recovery efforts.

INVESTIGATING BANKRUPTCY FRAUD AND PIERCING ITS DEFENSES

The voluntary bankruptcy process is one that has been susceptible to manipulation by fraudsters since its implementation. Whether a “bust out” scheme — where a fraudster will buy massive amounts of inventory on credit, only to declare bankruptcy and vanish before paying any creditors — or simply an unscrupulous owner diverting company assets for personal use before filing a bankruptcy petition, bankruptcy courts are rife with civil adversary proceedings filed by creditors seeking to recover some of what they’re owed.

One method fraudsters have used to further such schemes is to transfer assets to other entities, and in a recent ruling the U.S. Supreme Court held that a creditor does not need to prove that an actual fraud had occurred at the time of a transfer, only that the intent of the transfer was the concealment of an asset, instead of the standard of proving that a misrepresentation has been made.

HIGH COURT RULING MAY TIP SCALES TOWARD CREDITORS

The effect of the recent ruling, Husky International Electronics Inc. v. Daniel Lee Ritz, may be to more broadly define fraudulent intent to mean efforts, including assets transfers, meant to deprive creditors of collecting a debt. This language could make it easier to attach assets of other entities, such as single purpose limited liability companies, if counsel can demonstrate that the single purpose vehicle was used to shield an asset from discovery — that the debtor moved an asset to it simply to avoid detection when creditors started looking for assets.

This broader scope should help creditors combat, and possibly deter, fraudulent conveyances during the bankruptcy process. Diligent asset research during the bankruptcy process can help your clients recover as much as possible, including assets a fraudster may have previously believed to be safely “off-limits” from collection.

April 2016

IN THIS ISSUE

— False Claims Act, in use for more than 150 years, could be reshaped by the Court
— Definition of fraud could change scope of investigations

GREETINGS!

Welcome to the April edition of our newsletter! In this issue, we’ll examine a case before the U.S, Supreme Court that could redefine what constitutes fraud with respect to allegations reported by whistle-blowers.

FALSE CLAIMS ACT, IN USE FOR MORE THAN 150 YEARS, COULD BE RESHAPED BY THE COURT

As has been mentioned many times before, the largest percentage of fraud investigations are begun with some kind of tip from a company insider, vendor or concerned customer. Since the time of the Civil War, participants in government bureaucracy — employees, and vendors, taxpayers — have had certain rights and protections to report waste in government spending.

Private companies which contract to provide services to the government — a much more widespread practice now than when the original act became law in 1863 — are also subject to the act’s regulations. As the case law regarding the multitude of False Claims Act cases has evolved over that time, certain interpretations — such as a company’s being able to claim “implied certification” with statutes in Medicare or Medicaid — have made a facially simple question more complex: what is fraud?

DEFINITION OF FRAUD COULD CHANGE SCOPE OF INVESTIGATIONS

As the highest court in the land wrestles with that question, each side has staked its ground. Whistle-blowers and their advocates have argued that materiality is key to the standard — the nature of a breach of contract, whether fraud or negligence, should determine the scope of the penalty. Contractors who provide services to the government have argued that there must be some form of omission from disclosure between the parties, or falsity of disclosure made, in order to show breach of contract. To apply a broad standard to other offenses, they argue, is to impose the civil tort system upon contract law between the federal government and its vendors.

The court has heard the arguments and is due to rule later this year. While the scope of the ruling could be narrowly applied only to federal entities, the definition of what they consider to be fraudulent activity that is covered under the False Claims Act could have ramifications for the private sector as well, both as vendors to the government and in terms of the broader definition of what is considered fraudulent activity in the marketplace.

March 2016

IN THIS ISSUE

— Offshore Companies, Abusive Trusts and More: Types of Tax Fraud
— Detecting Tax Fraud

GREETINGS!

Welcome to the March edition of our newsletter! In this issue, we’ll examine different types of tax evasion and fraud schemes used by both individuals and corporations.

OFFSHORE COMPANIES, ABUSIVE TRUSTS AND MORE: TYPES OF TAX FRAUD

As millions of individuals prepare their tax returns, the types of schemes used to avoid paying taxes – and in some instances to gain illicit refunds — deserve scrutiny. While money laundering is not typically used solely for tax evasion purposes, it can be one part of a scheme, where ill-gotten gains are funneled into one company and used to buy equipment or other goods where aggressive depreciation can be claimed, or a leaseback arrangement put in place between companies, resulting in a reduction in taxable income.

Most often, however, companies – and individuals with the means to do so – use a combination of legal means and illegal methods to reduce their tax burdens. These can include forming legitimate offshore companies, although the U.S. Internal Revenue Service has also warned about the rise of “abusive foreign trusts,” where a series of “layered” domestic trusts pass operating income and expenses to a foreign trust in a tax haven such as the Cayman Islands, which often also provide a layer of opacity as to who actually controls such a trust.

DETECTING TAX FRAUD

Identifying sophisticated tax shelter schemes as they occur can be difficult, but a researcher is not without tools. While countries like the Cayman Islands do provide cover for the actions of principals involved, they have minimal reporting requirements, such as the publication of new company formations in various newspapers. These notices typically include the name and address of a company’s agent — if your company sees that a business or individual is using the same agent to start several businesses, researching the agent or his company could help identify key methods or people involved in setting up the companies in question.

The principle of knowing your customer, as well as your business partner, is especially true with respect to matters of tax evasion. If you begin to see unfamiliar entities in locations where a party has not done business before, some due diligence is a good idea in order to prepare for the event where a regulator, having obtained a list of vendors with your company’s name on it, comes to ask questions about the nature of your business relationship with a company suspected of tax fraud.

February 2016

IN THIS ISSUE

— Straw Ownership: Using Legitimate Intermediaries for Illegitimate Ends
— Detecting Straw Buyer Fraud

GREETINGS!

Welcome to the February 2016 edition of our newsletter! In this issue, we’ll examine different types of straw ownership schemes, and offer ways to investigate them.

STRAW OWNERSHIP: USING LEGITIMATE INTERMEDIARIES FOR ILLEGITIMATE ENDS

Straw ownership is a fraud that can serve many purposes: in order for an unlicensed physician to open up a clinic; for a criminal individual to be able to buy property; or to further various other money laundering enterprises where a veneer of legitimacy is required. With respect to real estate, the prevalence of short sales in recent years has also created an increased use of straw buyers to obtain homes for sale in that way.

Although the methods of fraud vary somewhat, the object is the same in each instance: use an associate whose credibility and reputation exceed that of the perpetrator, in order to present the appearance of legitimacy for ill-gotten gains or other illegitimate purposes.

DETECTING STRAW BUYER FRAUD

Although often difficult to detect before a transaction occurs, there are steps which can be taken to develop a straw buyer case after suspicions have been raised. If the purported owner of a venture or piece of real estate knows little to nothing about their supposed area of expertise neighborhood, etc., this may indicate a straw ownership scheme. In that instance, a public records analysis to determine who the straw buyer’s known associates are — including reviews of their education, business affiliations and also litigation — could help identify the true owner, or at least the circle in which the straw buyer operates.

In some instances, such as “flipping” real estate, the straw buyer will quickly convey the questionably obtained asset to the intended owner, either personally or to a company acting on the true owner’s behalf. If the true nature of the scheme does not become readily apparent, as in when a medical clinic is opened by licensed professionals acting for unlicensed ones, surveillance and interviews of neighbors or customers could help uncover the true nature of the operation. While not as straightforward as some other frauds, straw buyer fraud can be detected and, while often not preventable, a case can be built to nullify the purported and actual ownership of the assets in dispute.

January 2016

IN THIS ISSUE

— Faltering Business or Shady Business? Signs of Bankruptcy Fraud
— Falling Victim to Bankruptcy Fraud: How to Respond

GREETINGS!

Welcome to the January edition of our newsletter! In this issue, we’ll examine the signs that a bankruptcy proceeding may have been initiated by, or tainted by, fraudulent acts as well as tips on how creditors can respond.

FALTERING BUSINESS OR SHADY BUSINESS? SIGNS OF BANKRUPTCY FRAUD

Since the financial crisis of 2008, courts have been awash in personal and corporate bankruptcy proceedings, with myriad companies seeking relief or protection from creditors. Some of these proceedings are likely the result of difficult economic circumstances, but some may also be the result of intentional, fraudulent acts by executives, and if your company has done business with a vendor, or client, that is considering bankruptcy, there are some signs to look for that may merit further investigation.

One potential indicator may be a significant change in ownership or management. If your company had supplied automobile parts to a large repair shop chain, for example, and new owners replaced the long-standing ownership (also replacing their executives), the background of the new owners and managers may be relevant. Although not an overt indicator of fraud, an established company presents such an opportunity for new managers to trade upon the company’s reputation as a means of extending lines of credit that the owners never intend to repay, for example.

Another potential indicator is that a company suddenly begins accruing a great deal more debt than it has traditionally; if your client has a relationship with the company, they may know about this directly, but sources such as Dun & Bradstreet or Experian also track the age and amount of debt, as well as a company’s payment habits and history.

FALLING VICTIM TO BANKRUPTCY FRAUD: HOW TO RESPOND

The process of being victimized by bankruptcy fraud is a painful one that begins long before a petition is filed, with repeated calls or letters seeking payment typically being the first course of action. Once a petition has been filed, if it is accepted by the court, creditors can file an adversary proceeding, a separate action before the bankruptcy court most often used to recover monies or property the creditor believes were fraudulently withheld or converted before the petition was filed. For instance, if the company owned a warehouse for many years and it was transferred to an unknown limited liability company shortly before bankruptcy, that could be a fraudulent conveyance. The best way to research this type of transaction is to review public records and, if approved by your counsel, to have a researcher speak with former employees in a position to know more about questionable decisions or transactions.

Bankruptcy fraud takes many forms and has numerous nuances, but the same principles apply no matter the particulars: vigilance and persistence during a relationship, and thorough research of a party’s actions after a petition is filed, can help prevent, or at least mitigate, the prospect of your client losing all they were owed or, at best, getting only pennies on the dollar via the typical bankruptcy process.

December 2015

IN THIS ISSUE

— Cop on the Beat With Hands Tied: Congress Hinders SEC Disclosure Rule
— What the Lack of Disclosure May Mean in 2016 and Beyond

GREETINGS!

Welcome to the December edition of our newsletter! In this issue, we’ll examine the U.S. Securities and Exchange Commission’s efforts to require disclosure of political spending by public companies, and what the push against it could mean for 2016 and beyond.

COP ON THE BEAT WITH HANDS TIED: CONGRESS HINDERS SEC DISCLOSURE RULE

As influence peddling abuses go, bribery and corruption generate far greater attention than campaign finance scandals, yet the power of the campaign finance system as a vehicle to influence decision-makers remains strong. In 2013, the commission first disclosed consideration of a rule to require public companies to disclose their political spending, but opposition delayed the measure from gaining traction.

The recent omnibus spending bill, which passed both houses of Congress and was signed into law one week before Christmas, included language preventing the SEC from issuing such a rule for another 12 months. When the consideration of the rule was first reported, public comments were submitted by advocates of disclosure and by opponents, typically large trade groups whose members would have been forced to comply. The rider added to the spending bill likely ensures that no such measure will be in place during any time in the 2016 election cycle.

WHAT THE LACK OF DISCLOSURE MAY MEAN IN 2016 AND BEYOND

The SEC has long maintained broad authority concerning information publicly traded companies must disclose to investors, and it is likely that the commission would have the authority to enforce a rule about disclosing donors if and when it was able to issue such a rule. This authority may be even more critical in the wake of the U.S. Supreme Court’s Citizens United decision, which rested in part on the notion that the “procedures of corporate democracy” would function — i.e., that companies would conclude that certain disclosures were in their long-term interest.

As it stands, the lack of a requirement creates a level of opacity that makes understanding how a company is advancing its agenda more difficult. While political spending by company political action committees, bundling by employees and lobbying of federal and state agencies can each yield useful avenues for research, adding political activity to foreign operations disclosures, legal proceedings and other material events would give researchers, and the public, another tool with which to understand a company’s intent and operations. Which, it seems, is why opposition existed in the first place.

November 2015

IN THIS ISSUE

— Someone on the Inside: The Potential Roles of Whistle-blowers in Investigations
— Cooperation and Scrutiny: Handling Whistle-Blowers

GREETINGS!

Welcome to the November edition of our newsletter! In this issue, we’ll examine how whistle-blowers can aid in corporate investigations, and the risks to both your company and the whistle-blowers themselves.

SOMEONE ON THE INSIDE: THE POTENTIAL ROLES OF WHISTLE-BLOWERS IN INVESTIGATIONS

While the traditional image of a whistle-blower is that of a “Deep Throat”-style source arranging clandestine meetings in a parking garage, in reality whistle-blowers have become a much more integral part of corporate investigations. The majority of internal investigations begin with a message to a tip line, often made anonymously. Sometimes the whistle-blower, who has some level of knowledge of a perceived fraud or wrongdoing, is never identified. In certain instances, as with claims of overbilling federal government programs, the whistle-blowers make themselves known as part of a legal proceeding brought on behalf the government agency at issue.

While each employee’s knowledge of abuses can vary, the information gleaned — if obtained legally and properly preserved by both the source and the investigator — can protect your company from the financial and public relations damage an insider fraud case can bring. Without proper safeguards for both the source and their evidence, however, an inquiry can do more harm than good.

COOPERATION AND SCRUTINY: HANDLING WHISTLE-BLOWERS

Like journalists chasing a “hot scoop”, there are risks for investigators who believe a source’s information is a “smoking gun” of impropriety. While this occurs in a few cases, most of the time the information obtained is best used to uncover a layer of information that was previously hidden, and from which people can be identified for interviews, other records can be sought, and other traditional investigative avenues pursued.

While a source is obviously putting their job — and possibly their reputation — at risk by coming forward with information, vetting of sources is also an important step. An understanding of the source’s history at their current (and past) employer is a key aspect to consider before going ahead with an investigation predicated on the information. Does the source have another agenda beyond exposing fraud, such as retribution after a poor performance review? Have they made similar complaints at other jobs? Do they have financial difficulties which they are hoping to remedy by receiving a percentage of a civil penalty or fine? By understanding the context in which allegations are made, including the background of the source making them, you can protect your company from uncovered fraud while ensuring that the integrity of the inquiry remains intact.

October 2015

IN THIS ISSUE

— Growth of Form PF Usage Increases Hedge Fund Manager Disclosure
— Recent Requirements Stress Enforcement Over Disclosure

GREETINGS!

Welcome to the October edition of our newsletter! In this issue, we’ll examine recently enacted disclosure requirements put in place by the U.S. Securities and Exchange Commission, as well as the efficacy of some existing programs, and discuss what each could mean for you and your clients.

GROWTH OF FORM PF USAGE INCREASES HEDGE FUND MANAGER DISCLOSURE

Of the numerous regulatory reforms put in place after the 2007-2008 financial markets collapse, several have gained widespread attention, such as the increased protections for whistleblowers. But a less well-known provision, the establishment of Form PF in 2012, could also have a significant impact, and recently disclosed data indicates that it is becoming much more of an enforcement and disclosure tool.

Form PF requires advisers to private funds — including entities considered to be hedge funds — to report the total assets under management for their clients, and – for each hedge fund – describe the strategies it uses, including long or short biases. Such funds must also disclose the geographical region for any assets held outside of the United States, and in certain instances disclose whether the fund is subject to client redemptions.

RECENT REQUIREMENTS STRESS ENFORCEMENT OVER DISCLOSURE

As of this writing, there is no library from which members of the public can obtain Form PFs submitted by advisers, in the same way that investors can obtain a fund’s Form ADV filing. The number of advisers reporting on Form PF has grown steadily, from more than 2,400 at the beginning of 2013 to nearly 2,600 at the end of 2014; the number of funds retaining these advisers has also grown over that period, yet access to information about their activities remains limited.

While a researcher could submit a Freedom of Information request to the SEC, the information gathered on Form PF remains a somewhat guarded segment of data. In an era where more high net worth clients are relying on these advisers and the hedge funds with which they do business, greater disclosure and transparency requirements — structured to be distributed as broadly as possible — would aid investors, and enforcement officials, in making informed decisions and taking action.

September 2015

IN THIS ISSUE

— New Rules of the Road: Justice Department Pushes Companies to Police Their Own
— How to Respond to New Guidelines

GREETINGS!

Welcome to the September edition of our newsletter! In this issue, we’ll examine the U.S. Justice Department’s recent policy attempting to hold corporate executives accountable for fraud, and what you and your clients can do about it.

NEW RULES OF THE ROAD: JUSTICE DEPARTMENT PUSHES COMPANIES TO POLICE THEIR OWN

Since the financial crisis of 2007-2008, numerous banks and other investment entities have been fined and otherwise sanctioned, but one common complaint has arisen: few, if any, senior executives were criminally prosecuted for conduct that contributed to the crisis. Nearly a decade later, new policies may be changing that circumstance, to some degree.

Earlier in September 2015, the Justice Department issued a memorandum titled “individual accountability for corporate wrongdoing.” In it, the department acknowledged the challenges of holding individuals accountable in large organizations, where responsibilities are decentralized by design. The memorandum also states that to be eligible for any “cooperation credit,” the company must provide “all relevant facts of material misconduct.” This emphasis places the onus on the company, not prosecutors, to investigate itself and its employees to a greater degree than before. Yet companies which are also prosecuted will not be eligible for any leniency during sentencing, even if they cooperate.

HOW TO RESPOND TO NEW GUIDELINES

The result of a working group of Justice Department officials and U.S. Attorneys, the policy also notes that cooperation rules apply to civil enforcement matters, and emphasizes that prosecutors should not “merely accept what companies provide,” and should conduct their own inquiries. This creates a second challenge for a subject company: first, it must examine its conduct to provide evidence of cooperation; then it must answer inquiries from prosecutors or investigators seeking information as part of their own efforts.

The manpower and resources to accompany both tasks, sometimes simultaneously, can be daunting. Retaining an experienced fraud examiner to review phone or e-mail records and other internal company resources, as well as assembling a financial profile from public records and interviews, can be invaluable if concerns are raised and multi-faceted inquiries come swiftly to your company’s door.

August 2015

IN THIS ISSUE

— Business as Usual? FCPA Breing Used to Scrutinize Previously Routine Conduct
— Something of Value: FCPA and the Letter of the Law

GREETINGS!

Welcome to the August edition of our newsletter! In this issue, we’ll look at challenges posed by a broadening interpretation of the U.S. Foreign Corrupt Practices Act, or FCPA.

BUSINESS AS USUAL? FCPA BEING USED TO SCRUTINIZE PREVIOUSLY ROUTINE CONDUCT

In recent years, fraud enforcement by authorities in the United States has increased in scope, owing to the (still evolving) Dodd-Frank regulations, the creation of a new federal consumer protection agency, and other measures put in place after the financial crisis of 2008. A less publicized tool, at the moment, is the use of FCPA to police the conduct of U.S. businesspersons in dealings abroad.

While we’ve looked at how FCPA is used to punish bribery of foreign government officials, recently it has been interpreted to include other forms of favorable treatment which had previously been considered routine business practice. In one recent instance, a U.S.-based bank with an international presence settled charges brought by the U.S. Securities and Exchange commission under FCPA. The bank had been accused of giving three college students, each of whom had connections to non-U.S. sovereign wealth funds which were clients or potential clients of the bank, internships with the bank as a means of currying favor with the fund’s executives, despite the students being considered unqualified for the positions. In its settlement order, the SEC said two of the interns were paid, while one was unpaid.

SOMETHING OF VALUE: FCPA AND THE LETTER OF THE LAW

While the first two instances would clearly fall under the purview of the FCPA — a fund executive’s relative received a compensated internship in return for favorable treatment toward the employing bank — the instance regarding the unpaid internship raises a question of new boundaries of enforcement. While the unpaid internship could easily be interpreted as being given to influence a fund manager’s decision concerning the bank, does experience alone constitute having given “something of value” to the foreign official under FCPA?

The bank’s internal policies also prohibited giving “anything of value” to a foreign official, according to the SEC’s settlement order. That order also cited violations of the U.S. Securities Exchange Act in stating that the bank would pay $14.8 million in fines (and disgorgement of profits earned from subsequent transactions with the fund), without discussing whether the unpaid internship actually constituted “something of value.” While perhaps not precedent-setting by itself, the settlement for charges stemming in part from unpaid student work should be a reminder to conduct due diligence on all aspects of trans-national transactions, no matter how seemingly innocuous they may appear to be.

July 2015

IN THIS ISSUE

— Resume Fraud: From Embellishments to Fabrications
— Vetting Candidates and Uncovering Fraud

GREETINGS!

Welcome to the July edition of our newsletter! In this issue, we’ll examine the areas of expertise that prospective employees are most likely to lie about, and how to investigate such claims.

RESUME FRAUD: FROM EMBELLISHMENTS TO FABRICATIONS

Stories of job applicants lying on their resumes seem to occur on a regular basis, sometimes ensnaring high-profile subjects, like the former chief executive officer of Yahoo! Inc., Scott Thompson, who said he earned a degree in accounting many years before his alma mater ever offered any such degree.

While fabrications are the most high-profile — claiming awards or degrees which were never attained — embellishments are also an area of concern. If a candidate said they “contributed to” research on a given topic, or were a team member for a large project, simply verifying their basic employment may not delve deeply enough.

VETTING CANDIDATES AND UNCOVERING FRAUD

While technology has made basic verifications simpler — with the advent of degree and employment verification services — claims that exist in a more gray area require greater effort. Some of the claims can be verified in industry-specific methods, but the principles apply to candidates in any industry. If a scientist claims to have worked on a popular cancer-fighting agent, for instance, did he publish scholarly articles about it? Attempting to speak with former colleagues would also help discern his level of involvement. The same methods apply across various industries — high-profile claims, if true, are often visible in a high-profile manner.

The damage is done once an award is granted, or a high-level position is accepted and announced, only to learn that the candidate expanded or fabricated claims in their resume. The time for action against such fraud is in the candidate vetting process, where a thorough public records search, followed by discreet interviews, can ensure a candidate’s integrity and save your company significant public relations headaches.

June 2015

IN THIS ISSUE

— Mini-IPOs: Another Tool For Small Investors
— Buyer Beware: The Risks of Acquiring Shares in a Private Company

GREETINGS!

Welcome to the June edition of our newsletter! In this issue, we’ll examine how proposed “mini-IPOs” can be navigated, by both investors and the businesses seeking funds, to minimize risk.

MINI-IPOS: ANOTHER TOOL FOR SMALL INVESTORS

As we’ve previously discussed, in recent years various regulations and pieces of legislation have been enacted to create greater safeguards for small investors, while also attempting to create greater access to new opportunities. As alternative investment methods like crowdfunding have grown in popularity, regulators have responded with rules meant to help manage what can often be a “Wild West” frontier.

A recent proposal by the U.S. Securities and Exchange Commission would expand this approach to privately-held companies looking to sell their shares to the investing public — without fully going public on an exchange. These transactions, dubbed “mini-IPOs”, have yet to catch on — while 22,000 private companies sold shares to “accredited investors” last year, only seven filed the necessary paperwork, under Regulation A, to sell their shares on a more general basis.

BUYER BEWARE: THE RISKS OF ACQUIRING SHARES IN A PRIVATE COMPANY

What is an “accredited investor”? The general guideline is someone with annual income of $200,000 per year and investment assets of $1 million or more. The Regulation A rules to democratize access to private capital also mandated that companies looking to raise that capital must file an exhaustive offering statement, which investors would then be able to peruse (most likely with the aid of a financial adviser and possibly an attorney.) The SEC recently increased the amount of capital that can be raised under Regulation A transactions, from $5 million to $50 million, as an incentive to motivate more companies to file the offering statement.

Yet private companies contain significant risks, even when well documented up front. In our experience, some companies — even once taken public in a traditional manner — can be run like fiefdoms, with a strong chief executive (often the company’s founder) hand-picking executives without any regard for the capital of outside investors, treating the company as though it was still his own startup. While small investors are unlikely to retain due diligence consultants, financial advisers who think their clients would benefit from “mini-IPOs” might do well to have the principals researched before suggesting any such deal to their clients.

May 2015

IN THIS ISSUE

— Open Records Requests As a Research Tool
— The Growth of Open Records Coverage

GREETINGS!

Welcome to the May edition of our newsletter! In this issue, we’ll examine how changes in disclosure requirements can assist investigative efforts.

OPEN RECORDS REQUESTS AS A RESEARCH TOOL

Open records requests, both on the state and federal level, can be a powerful tool when a researcher seeks to learn the inner workings of a regulatory agency, or about a company or individual’s dealings with that agency. With some exceptions, correspondence between individuals, and about various topics, can often be obtained via these methods. These, in turn, can help a researcher understand why certain decisions were made, and who may have influenced those decisions.

Certain types of records are typically exempt from being requested, either on state or federal levels. These most often include an agency employee’s personnel records, as well as anything that could constitute a trade secret, or communications to which privilege has been attached. But official meeting logs, travel records, and other valuable data is generally available to be requested under the appropriate act.

THE GROWTH OF OPEN RECORDS COVERAGE

Recently, some entities which have typically been excluded from open records requests have, according to certain court rulings, been found to be subject to those requirements. A recent case in Ohio, where a student journalist sought arrest record information from campus police at a private Ohio college, is one example. The Ohio Supreme Court found that while the college was not a state entity, its campus police officers were certified by the state, and in a 4-3 ruling held that the campus police department is “performing function that is historically a government function.” Dissenting justices argued that the campus police department was not created by the Ohio legislature, and thus should not be subject to the statute, and the ramifications of the case beyond Ohio, if any, are unclear.

The case does demonstrate the popularity of using open records requests as a research tool, both in academia and the private sector. As a complement to traditional public records research, open records requests can add depth, context and potentially relevant details that might have otherwise been left undiscovered if the request had not been made.

April 2015

IN THIS ISSUE

— The Recent Rise In Accounting Fraud Cases And Why It Matters
— What Accounting Fraud Means To Your Company

GREETINGS!

Welcome to the April edition of our newsletter! In this issue, we’ll examine a recent trend that suggests accounting fraud is increasing, and look at what your company can do about it.

THE RECENT RISE IN ACCOUNTING FRAUD CASES AND WHY IT MATTERS

Accounting fraud is certainly not a new phenomenon, especially since the accounting scandals of the early 2000s ushered in the Sarbanes-Oxley regulatory regime. Yet more than a decade after those reforms were put into effect, recent studies have indicated that regulators are prosecuting more instances of accounting fraud — especially for lax internal controls at some publicly traded companies.

The increase in enforcement is due, in part, to a greater interest in such cases by officials at the U.S. Securities and Exchange Commission, but it appears that the agency may be reacting to the environment in which it regulates. An increase in the number of earnings restatements is one indicator that companies are having a difficult time complying with new reporting standards, or are not following them as stringently as regulators had hoped.

WHAT ACCOUNTING FRAUD MEANS TO YOUR COMPANY

Aside from civil enforcement penalties and possible criminal prosecution, internal control problems and material misstatements can harm your company in other ways. Enforcement inquiries — even those that may not lead to prosecutions — are fodder for securities trial attorneys upon which they can base civil shareholder derivative actions. Often involving dozens or hundreds of plaintiffs — each of whom is or was a shareholder of a company’s stock — these actions will use enforcement efforts as the basis for long, costly and sometimes complicated arguments about how certain actions taken by management diluted shareholder value. Defending your company against such efforts can drain legal budgets and create public relations headaches.

While vetting of such claims is one important step, an equally important and proactive approach is to review the internal controls in place at your company, and also to create increased awareness about disclosure required when merger or acquisition talks occur, as these discussions — when conducted in private and without appropriate disclosure thereafter — are a key point upon which plaintiffs attorneys try to make their case. By knowing the requirements and promoting program to follow them, your company can prevent arduous circumstances that could otherwise create difficulty.

March 2015

IN THIS ISSUE

— Affinity Fraud: Exploiting a Sense of Safety and Common Purpose
— Scrutinizing From Within: Tools to Fight Affinity Fraud

GREETINGS!

Welcome to the March edition of our newsletter! In this issue, we’ll examine the ways in which affinity fraud is perpetrated, and what you can do to help your clients avoid becoming victims.

AFFINITY FRAUD: EXPLOITING A SENSE OF SAFETY AND COMMON PURPOSE

Human beings naturally form groups, in part to help create order and security in a chaotic world. Whether a religious group, condominium association or alumni group, these groups can provide comfort to the afflicted, and help members feel a sense of common purpose and unity.

Yet these same enclaves can be easily exploited, either by outsiders or members of the community who see a desire to trust others as a weakness to be taken advantage of. Bernie Madoff was one such example, circulating among Jewish charities and civic-minded individuals, claiming to get them amazing returns — which would help their efforts further the good they could do — while secretly leaving certain members of these groups (and others) victimized by being at the end of the Ponzi scheme chain he had created,

SCRUTINIZING FROM WITHIN: TOOLS TO FIGHT AFFINITY FRAUD

Affinity fraud among such groups is a white-collar crime, driven as much (or more) by a desire for money as it is a need to obtain status within a given community. This type of fraud also preys upon the human instinct to most trust persons like ourselves, creating tunnel vision toward what is actually occurring. Some states have taken notice and are instituting proactive steps to help communities become aware of such frauds. Utah, which has a large Mormon (Latter-Day Saints) population, recently created white-collar fraud registry focusing on affinity fraud, so that consumers, and law enforcement, have a central resource for identifying the past patterns and practices of such convicted fraudsters, after they’ve depleted one geographical area’s resources and moved to another part of the state.

While such tools are useful, there are other efforts which can help protect you & your clients. If a client is approached about an investment opportunity requiring large sums of money, but is told that the adviser will “handle all of the details” and is not shown terms and conditions, that adviser may be running a scam. Checking complaints with state attorneys general, as well as FINRA (or other regulated industry) registration, as well as a subject’s litigation record, can help you identify whether an adviser has a history of defrauding the people who trust him the most.

February 2015

IN THIS ISSUE

— Shared Rewards, Uneven Risks? Conducting Business Under FCPA
— Doing the Right Homework: Researching Companies for FCPA Due Diligence

GREETINGS!

Welcome to the February edition of our newsletter! In this issue, we’ll examine what recent fines and other actions concerning U.S. Foreign Corrupt Practices Act (“FCPA”) violations could mean for you and your clients.

SHARED REWARDS, UNEVEN RISKS? CONDUCTING BUSINESS UNDER FCPA

Since its inception in the late 1970s, the FCPA has been meant to promote ethical conduct by U.S. businesses who work with overseas parties. Part of this process often necessitates U.S. firms researching the backgrounds of the individual operating the overseas parties, as well as the reputation, litigation history and other elements of the non-U.S. company itself.

Recent cases have shown the importance of that due diligence, which is often a combination of public records research, interviews with management (and former employees) and, often, a review of relevant books and records. The U.S. Securities and Exchange Commission recently levied a fine of more than $15 million against a major manufacturer for FCPA violations, stating in part that the company had failed to properly research suppliers it used in sub-Saharan Africa, who had received more than $3 million in payments from the U.S. company’s subsidiaries in the region.

DOING THE RIGHT HOMEWORK: RESEARCHING COMPANIES FOR FCPA DUE DILIGENCE

In that case, regulators said that when the U.S. company acquired one of the local African subsidiaries, it had failed to properly investigate the manner in which the subsidiary conducted business. One trait used by the subsidiary prior to the U.S. company acquiring it in 2007 was the giving of payments to local government officials, or of private companies, in order to obtain business. The U.S. company, which had obtained a minority interest in one of the African subsidiaries in 2002, did not put a stop to the practice until 2011 and fully divested itself of the subsidiary in 2013, according to regulators.

The opportunities for U.S.-based businesses outside of the country’s borders are vast, but so are the risks associated with them. By taking the time and effort to fully understand how an acquisition target operates, and by understanding the people who operate it, your clients can be better prepared to avoid risky transactions altogether, and to put in place the internal controls to manage difficult situations if they do arise.

January 2015

IN THIS ISSUE

— Disclosure and Civil Liberties: When Groups and Their Members Conflict
— Going Against Leadership: When a Group Defies Its Backers

GREETINGS!

Welcome to the January 2015 edition of our newsletter! In this issue, we’ll examine issues that can arise when a self-regulatory organization tries to enact new regulations upon its membership.

DISCLOSURE AND CIVIL LIBERTIES: WHEN GROUPS AND THEIR MEMBERS CONFLICT

Self-regulatory groups, assembled and funded by certain industries to police themselves (such as in finance or accounting) were generally in vogue until the mid-2000s, when the collapse of Enron led to questioning of such groups (and, in the case of accounting, led to creation of a federal oversight board.) The largest financial industry regulatory group, FINRA, recently proposed requiring registered broker-dealers to provide monthly reports detailing transaction information — including margin call information — as a means of identifying abusive practices before widespread or systemic harm can occur.

Many of the companies that make up FINRA’s membership have gone on record as opposing the plan, stating that it violates an investor’s civil liberties to have such details disclosed. The system, which uses the acronym CARDS, has been supported by consumer groups who are concerned that their constituencies often fall victim to investment fraud.

GOING AGAINST LEADERSHIP: WHEN A GROUP DEFIES ITS BACKERS

On its face, an observer would be forgiven for thinking that FINRA’s proposal would die a quiet death. After all, FINRA is funded solely by fees paid by broker-dealers and the firms that employ them, and in 2013 FINRA generated more than $450 million in program service revenue. Public comments from large institutional money managers like Fidelity (which participated in a pilot program to help FINRA refine the program’s specifications) reiterated opposition to the inclusion of “customer account level data,” and the American Civil Liberties Union also expressed its concerns. The public comment period closed at the end of 2014 and it remains to be seen how the final version of CARDS may differ from what was proposed, but the program itself is generally seen as a leap forward in disclosure for an organization that purges data about registrants after they are out of the system (i.e., unregistered) for two years.

As many advocates have noted, dishonest advisers (in any industry) rarely prey upon just one client, and the aggregation of trading data may help the regulator (and, if need be, law enforcement) identify bad actors and their frauds in something closer to real-time. It would appear that despite some opposition, the CARDS program is moving forward, and how it finally takes shape may be a statement on the tolerance level markets have for self-disclosure.

December 2014

IN THIS ISSUE

— New Year, New Problems: 2015’s Crystal Ball of Fraud
— Using Technology To Track Cyber-Criminals

GREETINGS!

Welcome to the December edition of our newsletter! In this issue, we’ll look at emerging trends in fraud activity as 2014 comes to a close.

NEW YEAR, NEW PROBLEMS: 2015’S CRYSTAL BALL OF FRAUD

2014 saw various computer-assisted fraud issues emerge, from the anonymity of networks like Tor (and the illicit transactions such a network can allow) to the rise, and perhaps the fall, of the quasi-currency Bitcoin. 2015 appears likely to continue a trend toward computing-dominated fraud perpetration — and an effort toward increased computer-assisted fraud prevention.

Along with data breaches at major banks and retailers, the use of increasingly complex data structures and systems to commit fraud was a major headline in 2014. While the sophistication of these networks poses a certain challenge to fraud investigators, the data often left behind during the transaction can present an opportunity to follow cyber-criminals and ultimately build a case against them using traditional fraud prosecution methods.

USING TECHNOLOGY TO TRACK CYBER-CRIMINALS

While cyber-thieves pride themselves on using devices and methods seemingly beyond the grasp of most traditional investigators, their pride in such efforts can be their undoing. Using a specific username while making a transaction from one Bitcoin wallet to another, for example, can be a way to unmask the parties involved — many people tend to adopt one (or at most a few) moniker in their online life, and that psychological tendency can trump technological anonymity if that person uses the same “handle” on social networking sites, chat rooms, and anywhere they might divulge valuable details about themselves.

While it is likely true that law enforcement and regulators cannot out-regulate human ingenuity, that same ingenuity can be used to find emerging threats, collect necessary evidence and bring those responsible to account. As threats evolve, so too do the methods of confronting them, and this is likely to be a growing trend not just in 2015 but for many years to come. Happy New Year!

November 2014

IN THIS ISSUE

— Seeking an Edge: Why Kickbacks Occur
— How to Identify Kickbacks and Other Illegal Schemes

GREETINGS!

Welcome to the November edition of our newsletter! In this issue, we’ll examine the potential for kickbacks and other preferential treatment to arise in today’s competitive business landscape.

SEEKING AN EDGE: WHY KICKBACKS OCCUR

Given the competitive nature of many businesses, whether selling products or services, vendors are looking for any way to distinguish themselves from their peers. Ideally, this distinction begins and ends with the ability and willingness to deliver a superior product in a timely manner. Yet all too often this mindset is not enough, and vendors eager to earn a potential client’s business entertain offering a key contact “sweeteners” — whether cash or other services — to close a deal.

The key employees who make business decisions, in turn, often feel empowered by that circumstance, and may demand various forms of kickbacks, whether payment of a child’s tuition, an automobile or a silent partner equity stake in the vendor company itself. Any of these examples would be considered a bribe or kickback, which could ultimately harm the client company and its reputation.

HOW TO IDENTIFY KICKBACKS AND OTHER ILLEGAL SCHEMES

When looking at a kickback scheme from the perspective of the management/employee who is dictating the terms, a financial analysis due diligence, supplemented by interviews, can be helpful. Has the person obtained a new sports car recently, or bragged to a co-worker about putting an addition onto their house? Leads from interviews, as well as from initial public record searches, can be fleshed out by looking at building permits, recent car registrations, and the like. Patterns of behavior, such as meeting a preferred vendor on a more frequent basis, can be determined by reviewing the employee’s e-mail, telephone records, and expense or travel reports. Also important are vacation and sick leave usage, which can suggest whether an employee was using this time to arrange meetings.

When looking into a vendor suspected of offering kickbacks, a public record search can be an instructive start. Have similar allegations surfaced in the past? Has the vendor been sued previously (or received complaints) for failing to deliver as promised? If so, this could be one indication that an understaffed vendor favored one client over another, which could indicate a time frame as to when a kickback scheme began. By looking at public records, including an asset profile or the vendor company and its principals, you can begin to determine whether any inappropriate behavior has transpired, and when comparing that information to records concerning a suspected employee, can begin to build a case concerning a kickback scheme.

October 2014

IN THIS ISSUE

— JOBS Act, Meant to Spur Investment, Also Created New Secrecy Layers
— Piecing Together Typical IPO Information Shielded by the JOBS Act

GREETINGS!

Welcome to the October edition of our newsletter! In this issue, we’ll examine how reporting provisions for initial public offerings (IPOs) of a certain size, part of a 2012 bill meant to encourage funding of smaller companies, can create information gathering hurdles for potential investors.

JOBS ACT, MEANT TO SPUR INVESTMENT, ALSO CREATED NEW SECRECY LAYERS

In early 2012, Congress passed the Jumpstart Our Businesses and Startups (JOBS) Act, which President Obama signed into law that April. The bill eased securities regulations, including allowing companies with less than $1 billion in annual revenue to be exempt from certain Sarbanes-Oxley requirements. More than two years after the bill became law, that provision — which allows companies under the threshold to file IPOs “confidentially,” meaning that the filing, and any correspondence about it, is not accessible to media outlets (or researchers) until the “roadshow” prior to the actual trading of the company’s stock. Further, companies only need to provide two years of financial statements, versus the typical three years.

The benefit for companies is obvious: they can “test the waters” to gauge interest in a filing, and quietly withdraw the registration if the response isn’t as good as hoped (which is in contrast to some high-profile IPOs which were withdrawn, in very public fashion, after failing to generate interest.) From a due diligence perspective, however, problems arise: while a supposedly ‘secret” IPO is unlikely to remain that way for long, the prospectuses and other information that it typically filed prior to an IPO adds valuable information for potential investors, including management’s assessment of the risks their company faces, as well as information about management executives themselves.

PIECING TOGETHER TYPICAL IPO INFORMATION SHIELDED BY THE JOBS ACT

Despite the secrecy created by JOBS Act provisions, certain records can be pieced together through other sources. Key management, for instance, is often listed in corporate records filed at the state level, and smaller businesses often report certain financial information to third parties, such as Dun & Bradstreet or Experian, to build a credit history. Companies that use collateral to borrow from banks typically submit Uniform Commercial code filings; while these don’t include the amount borrowed, they often include collateral that can tell you about the company’s assets and operations. News articles about the company expanding to new markets, opening new facilities or hiring new people can also help assess its ability to prosper going forward.

In short, certain parts of the JOBS Act spurred investment at the cost of transparency. While this can create new issues for a fraud examiner to overcome, it should not dissuade your clients from doing their homework prior to making a smaller investment in what could be the next big thing.

September 2014

IN THIS ISSUE

— Why Records Vanish
— How to Bring Old Information Back to Life

GREETINGS!

Welcome to the September edition of our newsletter! In this issue, we’ll examine the pitfalls of reduced record retention windows and look at ways to work around the problem.

WHY RECORDS VANISH

Shrinking budgets and increased case loads have strained the ability of county courts across the country to preserve the records of their activities. These records, which are vital in researching anyone, are increasingly stored in digital media and cloud servers, but often are purged from a court’s files altogether after a certain period. Each court’s policies can vary greatly, but some important examples include the U.S. Tax Court, which has begun destroying its older case files, leaving only the final disposition in the public case file. In other instances, a court system can purge copies of filings after as little as five years, while others will ship a case file from the courthouse to a centralized archive (thus taking more time to obtain) after as little as three years.

Regulatory agencies and self-regulatory groups are no exception to this practice. FINRA, for instance, will delete a broker-dealer’s records from its system after that person has been inactive for a period of two years. While some resources exist to view historical arbitration actions, older copies of broker-dealer reports are increasingly rare to obtain, which can leave a broker-dealer’s past unknown to anyone who did not have firsthand knowledge of it before.

HOW TO BRING OLD INFORMATION BACK TO LIFE

Whether a court record has been destroyed or expunged, or a regulatory agency record has been purged, there are other avenues of investigation. News articles may have details of incidents, and state regulatory agencies (such as for broker-dealers) can hold records that can fill in gaps found in other sources. state agencies, unlike self-regulatory organizations, are also subject to state open records requirements, whereas self-regulatory groups have no compelling reason to turn over records, and arbitration actions (where most details are likely to be found for a dispute) are confidential unless entered into evidence in another case. While obtaining information about older court cases that have been purged can be difficult, reported opinion databases on both the state and federal levels can help provide details that can be useful for later steps in reconstructing events, such as witness interviews.

The ravages of time are no different for documents than they are for people: circumstances change, and a seasoned investigator must be able to change with them. With some persistence and creativity, obtaining the facts of a case can be achieved even long after the case itself exists no longer.

August 2014

IN THIS ISSUE

— Lack of Accountability Regarding “Going Concern” Prompts Action
— What Going Concern Issues Mean for Your Clients

GREETINGS!

Welcome to the August edition of our newsletter! In this issue, we’ll examine newly announced rules regarding accountability for “going concern” statements, and look at why they were put in place.

LACK OF ACCOUNTABILITY REGARDING “GOING CONCERN” PROMPTS ACTION

The rule that executives must attest that their company is able to function as a “going concern,” first proposed within the Financial Accounting Standards Board in 2008, have been subject to one of the more drawn-out rulemaking processes of any proposed after the financial crisis. Prior to this proposal, disclosures about a company’s ability to continue operating were generally left to the company’s auditors.

The new rule would help standardize the largely voluntary (and thus haphazard in terms of quality) disclosure system, and put into place sanctions against anyone who willfully fails to disclose material information about a company’s ability to continue as a going concern. Corporate governance activists have been joined in their efforts by disillusioned investors, who said a lack of warning prior to the financial crisis attributed to their steep losses.

WHAT GOING CONCERN ISSUES MEAN FOR YOUR CLIENTS

The disclosure of material events that could prevent a company from continuing operations are a lagging indicator of trouble, not a leading one. While such disclosure rules are likely to deter fraud in some respects (knowing that penalties exist for failing to report the underlying conditions), the disclosures themselves may come too late to protect your clients and their assets. Reviewing other SEC disclosures — as well as news articles, litigation, and other public sources — before making an investment or conducting a transaction will provide a more accurate picture in “real-time” than waiting for a quarterly or annual disclosure filing to state what the problem was. If warranted, interviews with former employees could also help ascertain the potential depth of the risk posed by uncovered issues or actions.

While rulemaking helps protect investors, it also helps protect fraud perpetrators and the companies they work for, allowing them to claim that the events involved were disclosed at some point. Diligence is a more active pursuit, however, and should be practiced in advance of any such disclosure, to allow your clients to respond with the right amount of time to take appropriate actions.

July 2014

IN THIS ISSUE

— “Retaliation” Against Whistleblowers Raises Concerns
— How to Assist Whistleblowers In Assisting Your Investigation

GREETINGS!

Welcome to the July edition of our newsletter! in this issue, we’ll examine efforts to strengthen the whistleblower protections put in place in 2010, why advocates feel they need strengthening, and how to manage whistleblowers who can aid investigations.

“RETALIATION” AGAINST WHISTLEBLOWERS RAISES CONCERNS

When the Dodd-Frank financial industry reforms were signed into law in 2010, one provision was to create greater financial incentives for whistleblowers to come forward with information about fraud — and another provision was to put in place penalties for companies or executives that acted to discourage such behavior. While the former element is well underway, with tipsters receiving as much as 30 percent of any civil penalty paid as a result of their tips, the latter provision is still being bypassed, according to various advocacy groups.

Such groups point to reports — as yet unconfirmed — that some large multinational corporations have required employees to sign statements affirming that they would not report allegations of fraud uncovered at the company. Advocates have called for more stringent requirements concerning how employee confidentiality agreements must be worded, in order to preserve a whistleblower’s right to come forward.

HOW TO ASSIST WHISTLEBLOWERS IN ASSISTING YOUR INVESTIGATION

Tips can be a vital part of any investigation, whether an internal inquiry or acting as an outside consultant. While scrutiny of sources and information is as important as scrutiny of possible subjects of an investigation, certain steps can be taken to create a cooperative environment for obtaining information while maintaining impartiality during the investigation. For example, having a confidential source sign a nondisclosure agreement is always a good idea, and while an investigator can’t necessarily reciprocate by pledging not to share the information obtained (in the event it could lead to a criminal prosecution, for example), treating the source in a respectful manner and keeping the parties informed to a minimum of relevant parties will build trust.

As with any source of information, it is important to vet the source’s credibility as well as that of the information itself. But when properly handled and carefully scrutinized,a source’s information can prove to be an essential part of an investigation, provided that such sources feel able to share pertinent information.

June 2014

IN THIS ISSUE

— Risks Ahead: Assessing Companies Tainted by Corruption
— Deep Dives: Identifying Red Flags of Ongoing Corruption Risk

GREETINGS!

Welcome to the June edition of our newsletter! In this issue, we’ll examine the aspects of due diligence when considering the acquisition of a company with corruption or regulatory red flags in its past.

RISKS AHEAD: ASSESSING COMPANIES TAINTED BY CORRUPTION

For many years, standard operating procedure for mergers & acquisitions has been for an acquirer to quickly turn the other way if corrupt behavior, such as the bribery of regulators, was identified at a target company. Yet the increasingly globalized business world has made this a more challenging, and perhaps less black-and-white, proposition than it has been in years past.

While certain legal measures make sense in such scenarios — such as requiring the target company to have set aside a higher level of reserves and/or insurance in the event of future acts occurring — investigative due diligence is key to assessing whether the reward to the acquirer is worth the risk, should patterns of corruption continue to exist.

DEEP DIVES: IDENTIFYING RED FLAGS OF ONGOING CORRUPTION RISK

One reason such transactions occur at all is that the very notion of corruption varies from country to country. yet certain indicators often exist to suggest that something improper is occurring, whether previously identified by authorities or not. For example, does the business derive a disproportionate share of its revenue from government contracts, particularly one or two agencies? What are the backgrounds of the persons leading those agencies, and what ties might they have (or have had) to the company’s executives? If a single government agency is a large customer of the target company, that could indicate a pattern of corruption and favoritism, and also prove to be a deal deterrent, if that agency is responsible for a large share of the business’ revenue.

There will clearly be occasions where the risks will outweigh the potential rewards. But a holistic due diligence effort, using both public records and human intelligence, can help your clients ascertain and understand those risks well in advance of a proposed acquisition.

May 2014

IN THIS ISSUE

— Identifying Thieves in the Den: Increased Enforcement of AML Regulations
— Warning Signs of Money Laundering

GREETINGS!

Welcome to the May 2014 edition of our newsletter! In this issue, we’ll examine the reasons for increased scrutiny of anti-money laundering practices, and explore how your company can be better protected.

IDENTIFYING THIEVES IN THE DEN: INCREASED ENFORCEMENT OF AML REGULATIONS

As the economy has become increasingly globalized in the last few decades, the opportunities for fraud have grown with the opportunities for commerce. While traditional banking institutions have long been aware of the need for robust investigation of potential and existing customers, as rules concerning who could act as a banking institution became more liberal, the newly admitted players had to catch up. As brokerage firms joined their supposedly more staid banking cousins in providing more traditional financial services, new opportunities arose for fraudsters to exploit the nascent marketplace’s evolving controls.

While money laundering evokes popular images of mafiosi and drug cartels, it can often be used simply to evade taxation, or even as a device to hide assets in marital disputes. Certain brokerage firms have been investigated by the U.S. Securities and Exchange Commission, for example, when a client transferred funds to a holding company that was simply a shell operation. Others have used such accounts to hide proceeds from other schemes, such as a jeweler who attempted to keep his cash payment for goods from being taxed.

WARNING SIGNS OF MONEY LAUNDERING

Whether your client is a newer entrant into the banking sector of a long-established institution, certain red flags exist of which it is best to be aware. If a customer opens multiple accounts within a short time frame, either at the same institution or multiple institutions, this may be an indicator that the groundwork is being laid for fraud. Similarly, if a customer provides questionable identification (such as a driver’s license having a different amount of digits than those legitimately issued in a state), or has a record of employment or business that is inconsistent with the frequency or amounts of deposits made, illicit activity may be underway.

The best prevention for financial institutions is a multi-faceted investigative approach of public records research (to verify claims made and establish a financial profile of the customer), obtaining a credit report and, where possible, conducting interviews with the customer’s former employers, roommates, and other references, both provided by the customer and identified via research. Know your customer, and you will better know the risk to your business that can accompany its rewards.

April 2014

IN THIS ISSUE

— Proposed United Kingdom Company Registry Changes Could Increase Disclosure

GREETINGS!

Welcome to the April edition of our newsletter! In this issue, we’ll examine the potential ramifications of proposed changes to the United Kingdom’s corporate registry.

PROPOSED UNITED KINGDOM COMPANY REGISTRY CHANGES COULD INCREASE DISCLOSURE

In late April 2014 Vince Cable, the United Kingdom’s business secretary, announced legislation that would make public all beneficial owners of United Kingdom-registered companies; currently if an investor uses a company located elsewhere, such as in the Cayman Islands, to own a portion of a company, the true owners of that foreign company are not disclosed in United Kingdom records. If someone wanted to identify the owners of the foreign entity, they would have to search in that country’s records — typically somewhere that was opaque for a reason: to encourage investment and discourage disclosure.

The new legislation would counter that, theoretically making identification of true owners a much quicker and cost-effective proposition. Opponents have countered that the new regulations will drive down investment, but proponents claim that the rules will make it much harder for corrupt businesspersons and government officials to carry out their misdeeds, previously perpetrated across a web of shell companies. While it remains to be seen how thoroughly the new measures are implemented and enforced — let alone whether such trends are duplicated in other countries — these developments may make it easier for a business to know who they’re truly dealing with.

March 2014

IN THIS ISSUE

— New Scenarios Test Limits of FCPA
— Changing Rules For a Changing World

GREETINGS!

Welcome to the March edition of our newsletter! In this issue, we’ll examine a recent U.S. Justice Department determination concerning the Foreign Corrupt Practices Act, and what it could mean for transnational businesses of all kinds.

NEW SCENARIOS TEST LIMITS OF FCPA

While it is well-known that one of the main applications of the FCPA is to keep government officials from being corrupted by financial incentives from companies seeking their favor, that principle recently encountered an interesting test. In December 2011, a minority shareholder (also serving as chief executive officer) of a non-U.S. investment firm was named to a government post, regulating the investment banking industry, in the same country where the investment firm was based.

When the shareholder accepted the government agency position, he relinquished his executive roles with the investment bank, remaining only as a passive shareholder. While the company is not directly regulated the agency, the company has had a client relationship with that agency for more than 20 years. When the minority shareholder sought to sell his shares in the investment firm, a question was raised as to whether the transaction could be construed as an inducement by the company to obtain business from the now-agency official. The Justice Department found that it could not, given that the sale valuation was reached by an independent firm and, in the department’s words, “There is no indication of either party requesting a minimum or specific valuation from the Firm or attempting to improperly influence the valuation.”

CHANGING RULES FOR A CHANGING WORLD

Due to the potential red flags raised in the example above, winning approval for the transaction under FCPA guidelines took eight months to complete. While some questioned whether that effort was really necessary given that each firm’s advisers had conducted their own due diligence, the investment bank sought an FCPA ruling from the Justice Department. Perhaps this measure of precautionary effort is an indication of our increasingly global marketplace and the risks that may present themselves, requiring knowledge of ever-changing regulations — and of what constitutes a risk in the first place.

February 2014

IN THIS ISSUE

— Is Ignorance Bliss? New Study Reveals Less Than Half of Companies Perform Due Diligence
— Preventive Measures: The Benefits of Due Diligence

GREETINGS!

Welcome to the February edition of our newsletter! In this issue, we’ll examine a recent study about trends among end users of investigative due diligence — particularly why some potential users aren’t engaged in such research.

IS IGNORANCE BLISS? NEW STUDY REVEALS LESS THAN HALF OF COMPANIES PERFORM DUE DILIGENCE

The business news headlines paint a daunting picture: insider trading convictions, bribery scandals, accounting fraud on a nearly daily basis. Given this landscape, you might expect that corporate counsels and executives would bulk up fraud prevention efforts, rather than pay fines and handle embarrassing press coverage after a fraud is revealed by others. Yet a new study by consultancy AlixPartners LLP, which surveyed more than 250 general counsels at large companies, found that less than half — 43 percent — regularly performs due diligence before retaining third parties.

According to the study, the largest barriers to conduct routine due diligence were “staffing constraints” (which was attributed as a cause by 65 percent of respondents), which was tied with jurisdictional regulations and restrictions (particularly outside of the United States.) While 30 percent of respondents said they had ceased doing business with certain parties due to perceived risk, 70 percent of respondents said they had not made such an effort.

PREVENTIVE MEASURES: THE BENEFITS OF DUE DILIGENCE

Looking at the reasons listed by survey respondents, several possible remedies present themselves. Using outside consultants to conduct at least some investigative work eases staffing concerns, as well as lowering overhead expenses such as office space and health insurance. Jurisdictional issues abroad can be researched and explored by fraud investigators who have a strong network of experts are resources in other parts of the world. Curiously, the survey also found that only one-fifth of European respondents perceived risk in dealing with third parties, which was half the percentage (40 percent) reported by United States respondents.

The study illustrates the point that a global economy, where companies and countries are increasingly dependent on one another, requires increased risk prevention efforts and more comprehensive strategies. The alternative is to have regulators or law enforcement knock on the door and read about your company’s troubles in the morning newspaper.

January 2014

IN THIS ISSUE

— Expanding Markets, Expanding Risks: Doing Business Worldwide
— Protecting Your Company from FCPA Prosecutions Before They Happen

GREETINGS!

Welcome to the January edition of our newsletter! In this issue, we’ll examine how the Foreign Corrupt Practices Act (“FCPA”) can affect your business in an increasingly global marketplace.

EXPANDING MARKETS, EXPANDING RISKS: DOING BUSINESS WORLDWIDE

In the last 20 years, technological advances have changed the way commerce takes place: communication happens instantaneously in many parts of the world, and billions of people in Asia and Africa now have smartphones. As goods and services expand their reach into ever farther concerns of the world, the risks to businesses looking to work within those areas also rise.

For U.S, businesses, those risks occur mostly within the purview of the FCPA, which prosecutes U.S. companies for illegal and unethical business practices — principally bribery and other forms of influence peddling, such as favoritism toward a target’s family — conducted with officials of a foreign government. The number of FCPA prosecutions has risen steadily since the law’s last revisions in 2008, and the trend is predicted to continue well into the new year.

PROTECTING YOUR COMPANY FROM FCPA PROSECUTIONS BEFORE THEY HAPPEN

Given the increase in the statistical likelihood that your company could one day face an FCPA investigation, the best measures to take are proactive, preemptive ones: although the quality of public records varies in other countries when compared to those available in the U.S., researching the reputations of public officials with whom your company is likely to interact is a good way to start. If your company is looking to hire a local agent or broker to act as an intermediary, a thorough public records investigation should be supplemented with discreet interviews of past (and possibly current) clients, former colleagues at other positions, friends, relatives, and also local law enforcement (especially if any possible infractions, however seemingly minor, are found in the public records phase.)

Although there is much overlap between a typical due diligence assignment regarding a U.S. subject and one overseas, some unique skills are required to effectively conduct an FCPA-related due diligence. Chief among these is an understanding of the political and cultural dynamic within the country (and often the state/region within that country), which can be much less homogeneous than it is within developed nations. Local leaders act often in local interests, and in accordance with local mores and values. Using a researcher who has a basis of knowledge about the countries and regions in which your company may do business can help your company see and understand the risks before they have a chance to hurt your bottom line.

December 2013

IN THIS ISSUE

— Emerging Trends in Fraud Detection – and Perpetration
— New Regulatory Regimes May Cause Old Headaches in 2014

GREETINGS!

Welcome to the December 2013 edition of our newsletter! In this issue, we’ll look ahead to what 2014 is likely to bring in terms of new regulations and fraud trends, and explain what it might mean for you and your clients.

EMERGING TRENDS IN FRAUD DETECTION – AND PERPETRATION

As several new rules concerning financial markets take shape in 2014 — such as the crowdfunding proposal we discussed in a previous newsletter — new opportunities arise for the detection of fraud. Yet opportunities also exist — as in the nascent use of Bitcoin as a currency — to exploit existing systems even further as part of various fraud schemes. While tried and true methods will continue to garner headlines — such as insider trading, bribery of foreign officials, and procurement fraud — advances in technology and an ever-increasingly globalized marketplace will continue to create new frontiers in fraud.

One of the new technological arenas for fraud will be in mobile devices, as more users embrace smartphones, tablets and laptops. Security defenses against phishing and other identity theft scams (not to mention “skimming” of physical credit card data) cannot evolve as quickly as the ingenuity to create new and more impressive schemes, and as a result individual vigilance may be as important than technological sophistication, if not more so, in the years to come.

NEW REGULATORY REGIMES MAY CAUSE OLD HEADACHES IN 2014

Given that much of its implementation was stalled by political infighting in Washington, D.C., 2014 may be a year in which the U.S. Consumer Finance Protection Bureau (“CFPB”) comes into its own as a regulatory entity. This may mean increased scrutiny, and corresponding compliance pressures, for banks, mortgage underwriters and other lenders. While data analytics can help large firms identify troubling trends in the early stages, seasoned fraud examiners are needed to determine the culpability of individuals involved and to ensure that internal investigations, meant to promote cooperation with authorities and project competent oversight, are performed at the highest possible standard.

Threats exist everywhere, at all time, and in this respect 2014 will be no different from prior years. As law enforcement and regulatory officials gain new tools in their fight against fraud, you and your clients should also remain vigilant to emerging trends and be prepared to act when the need arises, if not sooner.

November 2013

IN THIS ISSUE

— Not-So-Sweet Charity: New Rules Could Affect Groups’ Activities and Fundraising
— Making Informed Donor Decisions: Steps to Remain Vigilant

GREETINGS!

Welcome to the November edition of our newsletter! In this issue, we’ll look at several trends, and new regulations, affecting charitable giving, and discuss some ways your clients can remain vigilant as they remain generous.

NOT-SO-SWEET CHARITY: NEW RULES COULD AFFECT GROUPS’ ACTIVITIES AND FUNDRAISING

As the year draws to a close and time is spent thinking of those less fortunate, many people reflect on their prosperity for this year by reaching out to help others. Most of us do this by supporting a local food bank or hospital, or a national group like the United Way. Many of these groups, especially larger ones, have often behaved in a manner befitting a for-profit company, differing chiefly in that their earnings are distributed to those in need, not shareholders. Like retailers, airlines and other industries, non-profit groups lobby politicians on issues of importance to their constituents. Some proposed new rules aimed at limiting the political influence of social welfare organizations, classified under Section 501(c)(4) of the tax code.

Despite the name of their category, in recent years many such groups have acted solely with the goal of disseminating information favored by their political allies, and attacking those on the opposite side (often while keeping the identities of their donors hidden.) Currently, the Internal Revenue Service conducts what it terms “fact-intensive inquiries” to determine if an entity is engaging in political activity outside of its social welfare scope, including holding town-hall style forums as well as buying advertising.

MAKING INFORMED DONOR DECISIONS: STEPS TO REMAIN VIGILANT

For prospective donors, the proposed new rules (if adopted as anything resembling their current form) will not change the fact that contributors to 501(c)(4) groups can choose to remain anonymous. But for wealthy donors who seek to be both socially conscious and politically active, the stain of an IRS inquiry into a group’s activities can bring unwanted attention. Although these new rules have yet to be put in force, requests can be made to determine if the Internal Revenue Service, state attorneys general or consumer protection agencies have looked into a group’s activities before a donation is made. Additionally, although pro-disclosure litigants file their claims bringing their agenda to the fore,a search of any such civil litigation could yield information that would be useful in making a decision. An experienced fraud examiner can help you and your clients navigate this information and assess if any reputational threat may exist before a donor decides to support a certain group.

The last half-decade has seen more than one seismic shift in how various groups can express political views, and the situation remains fluid enough that any assumption about the matter being settled in short order seems premature. Yet this climate does not need to inhibit your clients from supporting their favored causes, either monetarily or by joining a groups’ leadership. Given the sensitivity in many quarters to seemingly political activity by supposed social welfare groups, however, a proper due diligence effort can prepare your clients for any potential public relations blow-back and assist them in making an informed and reasoned decision.

October 2013

IN THIS ISSUE

— Bad Things Come in Small Packages: The Perils of Crowdfunding
— Is Three a Crowd? Crowdfunding, Investors and the SEC

GREETINGS!

Welcome to the October edition of our newsletter! In this issue, we’ll examine the processes (and lack thereof) regarding crowdfunding.

BAD THINGS COME IN SMALL PACKAGES: THE PERILS OF CROWDFUNDING

In recent years, as some traditional financing sources have struggled following the 2008 financial crisis, a more “open source” method known as crowdfunding — where companies can raise as much as $1 million via solicitations to multiple types of investors — has become increasingly popular. Yet this new method, driven primarily via companies like Kickstarter, poses challenges for both the companies raising money and the investors seeking to make investments.

Crowdfunding has been used to fund a wide variety of endeavors, from disaster relief to scientific research — both of which, it should be noted, are areas that can be ripe for fraudsters to prey on the hopes or sensitivities of investors. As traditional for-profit companies embrace crowdfunding as a tool, the same risks remain for investors: is the person or group developing this product or service legitimate? Have they had any failed ventures in the past, and have any past investors been stuck with significant losses? The addition of Internet-driven crowdfunding adds a new layer of accessibility to old models of private company fund-raising, which in turn can create more risk for fraud, not less. Similarly, companies seeking to raise capital must be diligent to make sure that investor funds are also legitimate, and not proceeds from illicit activity. The use of accepted banking methods can help deter this aspect of fraud (versus raising cash itself, as an entrepreneur might do among family and friends,) but basic diligence is still warranted to avoid the taint of having a disreputable person or group among your early investors.

IS THREE A CROWD? CROWDFUNDING, INVESTORS AND THE SEC

As part of the 2012 JOBS Act, the U.S,. Securities and Exchange Commission was tasked with developing reporting requirements for companies that raise funds via the relatively new crowdfunding method. Whereas privately-held companies are currently obligated to disclose little to no information about their revenues and other operational details, companies seeking to engage in crowdfunding would have to file reports that describe their business and what they intended to do with the raised funds, similar to offering documents for public companies. The proposed rule, submitted on October 23, 2013, remains open for comment for 90 days, meaning that final rules will arrive no earlier than January 2014, and possibly months after that date.

For a small company, or one seeking to grow, crowdfunding can be an attractive means of raising capital, and for investors looking to be part of something in the early stages, crowdfunding can present a vast array of new opportunities. But with all opportunities come risks, and through due diligence before investing funds — and during the process of raising such funds — can protect your client’s reputation, either as an investor or a nascent company.

September 2013

IN THIS ISSUE

— Scheme a Little Scheme: Types of Pension Fraud
— Warning Signs: How to Detect Pension Fraud

GREETINGS!

Welcome to the September edition of our newsletter! In this issue, we’ll examine methods of committing pension fraud, and recommend some tactics your firm can undertake to detect and prevent it.

SCHEME A LITTLE SCHEME: TYPES OF PENSION FRAUD

A pension plan, which can include defined benefit plans and other forms, is a useful tool for both employers (for whom matching contributions are typically tax-deductible) and employees (who also get a tax deduction and build retirement savings.) Yet such plans can also be abused, as recent details from the bankruptcy of Detroit, Michigan — where city officials issued an “extra” 13th check, in addition to the mandated monthly pension payments — demonstrate. The extra check scheme is estimated to have cost the now-bankrupt city more than $1.9 billion over a period of 23 years. In its bankruptcy petition, the city said its largest single liability was an unfunded pension liability of $3.5 billion.

Pension fraud can occur in multiple forms: contributions exceeding the stated limits for each plan, excessive loans to plan participants (most plan types cap loans at 50 percent of the assets held), or working with the plan administrator (often a third party, not an employer or their agents) to create phony expenses against the plan which are actually paid to the scheme participants.

WARNING SIGNS: HOW TO DETECT PENSION FRAUD

Most pension plans are required to file a Form 5500 return with the U.S. Internal Revenue Service (which developed the form with the U.S. Labor Department.) Structured much like a business tax return, the form discloses the number of participants, plan assets at the beginning and end of the year, as well as the aggregate amount of loans taken out by participants against their plan investments. If the loan figures or the plan expenses (also reported, again in an aggregate amount) seem unusually large relative to the plan assets — or if plan asset balances fluctuate greatly between the beginning and end of a year (without a known cause, such as widespread layoffs) — these may be indicators of pension fraud.

Companies of all sizes often have some measure of pension plan, a four-person plan for a dental office can be just as susceptible as a Fortune 500 company. If a routine review of the plan financials (such as when preparing the Form 5500, typically authorized by a chief financial officer or equivalent executive) uncovers indicators of irregularities, it is best to bring in a qualified fraud examiner to assist in identifying the patterns necessary to determine who perpetrated the fraud and how best to prevent it in the future.

August 2013

IN THIS ISSUE

— Flying Blind: The Perils of Lending in a Crisis
— Warning Signs: Red Flags Before and After a Loan is Made

GREETINGS!

Welcome to the August edition of our newsletter! In this issue, we’ll examine the role of due diligence in the lending process, whether that lender is a private entity, or the federal government.

FLYING BLIND: THE PERILS OF LENDING IN A CRISIS

Rahm Emmanuel, then the White House chief of staff, reportedly said in 2008 — as financial markets collapsed — that you should “never allow a crisis to go to waste.” Out of this sentiment was born a maze of bailout programs, meant to provide assistance to multiple facets of the American economy, from housing to the continued employment of police, firefighters and teachers. Yet Emmanuel’s maxim does not touch upon the waste created by these measures, some of which has been the product of fraud.

Take, for example, the case of Darryl Lane Woods, whose Mainstreet Bank (Ashland, Missouri) reportedly received $1 million in federal bailout funds from the U.S. Treasury. Within days, prosecutors alleged, Woods used more than $380,000 of those monies to buy himself waterfront Florida real estate. A short time ago, Woods entered a guilty plea after a successful investigation by the Special Inspector General for the TARP program.

WARNING SIGNS: RED FLAGS BEFORE AND AFTER A LOAN IS MADE

Whether the loan originates in the public or private sector, the risks to the lender remain the same. Prior to making a loan, even on an “emergency” basis, the lender should request detailed financial information from the borrower, and examine those records for any irregularities. Is the borrower extended financially beyond its means on a regular basis? has it defaulted on other loans in the past, and been the subject of multiple liens, judgments, or a bankruptcy proceeding? An affirmative answer to any of these questions, which an experienced fraud examiner can help your client determine, could be a sign that repayment may prove difficult if a loan is made.

After a loan is made, however, the dynamic changes somewhat, although the principle remains the same. Monthly or quarterly audits of a borrower’s income and operations will help a lender stay informed so that if fraud like the case detailed above does happen, protective or recovery measures can be taken quickly, not months or years later. Acting in a crisis can cloud a lender’s otherwise sound judgment, but whether in a crisis or not, thorough due diligence can inform decision-making that will cost far less at the outset than it would after a loss (or a fraud) has occurred.

July 2013

IN THIS ISSUE

— Scarcity, Security and Scams Can Lead to Scandal: How Commodities Fraud Works
— A Deal Too Good to be True: Spotting Commodities Fraud

GREETINGS!

Welcome to the July 2013 edition of our newsletter! In this issue, we’ll examine differing types of commodities fraud, and offer some examples of how to protect your clients.

SCARCITY, SECURITY AND SCAMS CAN LEAD TO SCANDAL: HOW COMMODITIES FRAUD WORKS

Commodities are in almost everything we consume today — smartphones, televisions, and, increasingly, headlines. As the U.S. Senate investigates whether large Wall Street firms were hoarding precious metals and other commodities — in moves meant to raise the market prices of the goods, such as aluminum or copper supplies — it is worth reviewing the more common type of manipulation, by which fraudsters target investors of all kinds with scams touting the “safe haven” aspect of such items.

Many people have seen advertisements, in both print and on television, offering to help customers invest in metals such as gold, either directly or via an exchange traded fund. Many of the advertisements use talk of federal government instability — rising taxes and government debt — as a reason to own metals, especially gold, that can be seen as a hedge against other investments which, the pitch goes, are more susceptible to the influence of bad decision-making, whether in Washington D.C. or worldwide. Many of these claims, in addition to stressing the safety of the investment, also boast of past returns well above average, and often above the historical trends of equity market indices.

A DEAL TOO GOOD TO BE TRUE: SPOTTING COMMODITIES FRAUD

Such fantastic returns are just that — fantastic and unreal. The signs of the commodities fraudster are similar to instances when we’ve investigated investment advisers for the sale of unregistered “penny stock” offerings to often unwitting clients: If the broker or firm offering to sell the metals (or fund backed by such metals) is not registered with the National Futures Association’s BASIC system (and is not regulated by its sister agency, the Commodities Futures Trading Commission), the absence of those professional bona fides should be a concern in itself. Scrutinizing the regulatory and administrative histories of registered professionals, as well as reviewing litigation records and other public sources, can help create a profile of the adviser’s trustworthiness before an investment is made.

Although these types of fraudsters often try to prey on older, potentially less sophisticated investors — a trait shared by many “pump and dump” stock operations — even high net worth, sophisticated investors have fallen victim to the high pressure tactics employed by some commodities scammers, including repeated telephone solicitations at odd hours. While the proper due diligence won’t keep them from badgering your clients until they succumb to a scam, confronting a fraudster with details of their checkered past could lead them to part with your client’s company, instead of with their money.

June 2013

IN THIS ISSUE

— Deep Connections Require a Deep Dive: Researching High Profile Executives
— Big Business, Big Issues: Red Flags to Consider in Vetting Executives

GREETINGS!

Welcome to the June 2013 edition of our newsletter! in this issue, we’ll examine the necessity of thorough investigation of high-profile executives and board members, and look at techniques to help accomplish this objective.

DEEP CONNECTIONS REQUIRE A DEEP DIVE: RESEARCHING HIGH PROFILE EXECUTIVES

While revolving doors between the political and business world are nothing new, a recent wave of retirements of high-profile politicians who have taken seats on corporate boards — such as Olympia Snowe (R-Maine), who joined the board of directors of investment firm T. Rowe Price — has highlighted the benefits of bringing a recently retired politician, or business executive, on board. Such high-profile subjects may be considered to be “open books” in the sense that their careers have been scrutinized during their prior positions of significant power — and even greater media exposure — yet problems can persist for companies which don’t do their homework.

Both politicians and business executives can present challenges. A former politician who served on the Senate Finance Committee, for instance, can certainly help open regulatory doors and develop business opportunities for a banking company on whose board they will sit after leaving office. It behooves that company to examine any campaign contributions their political action committees or employees may have made to the politician while in office, the actions taken by any lobbyists the company may have hired to advocate an agenda before the politician or their committee, as well as any legislation the politician may have sponsored that could be seen as favorable to the company while in office. Business journalists and others will be researching these avenues when someone who is high profile joins a new company, and that company should be prepared for whatever issues may be developed.

BIG BUSINESS, BIG ISSUES: RED FLAGS TO CONSIDER IN VETTING EXECUTIVES

Business executives can also present concerns, given their often equally high public profile, and there are several questions to ask before making such an appointment. What other affiliations have they had, and might those affiliations create areas of concern? How have their businesses fared while under their leadership? Have they had any personal or financial issues that could be fodder for negative publicity? Public records research, often supplemented by discreet interviews with former employees and perhaps adversaries, can help give your firm a fuller picture of an executive’s risk profile before making an appointment.

Vetting high-profile executives can involve challenges that don’t exist with middle management employees, especially given an elevated media profile and the prospect of being involved in copious amounts of litigation, however tangentially. A seasoned researcher can develop methods to identify the most significant “red flag” issues, such as conflicts of interest or financial stressors like bankruptcy. By making a determined effort to investigate a high-profile appointee using the same scrutiny as you would an adversary, issues that would be of great concern if first revealed by others can be better managed to help your firm benefit more from an appointment.

May 2013

IN THIS ISSUE

— Government Backed, But Still Problematic: Fraud in the Bond Market
— Checking All of the Details: Investigating Bond Sales

GREETINGS!

Welcome to the May edition of our newsletter! In this issue, we’ll examine instances of fraud in the municipal bond markets, often thought of as a safe place for investor funds, and detail methods that can help your clients avoid losses from such fraud.

GOVERNMENT BACKED, BUT STILL PROBLEMATIC: FRAUD IN THE BOND MARKET

Bond buying has been a staple of many investment portfolios for most of the last 70 years, and it’s easy to see why. After all, what could be less controversial than a municipality wanting to raise funds for water and sewer upgrades, or a professional sports stadium? (On second thought, that last example may stir up some controversy.) But the once-safe world of municipal bonds was shaken somewhat earlier this month by the U.S. Securities and Exchange Commission (“SEC.”)

In early May, the SEC sent a cease and desist letter to the city of Harrisburg, Pennsylvania — which also happens to be the seat of the state government — for making “misleading” statements not in investor materials about the bonds the city was selling, but in presentations about the securities in subsequent meetings about the city’s budget. Among the omissions cited by the SEC was Harrisburg’s outstanding debt having been downgraded by a ratings agency in 2008.

CHECKING ALL OF THE DETAILS: INVESTIGATING BOND SALES

When working for an investor who is considering a large purchase of government debt, it is essential not only to look at the quality (and accuracy) of the financial statements accompanying the offering, but also to examine the underwriters chosen by the municipality to assist in completing the sale. What ties do the underwriters have to the officials that hired them,. and could this indicate a laxity to the process that could endanger an investment at a later date? In past investigations, we’ve uncovered instances of nepotism and cronyism between underwriters and the communities they serve. Much of this information, as with the vetting of claims made in offering documents, is a matter of public record, but this can also be complemented (after that research is completed) by interviews with officials (likely former officials, in most cases) and perhaps whistle blowers who sense something is amiss.

Small purchasers of these securities are unlikely to feel compelled to hire an expert to perform this sort of research, but several not-for-profit agencies, university endowments, family trusts and other large investors routinely see municipal bonds as a safe place to grow their asset base, and as a hedge against traditionally volatile equity markets. Yet as the Harrisburg example may have shown, there are fewer safe havens today than in the past.

April 2013

IN THIS ISSUE

— Strategic Approach: Cooperation Versus Confrontation in FCPA Probes
— Turning Over Stones: A Holistic Approach to FCPA Cooperation

GREETINGS!

Welcome to the April edition of our newsletter! In this issue, we’ll examine how working with prosecutors can help your company through Foreign Corrupt Practices Act (“FCPA”) inquiries, and discuss some of the best avenues for cooperation.

STRATEGIC APPROACH: COOPERATION VERSUS CONFRONTATION IN FCPA PROBES

Investigations and prosecutions of U.S. companies under FCPA have risen in the last decade, and an increasingly global marketplace suggests that the proliferation of these efforts will continue. While the initial response of many accused companies has been (and still continues to be) to issue a press release stating that they will vigorously defend themselves against the charges, some are taking a more cooperative tone — and mitigating potential damage in the process.

Ralph Lauren Corp., for example, recently announced that it would pay more than $880,000 in criminal fines, plus forgoing more than $700,000 of profits obtained, prosecutors alleged, by the bribing of Argentinian customs officials. Ralph Lauren reportedly went further than the U.S. Securities and Exchange Commission (which brought the case with the U.S. Justice Department) sought in the non-prosecution agreements, voluntarily closing its Argentinian operations after the allegations came to light.

TURNING OVER STONES: A HOLISTIC APPROACH TO FCPA COOPERATION

Efforts to cooperate with FCPA will require levels of due diligence that may not have been undertaken prior to the questioned transaction. When dealing with current or former government officials in a foreign country, for example, a company’s principal concern is often what these people can do for them in-country. After allegations surface, however, the need to identify patterns and practices emerges. Has this person been accused of accepting bribes (or other corrupt activity) in the past? What is, and has been, his reputation? Coupling a public records-driven investigation with interviews and a review of internal controls and practices (to identify how widespread the alleged behavior may be) are critical steps every company should take, whether they choose to share that information or not.

Given the substantial cost of litigation involving witnesses and parties in multiple countries, fighting the good fight in a court — or courts — of law may not always be your company’s best option. A well-prepared investigation and set of recommendations for improvement of internal controls and practices can be extremely persuasive as part of trying to present your company in the best light to often zealous prosecutors.

March 2013

IN THIS ISSUE

— Like “Argo”, Minus the Hostage Rescue: Phony Film Crews and Other Scams
— Avoiding Guilt by Association With Rebate Scams

GREETINGS!

Welcome to the March edition of our newsletter! In this issue, we’ll examine various government rebate scams and discuss ways you can protect your clients from being tainted by association.

LIKE “ARGO”, MINUS THE HOSTAGE RESCUE: PHONY FILM CREWS AND OTHER SCAMS

As cash-strapped city governments have looked to leverage their locations for more revenue, allowing film crews to use famous locations within city limits has become a popular way of boosting both revenues and the local economy — even if, as this observer has noted, it meant a film crew using a snow machine in the midst of a cold and snowy Chicago winter. To attract television and film business, whose productions tend to be both capital and labor intensive, city governments often offer tax rebates that are typically dependent on the size of the production. But they don’t always check to make sure that $300 million blockbuster isn’t starring a B-list actor in a giant rat costume.

That type of scam, where phony (or nominally talented) film personnel concoct a story that professes to have a big budget behind it, take a tax rebate, then film a low-budget picture to “justify” the rebate check, may seem far-fetched, but it happens more than you might think. Five United Kingdom citizens were recently convicted on charges that they submitted GBP 2.78 million in valued-added tax rebates, successfully obtaining nearly GBP 600,000 for a film, “A Landscape of Lives,” that contained seven minutes of film, in the court’s words, of “unusable quality.”

AVOIDING GUILT BY ASSOCIATION WITH REBATE SCAMS

Film crews may be the more colorful type of rebate scam, but they’re hardly alone — any aspect of the economy where a government entity plays a role can be preyed upon. Landlords who provide affordable housing and receive rent subsidies, for example, or construction companies working on infrastructure projects, can each game the system to siphon off government funds for illegitimate purposes — and damage the reputations of the banks that lend them private funding, or the suppliers and vendors who believed a legitimate transaction was taking place.

If your client is working with a company that is receiving some form of government aid and suspect something is amiss, there are several steps an investigator can take. Open records requests for any permits or applications would provide information about the portrait the contractor provided to the government, which can be compared with the actual results of the project once undertaken. Most often, interviews of officials and reviews of court records (in the event that a discovered scam was not the subject’s first) will help assemble a pattern and practice that can help your client recover funds and maintain their credibility in the business community.

February 2013

IN THIS ISSUE

— Navigating a Global Economy: The Importance of FCPA Compliance
— Caution On All Sides: Risks for Participants — And Prosecutors

GREETINGS!

Welcome to the February 2013 edition of our newsletter! In this issue, we’ll examine best practices for Foreign Corrupt Practices Act investigations, and the potential downside if those practices aren’t properly executed.

NAVIGATING A GLOBAL ECONOMY: THE IMPORTANCE OF FCPA COMPLIANCE

Companies of all sizes conduct business internationally in today’s economy, certainly more so than even 30 years ago. While the globalization of trade has opened up markets to businesses, and offered goods and services to consumers who didn’t have access to them before, the differing laws, customs and social norms between countries can pose a serious risk to a company’s reputation and operations. For U.S. businesses conducting transactions overseas, much of this risk falls under the rubric of the FCPA.

There are several key questions to research (and perhaps ask for further details in pre-transaction interviews after that research is completed) when considering business with an overseas partner. What is their standing in the community? How did they attain it? How have they responded to competitive threats in the past? This is one point where cultural differences matter: the answers to these questions may be different for a Greek shipping tycoon operating a third-generation business than they will be for a former South African politician using his clout to start a new private equity fund. In order to assess each situation in its proper context, research must be conducted with an understanding of the current and historical political, social and economic events in the country where your firm hopes to do business, and examine your potential partner’s actions in that context.

CAUTION ON ALL SIDES: RISKS FOR PARTICIPANTS — AND PROSECUTORS

While good FCPA compliance practices can aid a business in preventing prosecutions, with proactive programs often persuading authorities to complete an inquiry without taking any action, occasionally the regulators themselves can go too far. This was the case with former Siemens executive Herbert Steffens, who was accused of orchestrating a bribery scheme to elicit favorable behavior from officials in Argentina. A federal court dismissed the U.S. Securities and Exchange Commission’s complaint against Steffens on the grounds that it was overly broad, asserting that regulators were suggesting that every employee of the German company who had knowledge of the scheme (or the falsified financial statements meant to cover up it existence) could be found liable under their reading of the FCPA. The court found that no such jurisdiction existed over Steffen in the United States, who was brought into the scheme solely for his purported connection to Argentine officials.

While this apparent regulatory overreach is a matter of legal interpretation, it raises an important point: whether working for a regulatory agency or the companies subject to them, it is essential to know your partners overseas on a holistic level, using thorough investigative techniques to foresee as many red flags as possible and information a business judgment before it is made, not after it is too late.

January 2013

IN THIS ISSUE

— A Stanford Effect? The Issues Raised in Review of Shareholder Suits
— Stanford Ruling Could Change Securities Fraud Landscape

GREETINGS!

Welcome to the January edition of our newsletter! In this issue, we’ll examine the issues involved in the R. Allen Stanford fraud case, which the U.S, Supreme Court has agreed to hear, and how their potential ruling could affect fraud investigations and shareholder suits.

A STANFORD EFFECT? THE ISSUES RAISED IN REVIEW OF SHAREHOLDER SUITS

Billionaire financier R. Allen Stanford, convicted in July 2012 of running a Ponzi scheme and sentenced to 110 years in prison, may yet have an impact on the court system that has sent him to prison for likely the rest of his life. As numerous defrauded investors flooded the courts with civil class action securities fraud suits, a U.S. Court of Appeals ruled that investors could sue law firms and insurers, after the investors argued that the firms were aware of in advance. Now, the U.S. Supreme Court will hear the law firms’ appeal of that ruling.

The most recent relevant preceding law was passed in 1998. Known as the U.S. Securities Litigation Uniform Standards Act, the law created different standards for the bringing of class action securities fraud suits, allowing suits alleging misrepresentations of “covered securities” to be removed to federal courts, not state courts. This ruling could potentially create further restrictions — or, at a minimum, insert clarity where some ambiguity currently exists — regarding the proper venue for securities class actions predicated on fraud.

STANFORD RULING COULD CHANGE SECURITIES FRAUD LANDSCAPE

Currently, there are very few exemptions to the 1998 Act, including one that allows securities class actions alleging fraud that are based on the state securities laws of where the defendant company is incorporated — but this is of less help against independent operators who are typically prominent in “pump and dump” schemes, and also of less help against corporations domiciled in states where securities laws are more favorable to the defendant than federal securities laws.

The court’s ruling could potentially create more exemptions from the 1998 Act, which would broaden the amount of shareholders able to bring actions regarding “covered securities”, but its equally as likely to create restrictions limiting what parties can be sued under securities fraud statutes. Given this latter possibility, counsel and their investigative teams need to tailor their work to respond to this changing environment. many of the usual steps – maintaining a chain of custody for documents, interviews, etc. — will still apply, but a sharpened focus will be required if fewer players are able to be the focus of an inquiry.

December 2012

IN THIS ISSUE

— Making Money From News: How Short-Sellers Operate
— Information Protects Against Information: How to Defend Against Short-Sellers

GREETINGS!

Welcome to the December 2012 edition of our newsletter! In this issue, we’ll examine how activist investors looking to change (or control) a public company’s leadership can use negative events or information to their advantage, and what your company can do about it.

MAKING MONEY FROM NEWS: HOW SHORT-SELLERS OPERATE

In addition to the traditional position of holding a public company’s stock for a long period of time in hopes for capital appreciation, investors can also “short” a stock — buying positions, using borrowed funds, that essentially bet that a stock’s price will decline to a certain percentage by a certain date. If the purchaser is correct, they can repay the loan and reap substantial profits — if the stock rises in value, the loan must still be repaid at the maturity date, which can lead the purchaser to take a substantial loss on the investment and force them to use other assets to repay the loan.

Investors who take short position can either be looking to make a quick profit and exit their position, or — as in more often the case in large institutional investors — a purchaser can attempt to use successful short positions to obtain oversize influence (often millions of shares) at a reasonable cost, thereby seeking to aggressively promote its proposals at shareholder meetings and often by obtaining board memberships and key committee assignments on that company’s board.

INFORMATION PROTECTS AGAINST INFORMATION: HOW TO DEFEND AGAINST SHORT-SELLERS

Short-sellers will often take their positions early in a negative event’s news cycle, betting that the market has yet to fully digest the severity of bad news — and that their short positions will grow as that process reaches fruition. The accounting scandals of the early 2000’s,. from Enron to Tyco, provided opportunities for short-sellers to profit handsomely. While many short-sellers rely on publicly available information, some use insider tips to fortify their predictions, while others have third parties disseminate negative (even blatantly false) information about a company or its executives to drive a stock price down.

What can be done to combat aggressive tactics by the holders of short positions? Since that market is more opaque than the market for long positions — and since many of the larger such investors operate entirely or in part via overseas tax havens with lax disclosure rules — tracing ownership can be difficult, but a tenacious researcher can assist your firm in identifying the parties operating the companies that make such purchases. From that point, due diligence profiles — focusing on prior litigation, regulatory actions, news articles, and previously disclosed positions, both short and long — can help identify conflicts of interest, adverse events and other items that can help your firm prevail in the court of public opinion, and hopefully mitigate any damages short-sellers might be able to inflict.

November 2012

IN THIS ISSUE

— Who You Know: The Importance of Relationships in Fraud Investigations
— Digging Through The Past: Finding Lower-Profile Relationships

GREETINGS!

Welcome to the November 2012 edition of our newsletter! In this issue, we’ll examine how various networks and interconnections between parties can be an important component of investigating fraud.

WHO YOU KNOW: THE IMPORTANCE OF RELATIONSHIPS IN FRAUD INVESTIGATIONS

Every fraud investigation – from a gas station’s employee embezzlement to a multi-billion dollar revenue recognition scheme — shares one key component: people are behind each and every case. To paraphrase Barbara Streisand, these are people who know people, and often who they know can have a direct correlation to their activities — both benign and fraudulent.

Whether high school classmates, fellow United Way volunteers, yacht club members or former co-workers, relationships between parties can help identify avenues for fraud, and sometimes help explain such behavior. Government regulators have taken notice; the U.S. Securities and Exchange Commission recently charged four individuals in an insider trading ring originating in New Jersey; one of the people trading on the alleged inside information was a social acquaintance of the purported tipster employee, and another trader was a former high school friend of the first trader. these kinds of connections are not often identified via public company filings, and fleshing them out often takes a different method of inquiry.

DIGGING THROUGH THE PAST: FINDING LOWER-PROFILE RELATIONSHIPS

Relationships like high school classmates tend to be somewhat under the radar, especially as time passes from when two people graduated together. But that doesn’t mean they’re impossible to discern. Alumni networking web sites have made it easier, if still somewhat time consuming, to identify high school or college classmate lists (on-site visits to browse yearbooks may never go out of fashion, unless yearbooks do), which can then be cross-checked with disclosed transactions such as trading records, vendor receivables, or whatever fraud the particular case entails. Other avenues for networking include social welfare organizations — while only top leadership are listed on a group’s Form 990, donors and volunteers are often identifiable in local or national organization newsletters or media articles highlighting a group’s efforts. In one past instance, we learned that several company executives suspected of colluding had each been named to the board of a large non-profit within a year or each other — with one subject’s company becoming one of the charity’s top five vendors shortly thereafter. These kinds of connections not only provide a patina of service and community involvement to the subjects, but also are a convenient avenue for discussing potential fraudulent schemes away from the subject of the possible fraud.

Social networking sites, corporate records and news articles can also help identify relationships that may serve as an important subtext to a fraud investigation, and can also create predication for requesting certain records, such as a group’s meeting minutes, once an inquiry is underway. These steps can help reveal connections that the parties would have otherwise preferred to keep from view – superficially positive relationships that can be abused as a back channel for committing fraud.

October 2012

IN THIS ISSUE

— Outside Directors, Insider Trading: The Need for Independence
— Admission Testing: Performing Due Diligence Before Opening the Boardroom Suite

GREETINGS!

Welcome to the October 2012 edition of our newsletter! In this issue, we’ll examine how conflicts of interest among a company’s audit committee members can cause enforcement concerns, look at what the U.S. Securities and exchange Commission is doing about it, and what your clients can do about it as well.

OUTSIDE DIRECTORS, INSIDER TRADING: THE NEED FOR INDEPENDENCE

The recent sentencing of former Goldman Sachs Managing Director Rajat Gupta to two years in federal prison for insider trading made headlines for a variety of reasons, but one of the key elements of the case is somewhat lesser known: Gupta was also a non-executive, or outside, director at several large publicly-traded companies, including Procter & Gamble and American Airlines. While the criminal case against him centered on inside information obtained concerning the investment made by another publicly-traded company, Berkshire Hathaway, in Goldman Sachs, Gupta was also alleged to have tipped Raj Rajartanam of galleon Group off to information gleaned from some of his outside directorship conference calls. Gupta’s place of trust in some of the nation’s most powerful boardrooms afforded him access to executives and information which, if used to influence trading decisions, could reap recipients millions in profits.

Gupta served at various times on the audit committees of Goldman Sachs, American Airlines’ parent holding company AMR Corp. and Procter & Gamble. While the trust placed in all directors and their committee appointments — whether to the compensation or nominating committees, for instance — is essential, the function of the audit committee is critically important in combating fraud and ensuring accuracy in financial statements. In a 2003 rule following the enactment of Sarbanes-Oxley, the SEC said: “Effective oversight of the financial reporting process is fundamental to preserving the integrity of our markets. The board of directors, elected by and accountable to shareholders, is the focal point of the corporate governance system. The audit committee, composed of members of the board of directors, plays a critical role in providing oversight over and serving as a check and balance on a company’s financial reporting system. The audit committee provides independent review and oversight of a company’s financial reporting processes, internal controls and independent auditors. It provides a forum separate from management in which auditors and other interested parties can candidly discuss concerns. ” when that candor is compromised and used for outside material gain, the ability to trust a company’s financial statements is also tarnished.

ADMISSION TESTING: PERFORMING DUE DILIGENCE BEFORE OPENING THE BOARDROOM SUITE

The downside risk of not vetting director candidates (especially on the audit committee, but also elsewhere) becomes obvious in instances like the Gupta matter. But what can corporations do to protect themselves? A thorough investigation of the public record, including any history of regulatory discipline or litigation, should be conducted, followed by efforts at interviewing former colleagues and subordinates to help follow any leads a public records investigation would produce. Federal and state regulatory agencies would also likely provide immensely helpful material via state open records act requests or those made under the federal Freedom of Information Act.

Due diligence is about risk management, not risk abatement. But casting a skeptical eye toward a prospective board member before placing that person in a position of trust and power can pay huge dividends for a corporation’s counsel and executives — as well as providing a sense of stability and security for its customers and shareholders.

September 2012

IN THIS ISSUE

— Turning Hot Tips to Cash: Law Enforcement’s Increased Use of Tipsters
— A Fine Line: Corporate Challenges in Protecting Whistleblowers and Companies

GREETINGS!

Welcome to the September edition of our newsletter! In this issue, we’ll examine the effect of recently enacted whistleblower regulations, and look at the opportunity for rooting out fraud that is accompanied by the risks posed by tipsters who may have had an active role in frauds which they are now seeking to expose.

TURNING HOT TIPS TO CASH: LAW ENFORCEMENT’S INCREASED USE OF TIPSTERS

Tips from current or former employees have long been a leading source of predication for successful fraud investigations, and after both the accounting scandals of 2001-2002 and the financial collapse of 2007-2008, increased protections for whistleblowers were one feature of resulting reform legislation. While important, news-making tips generate great publicity for law enforcement agencies, risks exist both for those agencies and the companies which they are seeking to regulate.

Those risks and rewards came into focus earlier this month, when the U.S. Internal Revenue Service awarded former UBS banker Bradley C. Birkenfeld $104 million for helping the agency understand the Swiss bank’s efforts to aid its clients in evading billions of dollars in taxes. While Birkenfeld’s knowledge and information was reportedly essential in the case generating $5 billion in new revenue from UBS customers who had previously evaded taxation, Birkenfeld was hardly the conventional image of a concerned whistleblower who knew what was going on around him was wrong, such as Enron Corp.’s Sherron Watkins. Rather, Birkenfeld was described as having actively conspired in the fraudulent scheme, and served 2 1/2 years in federal prison as part of a plea agreement before receiving his reward.

A FINE LINE: CORPORATE CHALLENGES IN PROTECTING WHISTLEBLOWERS AND COMPANIES

Reports said Birkenfeld’s decision to come forward was motivated in part by a law requiring the IRS to pay informants at least 15 percent of any civil penalties received as the result of an investigation fostered by their tips. But such large rewards can create conflicts which can complicate those investigations — in Birkenfeld’s case, for instance, he aided a California real estate developer in hiding $200 million in offshore accounts. Was his willingness to cooperate motivated not only by possible financial gain but also the desire to make his illegal activity look smaller in comparison to that of his superiors?

Such concerns can present an opportunity for companies seeking to defend themselves against charges of fraud in which a whistleblower’s information plays a role. By carefully cataloging a whistleblower’s circumstance — including documenting any financial stressors that may also motivate a desire to earn a significant monetary reward — an investigator can add context to a whistleblower’s side of the story, and perhaps help mitigate some of the public relations damage that can occur from such claims being raised.

August 2012

IN THIS ISSUE

— Secretive No More: The Pros and Cons of Marketing Hedge Funds to a Broader Public
— Risks to Hedge Funds of Broader Appeal

Welcome to the August edition of our newsletter! In this issue, we’ll examine how the SEC’s recently proposed regulation concerning the marketing of hedge funds could affect that industry and its disclosure practices.

SECRETIVE NO MORE: THE PROS AND CONS OF MARKETING HEDGE FUNDS TO A BROADER PUBLIC

Hedge funds have often been portrayed as financial tools largely inaccessible to the broader public – a perception which has been bolstered by prohibitions against their marketing to individual investors in the same way mutual funds do, a rule set in place by the 1933 Securities Act. But a provision in the recently enacted JOBS Act would allow hedge funds to discuss their investment strategy and past performance in marketing materials with investors directly. This presents an opportunity for the hedge fund — a pool of heretofore uninvolved investors — but also risks for both the funds and their would-be clients.

The risks are not equal, in theory, but are equally important: for an investor who thinks investing a $2 million inheritance with a hedge fund is a good idea, information is available but it is limited relative to information available on mutual funds or broker-dealers. The SEC’s Investment Adviser Public Disclosure System and the National Futures Association’s BASIC system each provide information on hedge funds or their managers, and both sources include references to any arbitration awards against the firm or other regulatory actions. But neither can be used to independently verify claims of past performance, so for a new customer the burden of due diligence can be daunting, and a full spectrum of litigation searches, reputational interviews and other methods is warranted before making an investment decision.

RISKS TO HEDGE FUNDS OF BROADER APPEAL

While the new proposal, if enacted, would create a level of due diligence for any investor who previously had not dealt with hedge funds, there is a defensive incentive for hedge funds to do their homework as well. The guilt by association of being a conduit for the next Bernard Madoff or other schemers of his ilk can have lasting negative effects — especially damaging in a time when a fund that was not previously able to market to “everyday” investors had just begun to do so. The current system necessitates go-betweens who solicit clients for hedge funds and, to some degree, also vet those potential clients for the funds. If that layer of protection is removed, it would become the fund’s responsibility to make sure — to the fullest extent possible — that it would not suddenly become an unwitting accessory to fraud simply by accepting a client’s funds.

The proposed rule would create opportunities for both parties involved in an investment transaction, and could add liquidity and capital into funds that hadn’t existed previously. But it will also undoubtedly create the need for more attorneys and fraud examiners to thoroughly ascertain the risks posed by and for each side of the transaction. This could ultimately increase compliance costs, but may prove beneficial if the broader investment community gains exposure to, and benefits from, access to pooled fund operators like hedge funds.

July 2012

IN THIS ISSUE

— Running in Place: The Impact of Delayed Dodd-Frank Implementation on Fighting Fraud
— Prevention is the Best Medicine: Why it Doesn’t Pay to Wait For Regulators

GREETINGS!

Welcome to the July 2012 edition of our newsletter! In this issue, we’ll examine how companies seeking to prevent fraud can fill in the as-yet unimplemented pieces of the Dodd-Frank financial reform bill, which remains largely unenforced two years after its passage.

RUNNING IN PLACE: THE IMPACT OF DELAYED DODD-FRANK IMPLEMENTATION ON FIGHTING FRAUD

Since the passage of the Dodd-Frank financial reform bill in mid-2010, lobbyists have been working furiously to influence, or totally mitigate, the impact of its proposed reforms on the regulatory level, where the “nitty gritty” of the rules, versus the broader principles actually drafted into the bill itself, will be written. One estimate said that after nearly two years, as much as two-thirds of the bill’s provisions remains stalled, awaiting final regulatory approval. While many of these provisions concern how to buffer financial institutions from the effects of traumatic events — by requiring larger capital cushions, for instance — some of the measures relate to fraud-fighting efforts.

Some of those measures are already in place, like a whistle-blower program put in place by the Securities and Exchange Commission that mirrors the False Claims Act system in federal courts, where a whistle-blower can receive up to 30 percent of a fine or penalty as a reward for their tip leading to successful enforcement of a fraud matter. The office, which is actually called the Office of the Whistleblower, opened in May 2011 and fielded 900 calls from the public during the rest of its fiscal year, through September 2011, receiving 334 actual tips to investigate.

Yet the regulation of fraud concerning one of the industries that led to the financial collapse of 2007-2008 — derivatives and swaps — remains mired in regulatory limbo, with the SEC and Commodities futures Trading Commission exchanging proposals concerning how to regulate this vital, and potentially still toxic, area of finance as late as last month.

PREVENTION IS THE BEST MEDICINE: WHY IT DOESN’T PAY TO WAIT FOR REGULATORS

As the financial reform bill churns its way through a regulatory and enforcement process that can border on tedium, companies and their clients should be proactive in ensuring that their internal controls and fraud prevention efforts will make government enforcement efforts a moot point. Financial services firms — which have contributed more than $450 million to the SEC’s restitution fund created by the Dodd-Frank bill to compensate victims of financial fraud — have a vested interest in being a firewall between fraudsters and government enforcement agencies. Regularly scheduled internal audits and proactive use of fraud examiners in both internal and external capacities can help to lessen the impact of these regulations, however (and whenever) they finally take shape.

The liability to companies via the civil court system, in many instances, can dwarf even the largest penalties the government can conceive. By maintaining a watchful eye on a company’s directors and senior management, as well as maintaining an effective hotline and culture where potential fraudsters feel as though they’ll be caught, companies both large and small can assert their ability to police themselves more vigorously — and in a less costly manner — than even the most far-reaching regulatory measures could possibly accomplish.

June 2012

IN THIS ISSUE

— Microcap, Macro Hype: The Allure of Penny Stocks and Shell Companies
— Managing in an Ocean of Risk: Diligence and Vigilance in Penny Stocks

GREETINGS!

Welcome to the June edition of our newsletter! In this issue, we’ll examine the role shell companies play in promoting “penny stock” listings used in “pump and dump” schemes to bilk investors, and how you can protect your clients from such schemes.

MICROCAP, MACRO HYPE: THE ALLURE OF PENNY STOCKS AND SHELL COMPANIES

The “get rich quick scheme” has in all likelihood existed since well before the advent of currency. Somewhat perversely, these schemes tend to flourish more in difficult times than in opulent times, and as with any economic downturn, the so-called great recession dating from 2007 has seen its share of promoters seeking to cash in on investors’ desire — sometimes, the simple need — to make money more quickly than logic would normally allow.

Into this void of uncertainty promoters step, “sure thing” in hand, ready to promise extraordinary returns in exchange for upfront capital, usually with a minimum amount in six figures. Although some of these companies — with potentially profitable but unproven ideas, like extracting and transporting liquefied natural gas from the farthest reaches of Africa — are listed on major exchanges, most lurk in the “over the counter” bulletin board markets. Although required to file disclosures with the U.S. Securities and Exchange Commission like other public companies, over the counter “microcap” companies exist in a fast-paced, often speculative frontier that entails far more risk than even the newest Nasdaq technology offering.

MANAGING IN AN OCEAN OF RISK: DILIGENCE AND VIGILANCE IN PENNY STOCKS

Such “microcap” stocks are often prey to — and sometimes complicit in — so-called “pump and dump” schemes, where a stock promoter buys thousands or millions of shares for pennies per share, then unleashes an army of cold callers to promote the stock, solicit new investments, and also distribute information — true or not, often the latter — meant to advance their agenda, using positive information to drive the price up if they own the shares, negative information to do the opposite if they’re shorting the stock. One key component of these schemes is the use of shell companies — “empty” holding companies that can be used to obscure the identity of the true owner of a stock’s shares — and thus to hide the owner’s true motivations. The SEC recently halted trading in such shell companies in the fear that the companies could be used to “hijack” investor capital. This often happens when the target investment, struggling to raise working capital, looks to the promoter for a loan – typically provided at exorbitant rates. If the company succeeds, the promoter profits as the stock increases in value, and as the loan is repaid; if the investment fails, the promoter collects on the loan and whatever collateral was promised in the event of default.

How can you protect your clients from falling victim to these schemes? Generally speaking, if someone is promoting a given stock aggressively, there’s a reason they need to raise capital so desperately — that alone should be a sign. But if the allure of promised returns proves too much to resist for your clients, thorough due diligence is key to warn them of pitfalls ahead (whether they heed that warning or not.) Looking at the backgrounds of a firm and its principals — including regulatory and litigation histories, media citations and stock-trader chatter — are all key components to assessing the risk in a venture few people are likely aware of and for which significant questions may exist.

May 2012

IN THIS ISSUE

— Lies, Damn Lies and Curriculum Vitaes: Why We Verify
— Know Thyself: Investigating Potential Hires as if They Were Adversaries

GREETINGS!

Welcome to the May 2012 edition of our newsletter! In this issue, we’ll examine why vetting of employees should be a crucial part of any hiring process.

LIES, DAMN LIES AND CURRICULUM VITAES: WHY WE VERIFY

Trust is an essential part of any employer-employee relationship, and it has been an overabundance of trust that most often leads to trouble for a company. The recent case of Yahoo!’s Scott Thompson — who lied about receiving a computer science degree as an undergraduate, when in fact, he did not — demonstrates the negative consequences inadequate vetting can have. Not only did Thompson resign after four months in the top spot, but the director who headed the search committee also quit and, perhaps most difficult for Yahoo! management, the activist investor who argued for Thompson’s dismissal because of the resume lie gained three seats on the company’s board.

With such tactics becoming much more common among activist investors — who need only a minority stake to bring proposals to a company’s shareholders for a vote — the best defense for a company’s management or board is a good offense. Solid vetting techniques should not just include calling someone’s listed references, especially for those in management roles, but a thorough dissection of every claimed affiliation, certification or educational degree, as well as interviews with former employees and perhaps even competitors.

KNOW THYSELF: INVESTIGATING POTENTIAL HIRES AS IF THEY WERE ADVERSARIES

Once someone is hired, they’re on the team. Until that time, however, the best practice for any company is to be skeptical of every claim made by a potential hire, until they are fully vetted. It has become routine in our work to find that someone claimed to have a Master’s degree from an institution, when only receiving a Bachelor’s degree, as well as to claim membership in trade organizations (such as an engineering society) in which they have not actually participated. The same holds true for professional licensing — with rare exceptions, for someone in a licensed profession to claim that credential, they must continually renew that license and meet continuing education requirements.

While database research is a key component, interviews are also an important part of the vetting process. Human intelligence can add depth and perspective that a public records research effort may not be able to provide, giving insight into a potential hire’s management skills and personality — including whether they’re prone to embellish or fabricate information about themselves.

As the Yahoo! case has shown, the damage to a company for failing to properly vet candidates can extend well beyond the public relations arena and become an issue in the boardroom itself. Allowing outsiders to gain license to alter the composition of your company’s board due to someone else’s inaccuracy could doom a company — whether the person intentionally lied or was mistaken about information is moot once it becomes a tool for opposing interest to use against a company. In this instance, the adage that an ounce of prevention is better than a pound of the cure has seldom been more true. A seasoned fraud examiner can assist you in preventing an error or omission from placing your company’s direction at risk.

April 2012

IN THIS ISSUE

— No Good Deed Goes Unpunished: Why Vetting Donors Matters
— Setting Limits and Digging Deep: How to Investigate Donors

GREETINGS!

Welcome to the April edition of our newsletter! In this issue, we;ll examine the perils of failing to vet donors and supporters as you might an adversary party, and also look at methods to strengthen the due diligence effort so as to mitigate risk and unwelcome surprises.

NO GOOD DEED GOES UNPUNISHED: WHY VETTING DONORS MATTERS

Nearly every business in every industry, at some point, relies on the support of others — whether a bank loan officer providing credit to a small business or a supplier assuring an anxious owner that a needed shipment will arrive on time. While any such transaction carries a modicum of risk, the difficulties of not fully knowing the party on the other end of a transaction are enhanced when the support is a more public matter, such as a large charitable donation to a university or philanthropic cause, or a sizable donation to a political organization or civic group.

Many such transactions are consummated with nary an eyebrow being raised to question the source of the donation, but missteps in the process of handling donations, while relatively rare (compared to the sheer number of donations overall) are high-profile incidents, the tenor of which can cause long-lasting negative public relations effects if the situation is not detected first on a private basis, and also if not handled sufficiently once in the public sphere. The recent case of John Mazzuto, who had contributed $1.7 million worth of shares in a company that he victimized in a “pump and dump” scheme to Yale University, his alma mater — only to have the school settle with the now-bankrupt company for $1 million — illustrates the financial damage of not doing homework on donors. After Mazzuto was charged, a Yale publication noted that vetting done by the school’s fundraising office focused not on a donor’s background but on their ability to contribute.

SETTING LIMITS AND DIGGING DEEP: HOW TO INVESTIGATE DONORS

When considering donor due diligence, one of the more difficult tasks for an organization is simply to have the desire to ask difficult questions of persons or group which have been an ally, or are perceived as being one in the future. An independent fraud examiner can be key to overcoming the coziness that can exist between an entity and those who support it; to be effective, every due diligence assignment must be thoroughly and impartially undertaken, with no “blind spots” existing because of prior or current relationships between parties.

One measure of difficulty for an organization is to understand that while donor research is generally defensive in nature — it doesn’t generate financial gain — the value of the public image protection it can provide is nearly priceless, and even returning tainted donations after the fact has a positive spin, as Sen. John McCain found in 2006 after returning $20,000 contributed by the families of Sam and Charles Wyly, who were under investigation by the U.S. Securities and Exchange Commission at the time. While not every donor to a given cause can be vetted, setting a threshold for the top tiers of donors and making due diligence on them a regular part of an organization’s duties in the fundraising process can pay significant long-term dividends in terms of positive opinion and the prevention of possibly devastating opinion that can be unleashed when a group is tied — fairly or not — to a supporter whose dealings in other areas were questionable or fraudulent.

March 2012

IN THIS ISSUE

— Investigating Experts: When a Wealth of Experience Becomes a Treasure Trove of Evidence
— Digging Into the Details: Research Techniques for Investigating Experts

GREETINGS!

Welcome to the March 2012 edition of our newsletter! In this issue, we’ll examine how to investigate the backgrounds of expert witnesses in order to identify possible conflicts of interest or other deficiencies prior to their testimony.

INVESTIGATING EXPERTS: WHEN A WEALTH OF EXPERIENCE BECOMES A TREASURE TROVE OF EVIDENCE

Expert witnesses serve an essential role in American jurisprudence: they are not called upon by the respective sides to be fierce partisans in favor of a position, but instead to be seasoned and experienced professionals in a given field — anything from carpentry to ballistics — to provide analysis that, while provided through an impartial lens, is meant to add heft to the argument of the side for whom they are retained, As an investigator, while an expert’s experience can be credible and their testimony worthy, there are myriad ways in which the objective nature of such testimony can be called into question.

The motivations of an expert in offering to provide testimony can vary, and financial gain isn’t always a direct motivating factor. A successful orthopedic surgeon can,. for instance, testify about how someone may have sustained a back injury, and be doing so not for remuneration but to draw attention to a field of study he feels is under-appreciated. Other professionals complement their traditional lines of business, whether in accountancy or construction, by agreeing to review a party’s case files and other materials and offer their assessment, which can often lead to positive recognition throughout a community, and also increase their own business prospects.

DIGGING INTO THE DETAILS: RESEARCH TECHNIQUES FOR INVESTIGATING EXPERTS

The number of techniques that can be used to investigate experts are in some ways as varied as the types of experts themselves. While some techniques are industry-specific — such as investigating whether doctors testifying about an experimental drug had conducted any clinical trials for products that could compete with the drug about which they testify — others are similar to the standard techniques of a quality due diligence assignment. What was said in previous testimony, and how might it relate to the current case? What positions did the person hold before becoming an expert? if the expert was a public official or corporate executive before becoming an expert witness, delving into their reputations in their past career incarnations — and the litigation that likely resulted from them doing their jobs — can be a very fruitful way to give context to their arguments — or, depending on the nature of the evidence uncovered, undermine their arguments substantially.

Litigation is ultimately a battle between two sides, and each side will draw upon all available resources to make its case. While both sides will often employ experts whose careers are distinguished — and whose credentials may seem, upon first glance, above reproach — the process of countering the arguments made by another side’s experts is far more nuanced. By seizing upon key details from a case or business transaction in an expert’s past, a thorough investigator can help counsel cast doubt on the supposedly objective perspective of the other side’s witness, and strengthen counsel’s argument against their testimony.

February 2012

IN THIS ISSUE

— Tone at the Top Can Be Altered by a Strong Personality
— Tone at the Top and Corporate Governance

GREETINGS!

Welcome to the February edition of our newsletter! in this issue, we’ll examine how a powerful persona at the top of any organization, large or small, can create blind spots toward fraudulent activity, and suggest ways to navigate around such concerns.

TONE AT THE TOP CAN BE ALTERED BY A STRONG PERSONALITY

Much is made among fraud examiners and business consultants alike about “tone at the top” — a respect for and adherence to the rules of law and decency among a company’s top management that should, in theory, set a standard for everyone on the rungs of management below. Often, strong tone at the top can prove to be a deterrent against fraud, especially in smaller organizations, where the potential for a fraudster to feel shame and embarrassment if his scheme was exposed can be a means of prevention before any crime occurs. But what if the fraud itself originates from, or is condoned by, those at the top?

The most recent prominent example of high-level officials “looking the other way” involved not a financial fraud, but the sex-abuse charges against former Penn State University assistant football coach Jerry Sandusky. Many observers, including those with intimate knowledge of and a strong interest in the goings-on of the university, said that the former football coach Joe Paterno’s “turning a blind eye” to the allegations not only allowed them to continue for nearly nine years after “JoePa” first learned of them, but it strengthened the denial of the most stringent supporters — “JoePa would never condone such a thing” — and also has made it that much more difficult for the university, of which Paterno was among the top management ranks during his legendary tenure, to begin recovering its image and reputation.

TONE AT THE TOP AND CORPORATE GOVERNANCE

Examples of strong leaders creating insular cultures where there values are not called into question have also helped create the breeding ground for some of the greatest financial collapses and frauds, especially in the early part of the 20th century. Many accounts of the 2008 fall of Lehman Brothers, for instance, noted that CEO Richard “Dick” Fuld created an aura of dominance that extended to his board of directors, which is supposed to be one of the most independent checks on a CEO’s power. “To say he was surrounded with a cult of personality would be an understatement,” one report noted. “He was the textbook example of the command and control CEO. Fuld inspired great loyalty and, on occasion, great fear. Those closest to him slaved like courtiers to a medieval monarch, insulating him from trouble – from almost anything he might not want to hear.” While many professional fraudsters use charm, wit or intimidation to pressure “marks” into acquiescing, these tactics also occur in the corporate world, and can often blind otherwise knowledgeable people from challenging the unlawful acts a forceful leader might take or approve, tacitly or explicitly.

Fortunately, both those inside management and those outside, like shareholders, have tools at their disposal to expose the coziness that often permeates such “cults of personality.” In the vast majority of instances, a public records-driven background check of the top management and the board of directors will identify commonality of cause among them, whether it’s something as simple as sharing the same alma mater, giving to the same political candidates or one party investing his private funds in another party’s side venture. Reviewing public records, including litigation and SEC filings, for related party transactions and shared interests, can help outsiders (and often even insiders) understand the culture within a company, and help identify how it might need to change in order to prevent a scandal from being swept under the rug until it is much too late to be addressed.

January 2012

IN THIS ISSUE

— Knowing Where to Go Before You Get There: Researching Before an Interview
— Getting Down to the Details: Conducting Informational and Admission-Seeking Interviews

GREETINGS!

Welcome to the January edition of our newsletter! In this issue, we’ll examine how a carefully prepared and conducted interview can bolster a fraud investigation, while less than careful treatment of an interview subject can become a major obstacle.

KNOWING WHERE TO GO BEFORE YOU GET THERE: RESEARCHING BEFORE AN INTERVIEW

Copious amounts have been written on the art of conducting an interview, especially an admission-seeking interview in person, to look for indicators of guilt in a fraudster’s behavior: changes in vocal tone, verbal tics and cues from body language. Yet equally as important as the conduct of the interview is what happens beforehand. Whether the purpose of the interview is to gather information (from a co-worker of a subject, for instance, to learn about the subject’s daily routines) or an admission from the subject himself, the research conducted prior to an interview is essential.

Although some interviews are conducted for due diligence purposes that don’t involve internal employee matters, many interviews are conducted as part of an internal inquiry that will also involve company records, such as e-mails, telephone logs and access logs. In either case, it is important to assemble a thorough portrait of the relevant subjects, using both publicly available records and any privately-held information, if appropriate. By developing a thorough picture of the subject”s financial condition, educational and employment background, criminal and marital histories, an interviewer can enter the interview well-armed to know what he doesn’t know, and to use what he does know to elicit the needed information.

GETTING DOWN TO THE DETAILS: CONDUCTING INFORMATIONAL AND ADMISSION-SEEKING INTERVIEWS

Although television shows have often portrayed interviews — especially those by law enforcement — as exercises in an interviewer’s persistence leading a subject to confess under the weight of the evidence — and the interviewer’s own persona — there are proper and improper ways to conduct an interview. Even though admission-seeking interviews may seem to have an inherently combative nature to them, most subjects respond to a respectful yet confident tone. Several supposed “financiers” whose careers have been alleged to be Ponzi schemes in recent years, including Bernard Madoff and R. Allen Stanford, have complained of harsh treatment while in prison awaiting trial — with Stanford going so far as to say that a 2009 beating by inmates had “wiped clean” his memory of the frauds he had committed, leaving the judge to deem him unfit to stand trial and leaving the process of prosecuting his $300 million fraud in some doubt.

Proper protections must be afforded to interviewees even during incarceration, not necessarily to protect their civil liberties as much as to protect the integrity and usefulness of the information they may have. Skilfully crafted and properly conducted interviews can be an essential tool for a fraud examiner, and can ultimately solidify a case built upon a wide array of evidence.

December 2011

IN THIS ISSUE

— Cleaning Out the System: Fraud in Federal Budgets
— Blowing the Whistle on Whistle-Blowers: Vetting the Claims Made Under the False Claims Act

GREETINGS!

Welcome to the December edition of our newsletter! In this issue we’ll examine how fraud can affect government spending.

CLEANING OUT THE SYSTEM: FRAUD IN FEDERAL BUDGETS

With a clarion call for spending restraint issued in 2010 elections — and a Congress that subsequently can only agree to fund the government nine months at a time — deficit reduction and management of the federal budget have gained new focus. While both parties argue over the size and scope of the government (and thus its spending), a corollary to how the money is spent is how well it is spent — the latter being a far more opaque concept than the former.

In response to unscrupulous actions by government contractors during the U.S. Civil war, in 1863 the U.S. False Claims Act was enacted, allowing the government to recover payments made to vendors if it was proven that their claims were knowingly falsified; and also creating a “qui tam” provision that allowed citizens (non-government employees) to report instances of fraud by vendors, in turn making them eligible for a reward equal to a certain percentage of the funds recovered. Since the federal government was widely reorganized in the wake of the September 11, 2001 terrorist attacks, False Claims Act filings have risen from nearly 400 to, in 2010, nearly 700 such claims, and the amounts recovered have risen from $1.8 billion to $3 billion.

BLOWING THE WHISTLE ON WHISTLE-BLOWERS: VETTING THE CLAIMS MADE UNDER THE FALSE CLAIMS ACT

While many legal scholars and federal officials have pointed the False Claims Act’s value not in real dollar terms but as a deterrent against the commission of such fraud in the first place, the system has some vulnerabilities of its own. The financial inducement given to whistle-blowers (known in legal parlance as “relators”) to make agencies aware of wrong-doing can pose a conflict. In the past, we have investigated persons who had other motivations beyond ensuring transparency or even their own financial gain– in one case, an ex-employee of a hospital that received Medicare funding who was terminated and sought to cause trouble for his former employer. After a thorough background check and review of the ex-employee’s work-issued computer records, it was determined that he had filed numerous such claims against other employers (often not withstanding the scrutiny of U.S. District Courts, where such cases are heard) as a means of retaliation, and had also falsified qualifications of his own to get hired in the first place.

While the False Claims Act protocol is indeed an important firewall against potential fraud, and an effective means of recovery from (and punishment against) actual fraud, it is important that the private-sector parties who work for and deal with the federal government be as vigilant as the government itself. While no defense should be offered for truly false claims — whether they be invoices for non-existent helicopter parts “delivered” by a phony company or medical services that were never performed — due diligence must be exercised by all parties involved, including scrutiny of those making claims as relators to ensure that chasing after one fraud does not lead to falling victim to another.

November 2011

IN THIS ISSUE

— After the Fall: Finding Assets After Bankruptcy
— Turning Over Every Rock: Finding Hidden Assets

GREETINGS!

AFTER THE FALL: FINDING ASSETS AFTER BANKRUPTCY

The recent bankruptcy of investment firm MF Global — reportedly on pace to be the eighth largest bankruptcy on record, with as much as $1.2 billion of client funds unaccounted for — has cast a renewed spotlight on both the financial system and the corporate bankruptcy process. Having long been the arena of last resort for fraud victims to make their claims in hopes of recovering lost assets, bankruptcy courts are becoming unwilling watchdogs as we enter a new era of financial regulation.

In many instances, the damage to a company’s assets has been done long before bankruptcy is a consideration, although we have seen cases where the looting of a corporation occurs until days before a petition is filed. These are typically involuntary, brought by deceived or angered creditors to force a change in management and to create a focus on asset recovery. Given the wave of bankruptcies and bailouts that have occurred in the last three years, and those yet to come, the stakes in bankruptcy-related asset searches could not be higher.

TURNING OVER EVERY ROCK: FINDING HIDDEN ASSETS

While discovery during a bankruptcy proceeding is the surest way to obtain information, it can be costly, lengthy, and sometimes unreliable. As a complement to that process, it’s often wise to hire an outside examiner to scour public records for assets held by the principals of the now-bankrupt entity, their spouses and other confidants. While some of these efforts can be brazen — such as setting up a “management company” that can be used to siphon revenue from a company’s operations via related-party contract — others would appear to be more benign, such as the purchase of a lavish vacation property; in other instances, we have encountered principals of companies who bought more unconventional assets, such as professional sports franchises, in the months leading up to a firm’s bankruptcy — often after the principals have sold their interest for a lavish sum, before frauds are discovered that significantly diminish the new owner’s investment. Thorough analysis of the public record, especially after developing a matrix of a subject’s known associates and company interests, can help determine where the funds may have gone.

After determining who benefited from a fraud that precipitated a bankruptcy, and what they did with those proceeds, the next step is to determine the value of those assets, and see what has been left that creditors could claim in an effort to recoup funds. While this step also benefits from discovery, and the use of forensic accountants to ascertain value, measures can be taken via the public record. For instance, in the past we have examined public sources to determine the ongoing viability of several companies offered top creditors as a partial settlement in a bankruptcy-related adversary proceeding; we were able to determine, by examining public company documents, news articles and other sources, which companies were mostly likely to fail within a year (such as one operated by the subject’s son-in-law that had announced a series of layoffs) versus ones that seemed likely to earn proceeds for creditors if they kept them after seizure.

Bankruptcy is always a difficult process, and bankruptcies promulgated by a betrayal of trust between parties can create even more doubt, uncertainty and anger. Yet by dispassionately analyzing both public records and discovery-obtained information, a fraud examiner can help bring the process to a more satisfactory end, making creditors more whole than they may have previously anticipated.

October 2011

IN THIS ISSUE

— Senior Medicare Patrols: Eyes on the Ground Against Fraud
— Hotlines as a Tool in the Private Sector Versus Government Programs

GREETINGS!

Welcome to the October edition of our newsletter! In this issue, we’ll look at increased efforts to raise awareness among senior citizens about Medicare fraud, and gauge their efficacy in actually deterring fraudulent activity.

SENIOR MEDICARE PATROLS: EYES ON THE GROUND AGAINST FRAUD

“Fraud, waste and abuse” are often part of the discussion when talking of reducing the federal budget, where payments toward obligations concerning Social Security and Medicare are cited as serious long-term drivers of the federal deficit. In 1997, the Department of Health and Human Services launched “Senior Medicare Patrols” to, in the program’s words, empower seniors “through increased awareness and understanding of healthcare programs. This knowledge helps seniors to protect themselves from the economic and health-related consequences of Medicare and Medicaid fraud, error and abuse.” The agency said as much as $60 billion per year is lost to the Medicare program due to fraud, and as of December 2010 nearly 3 million seniors had been educated about fraud in the program, with the agency stating that $106 million was recovered by Medicare and Medicaid as a result of complaints made through the program.

In addition to education programs, the Inspector General for the Department of Health and Human Services maintains a hotline to report suspected fraud or abuse of the system. While employee hotlines are well-documented within the private sector as a wellspring of leads toward fraudulent activity, does the same hold true for the recipients of government benefits?

HOTLINES AS A TOOL IN THE PRIVATE SECTOR VERSUS GOVERNMENT PROGRAMS

In March 2001, the Department of Health and Human services Inspector General analyzed the effectiveness of that agency’s handling of complaints to their hotline and found, in analyzing data from a six-month period in 2008, that after one year’s time, 12 percent of complaints were not yet resolved. “Overall, 32 percent of complaints were confirmed as services billed in error,” the inspector general wrote. “Eleven percent of complaints involved allegations of fraud. Contractors closed 11 percent of complaints administratively. For another 32 percent, contractors researched complaints and found no problems. Two percent of complaints were referred to another agency. CMS had not resolved 12 percent of the complaints it received during our period of review.” The inspector general noted that while many investigations began within 30 days of receiving a complaint, 29 percent took “more than four months” to begin an inquiry after a complaint was made. The inspector general suggested establishing and distributing written guidelines “defining the roles and responsibilities of CMS and contractor staff and timeframes for assigning, researching, and resolving complaints,” and also to invest in upgrading information technology infrastructure for hotline functions.

While building awareness among Medicare recipients concerning the hallmarks of typical fraud schemes is a critical step to reducing fraud, responsibility lies both with the federal government and the private vendors which provide services under the program. For large health-care providers, the first step toward combating fraud should be working directly with a patient to resolve the issue, but if those efforts are unsuccessful, the establishment of a separate, practice-wide anonymous hotline — and, as the inspector general’s report stresses, equipping staff members with the means to use it effectively — will help private practitioners mitigate any fraudulent practices long before the federal government has a need to become involved.

September 2011

IN THIS ISSUE

— “Financial Experts” and Their Conflicts: the Role of the Audit Committee
— Sarbanes-Oxley, Reform Attempts and the Need for Vigilance

GREETINGS!

Welcome to the September edition of our newsletter! In this issue, we’ll examine the importance of vetting a publicly traded company’s board of directors, particularly audit committee members, before making a significant investment, partnership, or other transaction.

“FINANCIAL EXPERTS” AND THEIR CONFLICTS: THE ROLE OF THE AUDIT COMMITTEE

Every publicly traded company is supposed to, and typically does, rely on its board of directors for overall strategic guidance, insight into market trends, and the other “big picture” advice needed to run a large organization. While most boards have committees to advise on compensation issues and corporate governance, one of the most critical functions of a board of directors is that performed by the audit committee: to ensure the financial statements issued to the investment community.

The problems caused by flawed audit committees within the last decade are well known: the board of directors at Enron Corp., for instance, in 2000 was ranked among the top five firms in the country by Chief Executive magazine for having one of the most competent and informed boards .

The board, which featured former U.S. Commodities and Futures Trading Commission Chair Wendy Gramm (wife of former U.S. Sen. Phil Gramm, R-Texas) and former Stanford Business School Dean Robert Jaedicke, had considerable expertise — but also was rife with conflicts of interest that called into question its ability to serve the Enron’s shareholders: Mrs. Gramm, for instance, was also affiliated with a George Mason University center that received approximately $50,000 in donations fro Enron in the years preceding the firm’s collapse. John Mendelsohn, another audit committee member, was employed by the M.D. Anderson Cancer Center at the University of Texas, which received millions in donations from Enron and its founding chairman, Kenneth Lay.

SARBANES-OXLEY, REFORM ATTEMPTS AND THE NEED FOR VIGILANCE

While Enron and other large corporate financial statement frauds (Adelphia Communications and MCI WorldCom being near the top of a rather long list) ushered in the 2002 Sarbanes-Oxley Act and subsequent reforms meant to curtail self-dealing and obfuscation of a company’s true financial position, the reforms only went so far. The bill mandated that at least one strictly defined “financial expert” serve as an independent member of each audit committee, and many non-profit entities found even this requirement to be onerous. Other rules in the 2002 bill prohibited most personal loans made to executives by the company, as well as disclosure of any contracts held, for instance, between a publicly-traded company and a service provider owned by an audit committee member that provided a service to the company, such as a charter jet rental.

In the time since these reforms were enacted, greater transparency has occurred with respect to contracts like the example above. But connectivity between parties is often more subtle and insidious, whether via fund-raising for a shared alma mater or service on a non-profit company’s board of directors (which is not explicitly stated as required for disclosure under Sarbanes-Oxley.) If such linkages become public and cast doubt in the minds of shareholders or the public as to the true intent of a company’s audit committee, charged with ensuring the accuracy of that company’s financial statements, the public relations and investment consequences can be dire. Before considering a high-profile venture or investment in a publicly-traded company, the research efforts of a fraud examiner skilled in identifying the opaque relationships which exist outside public vie — and are often all the more relevant because of their secrecy — can be a very worthwhile measure to make sure the company you’re dealing with is dealing fairly.

August 2011

IN THIS ISSUE

— Whistleblower Protection and Prosecutorial Limitations: Dodd-Frank’s Mixed Messages
— Can a Work in Progress Work at All? Implementation of Dodd-Frank’s Provisions

GREETINGS!

Welcome to the August edition of our newsletter! In this issue, we’ll look back at the provisions of the “Dodd-Frank” financial regulatory bill and assess their anti-fraud effectiveness after the bill’s first year of enforcement.

WHISTLEBLOWER PROTECTION AND PROSECUTORIAL LIMITATIONS: DODD-FRANK’S MIXED MESSAGES

After one year in effect, the broader anti-fraud provisions of the new financial regulatory bill have garnered the most attention: plaintiffs attorneys have reported a surge in employee complaints against their employers, with some describing the motives as simply trying to cash in by using the new protections to reap a windfall award or settlement. The financial incentives are obvious: between 10 percent and 30 percent of a monetary award in cases where the award exceeds $1 million.

While some suggest that the provisions will serve as a catalyst for companies to enhance their fraud prevention systems, internal whistleblowing protocols and overall internal controls, the effectiveness of new whistleblowing protections as an increased fraud deterrent remains to be seen.

The advent of the bill, and the concurrent development of the Consumer Financial Protection Bureau (CFPB), may have also had some unintended consequences. The scope of what qualifies as a “financial product or service” subject to regulation under the Dodd-Frank bill, for instance, would seem to suggest that public records researchers and fraud examiners should not be subject to the limitations on access to information provided either by that bill, the CFPB or the Fair Credit Reporting Act (FCRA), which has long limited researcher access to certain types of consumer information. Whether the letter of the Dodd-Frank law, which would seem to support broader researcher access to information in support of anti-fraud efforts, will actually result in changes to the amount and types of information available to researchers is likely a matter to be decided by the courts.

CAN A WORK IN PROGRESS WORK AT ALL? IMPLEMENTATION OF DODD-FRANK’S PROVISIONS

A separate but equally important issue regarding the effectiveness of Dodd-Frank is the degree to which its various provisions, however worthy as fraud-fighting tools, have been implemented. On this score, the bill does not appear to fare well to date. A recent report found that at the end of July 2011, the one-year anniversary mark, only 13 of 117 benchmark deadlines for regulatory action were met. This same analysis shows that the Securities and Exchange Commission has missed more than half of the deadlines set for its rulemaking efforts, as has the Commodities and Futures Trading Commission.

The delay in enforcement — attributed to some degree to extended consultations between regulatory agencies and various interest groups as rules are defined — has some wondering whether the Dodd-Frank bill will have a muted effect on curtailing fraud, as many have said the 2002 Sarbanes-Oxley bill has done, adding multiple regulations (and legal compliance costs) without achieving behavioral and systemic changes to the consumer’s benefit. After one year, it may be too soon to tell if this will be Dodd-Frank’s legacy, but the early returns on anti-fraud enforcement efforts are not encouraging. If the bill does prove to be a catalyst for enhanced self-regulation by companies themselves, it may have been worth the effort, but the lax pace with which the regulations are being enacted has not created new deterrents toward fraud, as many of the bill’s proponents had hoped.

July 2011

IN THIS ISSUE

— FCPA and the Shadowy World of Information Gathering
— Is FCPA the Right Prosecutorial Tool for Phone Hacking? A Historical Analysis

GREETINGS!

Welcome to the July edition of our newsletter! In this issue, we’ll examine how the recently announced U.S. Justice Department probe of News Corp. may seek to apply Foreign Corrupt Practices Act (FCPA) criteria, and look at how some of the allegations may differ from other FCPA cases.

FCPA AND THE SHADOWY WORLD OF INFORMATION GATHERING

As the U.S. Justice Department announced that it would look into whether global media conglomerate News Corp. had hacked into telephones of victims of the September 11, 2001 terrorist attacks, FCPA regulations were brought into new relief. FCPA statutes, from a fraud examiner’s standpoint, typically come into play when a client, say a U.S. investment company., is seeking to do business abroad. The U.S. company needs to know all that they can about the company, its principals, their reputations and any past or ongoing controversy. How did this company grow? Did its leadership gain influence legitimately, or were favors traded to help the company grow? Did the company bid on the business it won, or were bribes and other means of “influence peddling” part of that process?

The current (and evolving) allegations against News Corp. seem to be a different manner of potential violation. While many police officers and private investigators in the United Kingdom have been implicated as helping the media conglomerate obtain voice mail messages and other phone records there, evidence has yet to surface that such conduct occurred regarding any of the U.S.-based companies. yet News Corp. is taking the nascent FCPA probe seriously, hiring Mark Mendelsohn, an attorney who until last year was in charge of prosecuting FCPA violations for the Justice Department.

IS FCPA THE RIGHT PROSECUTORIAL TOOL FOR PHONE HACKING? A HISTORICAL ANALYSIS

Enacted in 1977, the FCPA generally prohibits and punishes bribery to foreign officials by U.S. companies to obtain business in another country. “With the enactment of certain amendments in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States,” a summary said.

Yet the provisions of the text itself, on their face, relate strictly to the affecting of government officials in making business decisions, not to the acquisition of information as part of that business process (which, to date, does not appear to have involved any U.S. government officials.) Neither the 1977 bill or the 1998 amendment address liability of foreign company officers for obtaining information on U.S. citizens (via payment to other, private U.S. citizens), as may be the case if such conduct is found to have occurred at News Corp. In fact, no case law could be found dealing with this specific set of circumstances, suggesting that FCPA may be less well-equipped to prosecute any illicit information gathering by payment than conventional bribery statutes applicable to transactions solely between private parties, with no alleged government official involvement.

June 2011

IN THIS ISSUE

— Phony Expenses, Real Costs: Travel Fraud and Other Schemes
— Keen Eyes on Your Own Guys: How to Detect Expense Fraud

GREETINGS!

Welcome to the June edition of our newsletter! In this issue, we’ll examine the differing types of expense fraud and how your company can defend against it.

PHONY EXPENSES, REAL COSTS: TRAVEL FRAUD AND OTHER SCHEMES

In sales and other industries, travel is such a necessary part of doing business that most employers don’t give it a second thought. As long as the employee attends the meeting and closes the sale, no sum is too costly. Yet reimbursement for using a personal automobile for business purposes, as well as the booking or airfare, rental cars and other travel implements, is a common area for fraudsters to pilfer from their company. Receipts for meals and travel and records of mileage used are typically submitted and reviewed before any reimbursement is approved.

Unfortunately, many small companies (and also many larger ones) lack the internal controls and staff to adequately follow up on such requirements, especially when such activity occurs in a high volume. This is particularly difficult for companies with national or broad regional footprints, where an accounts payable clerk might not know the realities of the geography involved. Although hotel and restaurant receipts are more difficult to alter with any effectiveness, often fraudsters can take the easiest route and claim to have incurred expenses that simply did not occur at all.

KEEN EYES ON YOUR OWN GUYS: HOW TO DETECT EXPENSE FRAUD

Some of the policies that apply to detecting fraud generally will also be of particular use in combating travel fraud. For instance, if an organization is large enough to have a regional manager and national sales director, each should have to approve the invoice before it is processed. this will allow the company to have the perspective of parties that are both intimately involved with the employee and their area, as well as someone who can look at the legitimacy of transactions from a broader organizational perspective. If certain persons begin to seem like “repeat offenders” as far as the invoices they submit, an outside review by a fraud examiner of the subject’s submitted receipts — complemented by interviews of people where the subject claimed to have stayed, and a review of telephone and e-mail records — would begin to identify patterns and irregularities that would later assist in termination or prosecution proceedings.

Although vigilance has its costs, the price of lax controls over employee expenses can ultimately be much greater. By instituting stronger internal controls and using the eyes within the organization more effectively, the slow burn of expense fraud can be mitigated, if not avoided altogether.

May 2011

IN THIS ISSUE

— Beyond Politics: The Effects of Immigration Fraud on Businesses
— Old Mouse, New Traps: Enforcement Efforts and Preventative Techniques

GREETINGS!

Welcome to the May edition of our newsletter! In this issue, we’ll examine new techniques and efforts used by authorities to root out immigration fraud, and how you and your clients can remain protected from possible exposure.

BEYOND POLITICS: THE EFFECTS OF IMMIGRATION FRAUD ON BUSINESSES

The employment of people who immigrate to the United States illegally has been a political hot potato for at least 20 years, with the topic gaining attention following the ratification of the North American Free Trade Agreement in January 1994. While various episodes shine a spotlight on differing sides of the issue of whether such immigrants should be allowed to stay, the evolution of efforts to identify and (where necessary) prosecute offenders — both employee and employer — have grown with much less scrutiny.

The penalties for employers who knowingly employ illegal immigrants can be severe, increasing in 2008 to $3,200 fora first offense and $16,000 for repeat offenders. While media attention focused on highly-charged, ideologically driven stories — like the case of a firm building a California “border fence” that was penalized as much as $5 million for employing illegal immigrants — law enforcement officials have adapted their techniques for identifying offenders to stay in step with changing technology.

OLD MOUSE, NEW TRAPS: ENFORCEMENT EFFORTS AND PREVENTATIVE TECHNIQUES

Law enforcement officials have, albeit somewhat slowly, begun to adapt to and understand how technology allows a vast diaspora of illegal immigrant workers to keep in touch with a veil of secrecy, as this white paper on the use of social networking sites shows. The anonymity of Internet postings can be an asset to “immigration brokers’ looking to smuggle into the United States, but the same sources can be used to help identify offenders as well.

A diligent fraud examiner, can, for instance, run a client employee’s Social Security number through the 89-million record Social Security Death Index to see if the number was obtained theft of a public record, forgery or other means. Another good step is to identify the people living with a subject to see if each received their Social Security numbers around the same time, a hallmark of large immigration fraud and smuggling rings. If you are unsure of the veracity of a birth certificate, work visa, passport or other identification information, retention of a handwriting and document examiner can help determine whether someone’s documentation is legitimate or if you, as the employer, might be left exposed to significant civil penalties. A small measure of prevention and diligence can avoid harsh penalties, media exposure and negative attention throughout the business community.

April 2011

IN THIS ISSUE

— Tricks of Tax Fraud: Some Schemes Grow Complex, Others Simple
— Catching Tax Fraud Before it Becomes a Federal Case

GREETINGS!

Welcome to the April edition of our newsletter! In this issue, we’ll examine some of the more interesting recent attempts at tax fraud, and look at how the lessons from each case can be applied to a diligent fraud prevention practice.

TRICKS OF TAX FRAUD: SOME SCHEMES GROW COMPLEX, OTHERS SIMPLE

It’s an old refrain that nothing is certain in life but death and taxes — and often debated as to which is the least painful certainty. But some recent cases of tax fraudsters being prosecuted shed some light on the lengths to which perpetrators will go to enrich themselves and/or avoid paying taxes.

Take the case of James “Jay” McLamb, chief financial officer for third-party benefits administrator Castleton Group. McLamb admitted to his company’s founder and owner, Suzanne Clifton, that he “had prepared and filed false federal payroll tax forms and had failed to pay an estimated $8 million in federal payroll taxes due from the Castleton Group” for its 2005 through 2007 tax years, according to an administrative ruling order. McLamb reportedly kept the diverted funds within Castleton Group’s operations, rather than keeping the funds for himself, but the costs of his scheme to both the company and McLamb were severe — Castleton Group was declared insolvent and closed in December 2007 after once serving more than 100 clients, while McLamb entered a guilty plea to charges of tax fraud, receiving 2 1/2 years in prison and being ordered to make restitution of $8 million. Federal officials also filed civil actions against McLamb and Clifton to recover more than $500,000 of 401(k) contributions that were never actually deposited into employee accounts.

Others, perhaps not surprisingly, attempt to evade taxes as part of furthering other fraudulent schemes. One such case is former Cleveland area medical malpractice attorney Dale P. Zucker. “Zucker used his position as an attorney and a local businessman to convince clients and acquaintances into loaning him money for businesses that either had long-ceased to exist or never existed at all, according to court records,” one news release said. “The Indictment further stated that Zucker lulled investors into a false sense of security by mailing them promissory notes that guaranteed the return of their initial investment at an interest rate of 10% to 25%, depending on the investor,” another statement said. “Zucker knew he would not be able to repay the investors and, rather than fund the businesses as represented, he converted the investments for his own purposes, which included paying earlier investors, the expenses of his law practice and his own personal expenses. In addition, Zucker filed false federal income tax returns for the years 2003, 2004 and 2005, which failed to report combined income of approximately $588,000.” Zucker received a sentence of more than seven years in prison.

CATCHING TAX FRAUD BEFORE IT BECOMES A FEDERAL CASE

As with all types of fraud, vigilance at your company or client is the best defense. The first rule: don’t leave audits solely to authorities. Routine audits of payroll records, accounts payable, vendor services and other “hot spots” for fraud, likely best conducted on a quarterly basis either by internal compliance personnel or outside fraud experts, would probably have caught a tax (and payroll) cheat like McLamb before the damage from the scheme became excessive. Such efforts also will aid your company should authorities become involved at a later date — being able to document what the company, and the efforts made to contain a fraud situation in-house, can go far in terms of currying favor with prosecutors or enforcement agency officials.

As the tax code grows ever more complex — 64,000 pages and counting by some estimates — the ways fraudsters will attempt to subvert also multiply in number. A thorough set of internal controls and regular audits will allow your company to be prepared well before tax authorities come top the door with subpoenas and questions in hand.

March 2011

IN THIS ISSUE

— Preying on Compassion: How Fraudsters Exploit Tragedy for Financial Gain
— How to Avoid Disaster-Related Charitable Fraud

GREETINGS!

Welcome to the March edition of our newsletter! In this issue, as the world comes together to help Japan following the earthquake, tsunami and subsequent nuclear reactor failure, we’ll examine key indicators of fraudulent disaster-related charitable solicitations, and how to verify a charity’s background.

PREYING ON COMPASSION: HOW FRAUDSTERS EXPLOIT TRAGEDY FOR FINANCIAL GAIN

The trifecta of tragedy in Japan, arriving in such rapid succession, is nothing short of stunning in its magnitude. But unfortunately, both the United States and the world has no shortage of recent disasters that are similar enough to draw lessons about vetting charitable organizations. Whether discussing the Indian Ocean tsunami of 2004 or Hurricane Katrina the following year, each devastation offered cunning manipulators a chance to profit from the compassion of others, and to siphon resources from those who needed them most.

The fraud-related toll of Hurricane Katrina has come into full view more than five years after that tragedy. Organized shortly after the tragedy in late 2005, the U.S. Justice Department’s Hurricane Katrina Task Force was formed “to deter, detect, and prosecute instances of fraud related to the Hurricane Katrina disaster.” By the time its fifth annual report was issued in September 2010, 1,360 people had been charged in federal courts with fraud-related crimes concerning Hurricane Katrina or the two other hurricanes to arrive during that time, Rita and Wilma. many of the frauds concerned attempts to falsely claim eligibility for assistance, as with the recent conviction of a San Diego woman who claimed to have lost homes as a result of Hurricane Katrina and received aid from both the federal government and American Red Cross under false pretenses.

HOW TO AVOID DISASTER-RELATED CHARITABLE FRAUD

Although the latest task force report did not break out what percentage of prosecutions or convictions were related to charitable fraud, it did acknowledge the efforts by the U.S. Postal Service Inspector General’s office in this regard. Vigilance about contributing to charities in the wake of tragedy should include checking a group’s status with The Better Business Bureau and – if it’s large enough, as many charities are — reviewing its Form 990 filings, often available on sites like GuideStar. If considering a large individual donation, bequest from an estate or corporate contribution, it is best to hire a Certified Fraud Examiner to review public records on the organization or its principals, as well as conducting interviews with past employees or donors and – to the extent possible publicly – review the group’s books and records, like audited financial statements.

Millions have been lost to scammers in the fog of sympathy following a humanitarian disaster, but by proceeding carefully and with the right guidance, you and your organization can make sure financial assistance is received by those who actually need in their hour of desperation.

February 2011

IN THIS ISSUE

— Probing Histories Leads to Probing Questions
— How History can Affect the Present: The Importance of the Deep Dig

GREETINGS!

Welcome to the February edition of our newsletter! In this issue, we’ll examine how extensive pre-interview research can enhance the actual question-and-answers sessions, from employee interviews to witness depositions.

PROBING HISTORIES LEADS TO PROBING QUESTIONS

There is no question that much of the skill in conducting an interview lies in the interviewer’s unique skill set: an ability to read body language, pauses and other nonverbal cues, cross-reference that data instantly with the answers being provided, and formulate the next question, often in a matter of moments. This complex task makes the information gathered by the interviewer before the actual interview all the more crucial.

The types of information necessary for pre-interview due diligence can vary somewhat based on the particulars, but many of the same rules apply universally. In a scenario where questioning an employee suspected of embezzlement, for instance, in addition to analyzing public records for a history of a pattern and practice concerning payment of household finances, a researcher should also analyze accounts payable records, cash register logs and other company records. When interviewing someone for the purposes of obtaining a judgment, often it will be necessary to assess the subject’s net worth to the extent possible via public records, including public company filings, news articles about private company activities, and other sources.

HOW HISTORY CAN AFFECT THE PRESENT: THE IMPORTANCE OF THE DEEP DIG

Each of these scenarios have one common element: the depth of information required is extensive. The witness or interviewee will often, although not always, have consulted with counsel prior to questioning, having been coached in methods of answering, as well as having reviewed whatever records are available to them. Thus, in the battle of wits, arming an interviewer with information that may seem obscure or outside the scope of recall for a subject, no matter how sophisticated, can yield great advantages. If an interviewee is a businessperson with several privately held companies, for instance, researching each company’s history of real property ownership might yield related party transactions between the company and the interviewee or his spouse. In all likelihood, if such a transaction occurred five years ago, it would not be at the top of the subject’s mind — he might not have thought to disclose it to counsel beforehand — but could give the interviewer an ability to control the direction of the interview and elicit more forthcoming answers than he might otherwise obtain.

When thinking about an individual witness in somewhat generic terms, we have found success in researching real property records, litigation, news articles and even other asset information, such as watercraft and aircraft, in obtaining useful information prior to an interview. A thorough pre-interview research memorandum — often supplemented by a concise yet detailed executive summary — can enhance an interviewer’s ability in the moment, during the parry-and-thrust of the interview itself, to act as one of the most powerful weapons in an interviewer’s arsenal.

January 2011

IN THIS ISSUE

— Robo-Signings, Financial Reform and Other Fraud Stories of 2010
— Looking Into the Crystal Ball of Fraud for 2011

GREETINGS!

Welcome to the January edition of our newsletter! In this issue, as we begin a new year, we’ll look back on some of the more significant fraud-related stories of 2010 and look ahead to what may be on the horizon in 2011.

ROBO-SIGNINGS, FINANCIAL REFORM AND OTHER FRAUD STORIES OF 2010

2010 saw a series of efforts by government agencies to “toughen up”, at least on the surface, and strengthen anti-fraud efforts after the financial collapse of 2007-2008, including the creation of a Consumer Finance Protection Agency that, as of this writing, is still taking shape; and the passage of the so-called “Dodd-Frank” financial reform bill.

These efforts were coupled by enforcement impotency on other fronts: by May 2010, for instance, not one of the top executives at banks deemed “too big to fail” had been the subject for a criminal referral to the U.S. Justice Department for their part in precipitating the financial collapse. While several members of Congress have called for a coordinated effort to investigate the practice by banks of “robo-signing” foreclosure documents in an expedited manner, to date no such task force has materialized, although the National Association of Attorneys General has established a task force of attorneys general and banking regulators that is looking into the issue.

LOOKING INTO THE CRYSTAL BALL OF FRAUD FOR 2011

While enforcement efforts in Washington are likely to center on politically sensitive issues — such as immigration reform, in the wake of the failure to pass the DREAM Act, and potentially tax reform after the extension of current tax rates was signed into law — the effects of many policy and enforcement efforts remain to be seen. Will disclosure and record-keeping provisions in the new federal health care bill do anything to reduce fraud and abuse? How will the new consumer protection agency affect mortgage lending practices? Will large banks, who have already tightened their disclosure and income requirements for obtaining a loan, proceed even further in that direction?

One lesson that can be drawn from the scandal-ridden roller coaster of 2010 is that the only thing certain is that more uncertainty lies ahead. Whether considering a home purchase, selling a business, or any other complex transaction, the level of trust between parties remains near a historic low, and efforts to re-establish that trust in a systemic manner take time, if these efforts ever work at all. In the interim, the adage of “trust but verify” remains as true today as at any time in recent memory.

December 2010

IN THIS ISSUE

— The Deficit Commission: Closing Loopholes, Reducing Fraud?
— Giving it All Away: Tax Reform and Charitable Giving
— Hard Truths and Harder Choices

GREETINGS!

Welcome to the December 2010 edition of our newsletter! in this issue, we’ll examine the recent proposals of the National Commission on Fiscal Responsibility and Reform to evaluate whether their ideas will reduce fraud as they reform processes.

THE DEFICIT COMMISSION: CLOSING LOOPHOLES, REDUCING FRAUD?

In early December 2010, President Barack Obama’s bipartisan deficit reduction, empaneled less than ten months earlier, delivered a report that proposed a multitude of taxation and process reforms aimed at reducing the federal government’s long-term deficit. But will these reforms do anything to stem tax fraud, among the largest areas of fraud perpetrated by individuals and businesses?

Among the proposals put forth by the commission are the full repeal of the Alternative Minimum Tax, originally designed to tax high net worth earners in the 1970s, but as the law has not been indexed for inflation, many employees and small business owners who are unlikely to be considered “wealthy’” are subject to the tax. This can be a motivator for individuals and businesses to under-report income and, as the Congress has been “fixing’ the bill on an annual basis rather than properly adjusting it for inflation, the demise of the AMT might modestly decrease fraud over time.

GIVING IT ALL AWAY: TAX REFORM AND CHARITABLE GIVING

In the current environment, high income individuals use charitable donations, often directly to their own charitable foundations, to reduce their taxable income. The commission’s proposal would radically simplify this system, thus limiting its effectiveness as a taxable income reduction tool. The commission would replace itemized deductions with a deduction of 12 percent of charitable contributions available to all taxpayers, even those who don’t itemize deductions. This would not only add an element of progressivity to charitable tax rules — a low-wage earner donating $50 during the holidays would receive the same percentage deduction as a billionaire philanthropist — but would de-incentivize charitable giving fraud, which we have encountered on numerous occasions as wealthy individuals find new ways to “game” the tax code via charities that often donate a small fraction of their receipts to charitable purposes. One side effect of this change, were it enacted, could be a near-term decline in philanthropic giving, an area which has suffered significantly in the current recession.

HARD TRUTHS AND HARDER CHOICES

The commission also took aim at a number of other tax deductions where fraud is prevalent, such as the mortgage interest deduction for a non-primary residence. While this particular recommendation would stem the instance of fraud — the motivation to obtain a second home one might not be able to reasonably afford could decrease if the deduction was eliminated — the proposal does nothing to better deter fraud. But the process reforms laid out by the commission, while unlikely to be enacted in the near term, may indeed “level the playing field,” as the authors suggest, in a manner that would decrease loopholes that are currently motivators for a variety of tax frauds.

November 2010

IN THIS ISSUE

— A Tale of Carrots With Few Sticks: An Appraisal of TARP
— No Strings Attached, But Look Out For That Subpoena

GREETINGS!

Welcome to the November 2010 edition of our newsletter! In this issue, we’ll examine the oversight efforts regarding the Troubled Asset Relief Program (TARP) as it formally concludes, and look at areas where monitoring could have been improved.

A TALE OF CARROTS WITH FEW STICKS: AN APPRAISAL OF TARP

When TARP was enacted in late 2008, it was seen as a response to a crisis of extreme proportions — and was then extended as the crisis failed to subside to the degree lawmakers preferred. While the program provided financial lifelines to banks and other industry sectors that were suffering profound losses, the U.S. Treasury Department has been faulted for failing to police the funds properly — and even failing to explain where they went, and why. This led to public skepticism about “bailouts” in general and TARP in particular, the Congressional Oversight Panel charged with reviewing the program said in a report as TARP neared its expiration date of October 3, 2010. “Some of this stigma has arisen due to valid concerns with Treasury’s implementation of TARP programs and with its transparency and communications,” the authors wrote. “For example, Treasury initially insisted that only healthy banks would be eligible for capital infusions under the Capital Purchase Program (CPP). When it became clear that some of these banks were in fact on the brink of failure, all participating banks – even those in comparatively strong condition – became tainted in the public eye. Stigma may also have arisen due to deep public frustration that, whatever the TARP’s successes, it has not rescued many Americans from suffering enormous economic pain.”

While TARP expired to mixed public feelings and criticism from academic experts who called its foreclosure prevention efforts “half-hearted” and questioned the program’s efforts to actually buy “toxic” assets, one government official will be shining a light on TARP for years after its expiration: TARP Special Inspector General Neil Barofsky, who reportedly began hiring another 20 staffers — an increase of 14 percent — in the weeks leading up to the program’s expiration. “Most of the ramp-up in our numbers, the expansion in our hiring, is due to our criminal investigations,” Barofsky said.

NO STRINGS ATTACHED, BUT LOOK OUT FOR THAT SUBPOENA

Although TARP can make no new investments after its expiration, the question remains: did officials do their due diligence when allocating taxpayer dollars, or did they dole out cash first and reserve the right to investigate later? A partial answer comes from Barofsky, who said in the same article that the same institutions whose lies helped create the financial crisis often lied again when seeking government aid. “Under the bailout law passed in October 2008, TARP funds could go only to banks and other financial companies deemed by their regulators and the Treasury as healthy and viable institutions,” the article said. “Barofsky said more evidence is now surfacing that some of these institutions may have made false statements in their earnings statements, in their TARP applications, and in communications supporting their funding requests. ‘Predominantly where our resources are most deployed are where the intended victim or actual victim is the United States government,’ Barofsky said. ‘These are attempts to steal money from the taxpayer through fraudulent representation in their TARP applications.’”

The first conviction on TARP-related fraud charges came about two weeks after the program expired, when Charles J. Antonucci, former CEO of Park Avenue Bank, was convicted of fraudulently obtaining more than $11million in aid under the program, pleading guilty to that charge and other counts, including bribery. Antonucci reportedly misled regulators by “misrepresenting the source of millions of dollars of money that he claimed to have invested in the Bank out of his own pocket to recapitalize the Bank. He then attempted to use that sham recapitalization to fraudulently obtain over $11 million in TARP funds by convincing the Bank’s regulators that Antonucci had recapitalized the Bank when, in fact, he had not.”

Unfortunately, due diligence processes undertaken before the funds were distributed did not catch such schemes, leaving a costly and protracted legal and investigative effort – also on the taxpayer dollar — where a more focused prevention and detection effort likely would have been more effective. As Barofsky himself warned, apparently to no avail: “Inadequate oversight and insufficient information about what companies are doing with the money leaves the program open to fraud, including conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering.” Responsible financial institutions should bolster their use of internal and external fraud detection consultants, particularly when considering any future federal emergency assistance, to make certain to avoid embarrassing and costly scandals that only serve to increase public outrage.

October 2010

IN THIS ISSUE

— Friends, Love and Loyalty: When Officers Have Conflicts
— Identifying Motivators of Conflict of Interest Fraud
— In the next issue

GREETINGS!

Welcome to the October 2010 edition of our newsletter! In this issue, we’ll look at investigating conflicts of interest. including some unusual ways in which an officer or director of a company might have a conflict.

FRIENDS, LOVE AND LOYALTY: WHEN OFFICERS HAVE CONFLICTS

Since at least the post-Watergate political environment of the 1970s, the term “conflict of interest” has entered the American lexicon, and its meaning has evolved into something far beyond the political realm. Stories of government officials or corporate officers placing their own enrichment above their duty to their employers also make for great headlines, underscoring a populist “us versus them” angle for news media outlets. But for every high-profile case (think Darlene Druyun of the U.S. Air Force helping Boeing secure a contract then obtaining various perks from the company), there are dozens of unreported – and often simply undiscovered – instances of such breaches of conduct. How do you spot it, and how can you stop it?

The first signs that a vendor or consultant may have undue sway with an officer in your organization would be seen by looking at accounts payable activity. Did that vendor have a sudden surge in activity which could not be easily explained by a change in policies? was one particular official responsible within your organization for negotiating such contracts and purchases, or were those duties segregated? If the duties were split among many people, what was the nature of their relationships, if any, outside the workplace? Performing this sort of records review and conducting interviews will help identify who did what when — then you can move on to why.

IDENTIFYING MOTIVATORS OF CONFLICT OF INTEREST FRAUD

As with most frauds, the single greatest motivator in conflict of interest fraud is some measure of financial incentive — some times, this can intermingle will vendor fraud, where a purchasing manager sets up a dummy company to “sell” a company goods or services of nominal value, or which may not even exist. In this case, cross-checking vendor addresses with those of employees can often ferret out the culprits of the scheme and help establish a fact pattern. But typically conflict of interest frauds have a more complex nature: take, for instance, a case we investigated regarding various members of a well-known non-profit group, who also served together on the board of an unrelated, publicly-traded for-profit company. When the chairman of the for-profit company joined the non-profit’s board (the other two non-profit officers were directors on the for-profit company’s board), the for-profit company quickly became the second-highest paid independent contractor to the non-profit, grossing more than $5 million in sales. Previously, it had not been listed within the top five.

Conflicts can also exist among an officer’s shareholdings, either regarding his personal investments or, particularly in the case of well-compensated senior executives, concerning a charitable organization or family trust. Assembling a time line of insider trading filings or non-profit stock purchases (often reported in schedules attached to Form 990 tax-exempt organization filings) and comparing to your company’s history of transactions can help determine whether an officer had the company’s interests at heart when endorsing a course of action, or whether they were looking to help themselves even if the deal hurt the company’s broader interest and shareholder value.

IN THE NEXT ISSUE

In the November issue, as the TARP program officially expires, we’ll look at the efforts made to root out fraud among participants, and look at what remains to be done.

September 2010

IN THIS ISSUE

— The Fall of the House of Enron and the Quest for Accountability
— “Honest Services” Prosecutions as Anti-Fraud Tool: Too Broad of a Brush?
— A Skilling Chilling Effect? Debating the Aftermath of the Supreme Court’s Decision

GREETINGS!

Welcome to the September edition of our newsletter! In this issue, we’ll look at whether the U.S, Supreme Court’s recent ruling regarding former Enron Chief Executive Officer Jeffrey Skilling will affect other anti-fraud efforts.

THE FALL OF THE HOUSE OF ENRON AND THE QUEST FOR ACCOUNTABILITY

It has been nearly a decade since the swift collapse of Enron, an energy conglomerate that complemented its traditional power generation services with a complex, often byzantine, array of commodities trading platforms, as well as broadband Internet services. As the Supreme Court noted in its recent opinion regarding Skilling, Enron executives were determined to maintain the company’s high-profile success story at all costs, and “engaged in a scheme to deceive investors about Enron’s true financial performance by manipulating its publicly reported financial results and making false and misleading statements.”

As the schemes used to continue that deception began to unravel in 2001, Enron’s fortunes sank, taking with them those of the state-owned pension plans, hedge funds and individual investors who had seen the company’s success and wanted a share. A blizzard of investigations followed, including criminal prosecutions and Congressional inquiries. Some executives cut deals and went to jail, while Congress enacted a series of broad reforms to the accounting system which allowed the fraud, which cost investors an estimated $60 billion. Prosecutors sought accountability, but now, the Supreme Court faced the question: had they gone too far?

“HONEST SERVICES” PROSECUTIONS AS ANTI-FRAUD TOOL: TOO BROAD OF A BRUSH?

The prosecution of Skilling ultimately rested upon allegations that he violated his duty to Enron’s shareholders to provide his “honest services,” which prosecutors said he perpetrated via wire fraud; the subsequent securities fraud, wire fraud and making false representations were all charges that stemmed from Skilling’s furtherance of the scheme. The prosecution claimed that the “intangible right of honest services” due to Enron shareholders” had been breached.

On May 25, 2006, a jury empaneled at the U.S. District Court in Houston found Skilling guilty of 19 counts, including “honest services fraud”, and acquitted him of nine other counts. As part of his appeal, Skilling argued that the jury was incorrect to interpret the “honest services” statute as it did. The statute has, the Supreme Court noted, been strictly applied to cover only “bribery and kickback schemes,” as opposed to misconduct for indirect personal gain; efforts to broaden the scope were halted by the decision in McNally v. United States, which said that Congress had to clarify its intent if it sought to grant wider scope to the statute. Government attorneys in the Skilling appeal sought to push a similar line of reasoning, but the Supreme Court didn’t agree. “The Government urges the Court to go further by reading§1346 to proscribe another category of conduct: undisclosed self-dealing by a public official or private employee,” Justice Ruth Bader Ginsburg wrote in the majority opinion. “Neither of the Government’s arguments in support of this position withstands close inspection. … Skilling did not violate §1346, as the Court interprets the statute. The Government charged Skilling with conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health to his own profit, but the Government never alleged that he solicited or accepted side payments from a third party in exchange for making these misrepresentations.”

The language of Congress in pushing to expand the scope of Section 1346 may have been vague, but the court’s majority was clear in rejecting its application concerning Skilling. “The Government did not, at any time, allege that Skilling solicited or accepted side payments from a third party in exchange for making these misrepresentations,” the court wrote, adding later: “It is therefore clear that, as we read §1346, Skilling did not commit honest-services fraud.”

A SKILLING CHILLING EFFECT? DEBATING THE AFTERMATH OF THE SUPREME COURT’S DECISION

When the Supreme Court handed down its decision on June 24, 2010, commentators were quick to discuss the “chilling effect” the ruling might have on existing fraud prosecutions where “honest services” fraud was a tool. Ginsburg, in writing for the majority, saw strict interpretation of the statute as a check against overzealous prosecutions. “As to arbitrary prosecutions, we perceive no significant risk that the honest-services statute, as we interpret it today, will be stretched out of shape,” Ginsburg wrote. “Its prohibition on bribes and kickbacks draws content not only from the pre-McNally case law, but also from federal statutes proscribing-and defining-similar crimes.”

Investigators and prosecutors have been quick to discuss how the Skilling ruling would affect ongoing prosecutions, including that of an associate of former Washington lobbyist Jack Abramoff. A long-running fraud prosecution against Kansas’ Westar Energy was withdrawn due to the stricter interpretation imposed by the ruling. “”The law no longer supported our position,” U.S. Attorney Barry Grissom told The New York Times. “We were duty bound not to go forward with the prosecution.” The article noted a “flurry” of motions by defense attorneys based on the Skilling ruling’s interpretation. The long-term effects of the ruling remain to be seen, as does Congress’ ability to widen the scope of the law any further. The ruling remains a challenge to prosecutors and investigators who must now prove an intent to profit from fraudulent schemes with greater specificity. This makes the need for skilled investigative researchers, able to lay out the significance of even the most minute details, an even more essential tool against white-collar crime.

August 2010

IN THIS ISSUE

— Key Anti-Fraud Provisions of the Dodd-Frank Bill
— Dodd-Frank: Better Anti-Fraud Tools Than SarbOx?
— In the next issue

GREETINGS!

Welcome to the August 2010 edition of our newsletter! In this issue, we’ll examine the anti-fraud measures enacted as part of the so-called “Dodd-Frank” financial regulation bill, and see how they compare with the Sarbanes-Oxley provisions implemented in 2002.

KEY ANTI-FRAUD PROVISIONS OF THE DODD-FRANK BILL

The recently enacted “Dodd-Frank Wall Street Reform and Consumer Protection Act,” whose title hints at its length of 2,319 pages, contains many provisions meant to protect consumers from perceived and actual tactics meant to defraud and mislead them. But what does this bill do to address systemic risk detection and abuse?

One key provision, which mirrors many state securities or banking anti-fraud statutes, is to hold persons who “knowingly provide substantial assistance” to a fraudster as culpable as the fraudster himself. The bill grants the Federal Deposit Insurance Corporation (“FDIC”) greater powers to act as a receiver for “covered financial companies”, defined in part as a financial institution not covered by traditional deposit insurance. But the FDIC’s powers in receivership to avoid the financial consequence of fraudulent transfers are somewhat limited: all such transactions must have occurred within two years of the FDIC’s appointment of receivership, which in principle would leave the receiver responsible for liabilities from long-term fraud schemes.

DODD-FRANK: BETTER ANTI-FRAUD TOOLS THAN SARBOX?

Although the enforcement and recovery powers provided under Dodd-Frank seem somewhat limited in certain instances, it provides enhancements to one key tool in the fraud examiner’s arsenal: whistle-blowers. The new legislation codifies monetary rewards for accurate tips that lead to successful; enforcement actions, with amounts pegged to a range between 10 percent and 30 percent of the civil monetary penalty collected. The bill also enhanced legal protections for whistle-blowers who may fear the threat of retaliation by their employers after the information becomes part of a broader inquiry. No award can be given to a whistle-blower who was criminally complicit in the action in question, who served as an auditor on the matter, or who acted as a enforcement agency official overseeing the company in question. These conflict of interest safeguards help to protect the integrity of the whistle-blower process.

The question has arisen in the time since the bill’s passage: how does this improve upon the post-Enron Sarbanes-Oxley bill passed in 2002, and is it redundant in any way? While time and experience may provide the most objective assessments, others have weighed in, including some of the regulators themselves. The Public Company Accounting Oversight Board, created as part of the Sarbanes-Oxley bill, issued a statement lauding the Dodd-Frank bill for its additions to the existing framework allowing the board to share information with foreign authorities, seemingly a nod to a globalized marketplace.

History will be the final judge of the effectiveness of this massive new regulatory structure, but whistle-blower protections at home and regulatory information-sharing both home and abroad provide key tools to regulators and to private-sector fraud examiners who act as a first line of defense against abuses in the corporate environment.

IN THE NEXT ISSUE

In the September issue, we’ll look at how the ruling concerning former Enron Chief Financial Officer Jeffrey Skilling affected investigation and prosecution of financial fraud.

July 2010

IN THIS ISSUE

— It’s All Relative(s): Business Practices in Developing Nations
— One World, Many Priorities: Doing Business in a Global Marketplace
— In the next issue

GREETINGS!

Welcome to the July edition of our newsletter! In this issue, we’ll examine the issue of how differing cultural norms, values and definitions of “business ethics” affect the investigation and prosecution of corruption inquiries in various nations throughout the world.

IT’S ALL RELATIVE(S): BUSINESS PRACTICES IN DEVELOPING NATIONS

Corruption is one of the world’s oldest practices, and whether you’re discussing rights to oil fields offshore of Ghana or defense contracts in San Diego, the possibility of bribery or some other undue influence entering into the transaction is always present. Much has been done to attempt to curb these occurrences, given the bad outcomes they can create for companies and burden they can place on law enforcement or regulators (assuming, of course, they’re not the recipients of the largesse.) But what can be done when different cultural ethos and business norms around the globe’s 196 nations are taken into account?

It’s a common refrain among the recipients of kickbacks or other inducements: “That’s how we do business around here.” The World Bank simply defines good governance practices as “the traditions and institutions by which authority in a country is exercised for the common good.” Yet each nation’s elected government, and the people it represents, is distinct — the values and priorities of the voters in the Palestinian Authority who voted Hamas into office in 2005 are vastly different from the British voters who voted a coalition government into power this year. So how does a globalized business community reconcile these intrinsically differing values?

ONE WORLD, MANY PRIORITIES: DOING BUSINESS IN A GLOBAL MARKETPLACE

Many non-profit groups measure corruption, such as Transparency International, and others like Global Integrity (staffed by a few former colleagues of the author) aim to use the work on-site researchers to quantify corruption via numerical data and interviews with local businesspeople and activists to develop a Global Integrity index. The sunlight of such exposure of activities, and the news media attention it generates, is undoubtedly a worthwhile effort. For the businesses seeking to work with the public officials or other business under such scrutiny, more is required.

We have considerable experience helping clients navigate the Foreign Corrupt Practices Act (FCPA) within this globalized marketplace, and draw upon our own experience as well as regional experts to ascertain what “corruption” really means not only in the legal sense, which can occasionally cross borders, but also in the context of where business is conducted. Although a universal standard of business conduct and governance is ideal, it’s just an ideal as long as humanity’s instinct for self-preservation is the motivating factor. That is why the experience of a seasoned investigator well versed in the differing business ethics used across this globe is essentially to protecting your company and its most valued relationships.

IN THE NEXT ISSUE

In the August issue, as the “Dodd-Frank” financial regulation bill moves through Congress, we’ll look at the provisions to fight fraud, and examine attempts by some to get around the government’s programs put in place after the financial collapse.

June 2010

IN THIS ISSUE

— Watching the Watchdogs: Gauging Effectiveness of Federal Anti-Fraud Actions
— Private Sector Fraudsters and the Stimulus Bill
— Article 3 Headline

GREETINGS!

Welcome to the June 2010 edition of our newsletter! In this issue, we’ll look at how effective the various government agencies tasked with monitoring fraud have been, especially as stimulus monies have been distributed within the last year.

WATCHING THE WATCHDOGS: GAUGING EFFECTIVENESS OF FEDERAL ANTI-FRAUD ACTIONS

When the federal government decided to dole out $787 billion in stimulus monies following the implementation of the American Recovery and Reinvestment Act in February 2009, it also called for various anti-fraud safeguards to be put in place, including the centralization of reports by the U.S. Government Accountability Office and various Executive Branch agencies’ inspectors general, to both track where the money was going and to provide a mechanism to report fraud and abuse. So, more than one year later, how are they doing?

The answer to that question varies somewhat by agency — and often the federal agency reports vary themselves by state. At the U.S. Education Department, which received a considerable share of stimulus funding, the reports issued since the stimulus bill’s passage were analyses of internal controls at the education departments within various large states, such as New York, Texas, California and Illinois. In New York, for example, federal auditors found that the Kiryas Joel school district in Monroe, New York, lacked “adequate controls in safeguarding payroll checks” and auditors also found that the school district “did not have sufficient controls to minimize the risk of funds being improperly disbursed,” including accounting software which did not prevent duplicate checks from being issued. Kiryas Joel received more than $5 million of funds set aside under the stimulus legislation, and it is unclear to what extent they have implemented the changes suggested in the Education Department Inspector General’s February 2010 report.

PRIVATE SECTOR FRAUDSTERS AND THE STIMULUS BILL

Other federal agencies receiving stimulus monies, whether related to education or aviation, certainly have their fair share of fraud, abuse, or lax controls. Another concern for regulators is the reputation and worthiness of private sector vendors vying to assist newly enriched government agencies. To date, the most informative sources on this topic are anecdotal and are not considered exhaustive studies. In January 2010, for instance, the Orange County (California) Register reported that one contractor received a grant of more than $6 million to refurbish airport runways and other roadways despite facing “three federal probes, including a criminal investigation into whether it fraudulently overcharged the city of San Diego in the wake of the devastating 2007 wildfires.” A California watchdog group also said its state, which has received or will receive a total of $85 billion of stimulus act funds, said the U.S. Federal Bureau of Investigation expected seven to ten percent of all monies spent to be lost of waste, fraud or abuse, and noted that the California inspector General was working with the state’s Community services and development Department to identify fraudulent transactions using stimulus funds and disallowing them altogether. Among the culprits caught to date was the San Francisco Economic Opportunity Council, which accrued more than $540,000 of expenses that would later be disallowed, including $2,300 for bottled water and $8,300 for a directors retreat “at a luxury casino.” ProPublica, a non-profit journalism group in Washington, has published a collection of case studies demonstrating many instances where stimulus act monies were revoked due to fraud or abuse, although some of the highlighted case studies don’t say whether the funds were returned after fraud was discovered.

What more can be done to provide strict oversight of stimulus monies, many of which will be disbursed this year? While there is a web-based tool on the government’s recovery.gov web site for reporting of fraud, waste and abuse, as well as a hotline, oversight for each relevant agency stops with that agency’s Inspector General. These agencies are also tasked with providing fraud reporting training to the very agencies they oversee — in this time of flattened federal receipts, increased institutional fraud prevention is one area where the federal government could see return on its investment, although private consultants should be retained where IG staffs are stretched too thin or lacking expertise to provide appropriate training regarding internal controls.

IN THE NEXT ISSUE

In the July issue, we’ll examine the difficulty in investigating bribery and other foreign corrupt practices, particularly how to parse the legal and moral nuances between varying cultures.

May 2010

IN THIS ISSUE

— Breaking it Down: Why and How Smurfing Works
— Trouble in Smurf Village: How to Find Smurfs
— In the next issue

GREETINGS!

Welcome to the May edition of our newsletter! In this issue, we’ll examine the money laundering technique known as “smurfing,” and look at how to track and deter it.

BREAKING IT DOWN: WHY AND HOW SMURFING WORKS

Named after the 1980s cartoon series about a group of small characters which all appear relatively similar, “smurfing” applies that approach to the laundering of illicit funds. This can be done by taking the proceeds from a drug deal, let’s say $300,000, and using a group of ten intermediaries — the “smurfs” — to each make deposits of less than $10,000 at different banks over the course of, say, a week. (Smurfing can also apply to obtaining items which are sold in limited legal quantities to individuals, such as psuedophedrine, which is a cold remedy that can be used to aid in manufacturing narcotics.)

Why is $10,000 the magic number? Because any amount above that threshold deposited into an FDIC-insured bank would trigger a Suspicious Activity Report (and its more benign-sounding cousin, the Currency Transaction Report) to be filed, recording the identity of the depositor as well as placing on record the person(s) “on whose behalf the transaction is conducted.” If this information is documented, even falsely, it gives investigators a starting point for an inquiry criminals would rather not start in the first place.

TROUBLE IN SMURF VILLAGE: HOW TO FIND SMURFS

Tracking and ultimately prosecuting smurfs is no easy task — it’s similar in nature to tracing assets across a network of offshore holding companies, except the network in a smurfing matter is comprised of people, not entities, and thus paper trails are much more fluid and less reliable, if they exist at all. In an ironic twist worthy of Dickens, when former New York Attorney General Eliot Spitzer – who built his reputation in part by cracking down on smurfing – was caught soliciting escorts in 2008, it was revealed that he had wired several amounts under the $10,000 threshold — and even asked bank officials to remove his name from the transfers (they declined.)

Fortunately for fraud investigators both within financial institutions and without, the process of detecting smurfs among millions of transactions can be aided by ever-evolving automation techniques. Computer programs can be set to flag any repetitive deposits within a certain threshold, but once again human perception and discretion plays a key role. How large of a transaction is relevant but small enough to be smurfing? $1,000? $5,000? While the first known smurfers pushed the limits, recording transactions above $8,500 on a regular basis, today organized criminals uses multiple smurfs and dozens of institutions, willing to take extra steps to avoid detection. Cross-referencing address information (particularly P.O. Boxes) between account holders to find linkages can also help an investigator identify a network of smurfs to dig further into this serious “under the radar” scheme.

IN THE NEXT ISSUE

In the June issue, as various government agencies ramp up inquiries into financial fraud perpetrated by the private sector, we’ll look at case studies of enforcement employees who betrayed their oaths to become the proverbial fox in the hen house.

April 2010

IN THIS ISSUE

— Seeking Whistleblowers: Behind SEC Call for Financial Fraud Tips
— Managing Assets: How to Handle Whistleblowers
— In the next issue

GREETINGS!

Welcome to the April edition of our newsletter! In this issue, we’ll look at the U.S. Securities and Exchange commission’s efforts to increase whistleblower tips concerning financial fraud, its effectiveness, and how to best handle whistleblowers.

SEEKING WHISTLEBLOWERS: BEHIND SEC CALL FOR FINANCIAL FRAUD TIPS

In the wake of the Bernie Madoff scandal, where the SEC was chastised for not heeding the warnings of Certified Fraud Examiner Harry Markopolos until it was too late, the commission’s inspector general, David Kotz, has publicly contemplated creating “incentives,” monetary or otherwise, for whistleblowers who lead officials to financial frauds. Although such a system exists to a degree within the “qui tam” / false claims actions in federal courts, where a whistleblowing “relator” receives a portion of the fine levied against a fraudster, it is unusual for enforcement agencies to consider doing such things in-house. (Although the SEC now has a web site to file complaints.)

Whistleblowers, of course, can provide a unique perspective on frauds that occur, as many of them are fellow employees, customers or clients of the fraudsters themselves. Recent research suggested that whistleblowers tipped off authorities to 17 percent of frauds (in the group of 216 cases examined from 1996 until 2004), compare with 14.5 percent of tips coming from short sellers (looking for information to drive a stock price down), and analysts 13.8 percent. The SEC itself, offering a carrot to the whistleblowers? Only 6.6 percent of cases.

MANAGING ASSETS: HOW TO HANDLE WHISTLEBLOWERS

There are risks associated with whistleblowers, of course — and not just to the whistleblowers themselves. one drawback to employee tip lines is that they can be a forum for petty complaints, making it time consuming to separate legitimate complaints from gossip and office retribution. Negative events can affect whistleblowers and their colleagues, especially as layoffs occur after a major financial fraud is unearthed. Although federal protections exist to punish employers who retaliate against whistleblowers, there are some rules of thumb for fraud examiners to remember when evaluating whistleblower information.

While maintaining a proper chain of custody is essential in documenting any investigative effort, it is even more crucial in whistleblower situations, where bits of information can often be the initial thread of a fuller investigative effort. (Also be aware of right to counsel for union employees where appropriate.) Well-documented interview memos, supplemented as needed by telephone or e-mail review (to help convert a witness’ recollection of events into a factual time line) can turn vague accounts into a more formal report about which you can testify in open court if the need arises. Be sure to work with counsel to maintain privilege over investigative work product, and “trust but verify” when it comes to a whistleblower’s account of events. With a skeptical but cooperative eye, allegations can become investigative findings that can save your company money, time, and public relations nightmares.

IN THE NEXT ISSUE

In the May issue, we’ll examine the money laundering technique known as “smurfing” and how suspicious activity reports and other documentation can help catch an often cash-based fraud scheme.

March 2010

IN THIS ISSUE

— Responding to the Crisis: The Case for CFPA
— O Canada? Effectiveness of the Financial Consumer Agency of Canada
— In the next issue

GREETINGS!

Welcome to the March 2010 edition of our newsletter! In this issue, we’ll examine the stated reasons for creating the Consumer Fraud Protection Agency, and look at whether the system on which it’s modeled has proven effective enough to merit importation to the United States.

RESPONDING TO THE CRISIS: THE CASE FOR CFPA

The events are all too familiar for professionals and laymen alike: in the fall of 2008, the U.S. financial markets teetered on collapse, owing in large part to the default on sub-prime mortgages and subsequent failure of many investment linked to those mortgages. As regulators and educators surveyed the damage, it became clear that one root cause – though by no means the only cause – was that many individuals were “hustled” into approving mortgages at terms they didn’t understand, or terms which were misrepresented to them.

In the 18 months since that collapse, mortgage fraud has indeed risen, with U.S. Treasury unit FinCEN reporting that suspicious activity reports of “possible mortgage loan fraud” have risen by 7.5 percent. It didn’t take a prolonged crisis to convince Obama administration advisers that further protections were needed, however — adviser Elizabeth warren, whom Obama proposed would lead the new group, had first called for such an agency more than a year before the crisis, in June 2007.

O CANADA? EFFECTIVENESS OF THE FINANCIAL CONSUMER AGENCY OF CANADA

Warren’s inspiration for the CFRA? Canada’s Financial Consumer Agency (FCAC), which has been in operations since 2001. One of its major stated goals is similar to recently enacted credit-card legislation, increasing consumer awareness and access to information, which in turn “helps consumers enjoy the social and economic benefits of participating in a fair and secure Canadian financial marketplace.”

How has the CFRA furthered its goal? Via many initiatives that seem to replicate existing efforts undertaken in the U.S. by the Federal Trade Commission, U.S. Securities and Exchange Commission or Federal Deposit Insurance Corporation, with respect to disclosures by banks and trust companies, or their publicly-traded holding companies.

In 2008-2009, the FCAC received a total of nearly 5,000 complaints regarding mortgages, credit cards, insurance and other financial instruments. Of these, nearly one-fifth were referred to other agencies, but the FCAC report does not state how it handled the other 4,000 complaints. So is the Canadian way the way forward to fight consumer financial fraud and abuse? Their numbers don’t really tell the story.

IN THE NEXT ISSUE

In the April issue, with the SEC’s increased call for whistleblowers related to Ponzi schemes, we’ll look at the pro and cons of tip lines.

January 2010

IN THIS ISSUE

— A Problem for Every Solution: Difficulties Fighting Health Care Fraud
— Every Door You Close Opens Another: Efforts to Fight Health Care Fraud
— In the next issue

GREETINGS!

Welcome to the February 2010 edition of our newsletter! In this issue, we’ll look at the pervasive problem of fraud in the health care industry, and what proposed reform do – and don’t do – about it.

A PROBLEM FOR EVERY SOLUTION: DIFFICULTIES FIGHTING HEALTH CARE FRAUD

It’s no surprise to anyone that large infrastructure – whether a private corporation or government bureaucracy – breeds opportunities for fraud and abuse. The larger an organization, typically, the better chances it can be manipulated to a fraudster’s benefit. This was true in the 1980s when the Pentagon acquired items on a massive scale – recall the $436 hammer – and it remains true today, with a health care system that may be reformed in either large or small ways. But will any of those methods help protect health care consumers from further fraud-related losses?

The situation is rather dire: one private consultancy estimated that each instance of identity fraud within the health care space costs an average of $19,000, versus only $1,200 per instance of identity theft overall. Many times, the perpetrators of such frauds are health care employees who abuse their access to sensitive patient data – also often taking advantage of Medicare’s quick reimbursement system to obtain the cash far quicker than their crime can be detected. In other cases, fraudsters target the hospital, insurer or government organization itself, using a dummy corporation to convert invoices for non-existent goods into very real cash. The conservative estimate for losses to fraud each year throughout health care? $60 billion annually.

EVERY DOOR YOU CLOSE OPENS ANOTHER: EFFORTS TO FIGHT HEALTH CARE FRAUD

Despite the Obama administration’s much-publicized intention to root out fraud and abuse within health care – and to use the proposed cost savings to partially offset the costs of expanding coverage – through the administration’s first year, little tangible progress has been made. An “Interagency Health Care Fraud Prevention and Enforcement Action Team” was announced in May 2009 to combat fraud related to Medicare — which still only spends less than one-fifth of one percent of its budget on anti-fraud measures.

Against this backdrop, it is clear that whatever reforms may be signed into law, the onus of being a health care watchdog will fall largely to the private sector. Health care companies, especially those which seek Medicare reimbursement, will want to fortify their use of internal auditors and independent fraud examiners to both detect abuse and review internal controls and policies to spur deterrence. As Washington continues to debate what shape reform should take – and whether it should include any meaningful attempts to create more transparency within the system – the companies that may well be at risk should take it upon themselves to get ahead of that curve.

IN THE NEXT ISSUE

In the March issue, as talk of creating a unified consumer finance regulatory agency gains some momentum, we’ll look at which areas are most ripe for abuse, and what might be done to remedy them.

January 2010

IN THIS ISSUE

— How to Know the Devil You Think You Know: An FCPA Primer
— Learning the rules of the Road: Resources for Investigating Foreign Businesses
— In the next issue

GREETINGS!

Welcome to the January 2010 edition of our newsletter! in this issue, we’ll examine the perils of not conducting proper due diligence when working with foreign businesses, particularly when those groups are run by former government officials.

HOW TO KNOW THE DEVIL YOU THINK YOU KNOW: AN FCPA PRIMER

As we’ve mentioned in this space before, the globalized marketplace represents an ever-expanding buffet of opportunities for investors or businesses willing to take on the risks involved. But far too few look into how to really manage that risk, which often includes avenues of inquiry that don’t exist in the United States and other Western nations.

While “corruption” is an all-encompassing buzzword used by politicians when it’s convenient to appear outraged at how business is occasionally conducted, its implications are far more real for any business that may find itself involved in allegations of corruption, which can be poisonous to the mission of seeking new capital and customers.

While many government agencies tout their ability to be “tough on corruption” — take, for instance, President Obama’s pledge when taking office that recently resigned lobbyists would not serve in his administration, a pledge which has not been kept to a large degree — some governments pronounce their zeal quickly, only to have their effectiveness disappear just as quickly. take, for instance, the Philippines administration of Gloria Arroyo, who championed her Presidential Anti-Graft Commission years after she was accused of diverting federal funds to her presidential campaign. Her appointed anti-corruption czar, Constancia de Guzman, hired her son and his girlfriend as consultants — and de Guzman still has yet to investigate the allegations of Arroyo’s misuse of federal funds. “We could overlook such shenanigans, perhaps, if de Guzman were otherwise good at her job,” Ninez Cachao-Olivares said in the Daily Tribune. “But in this notoriously corrupt land, she hasn’t investigated one major official.” Indeed, in 2009 the Philippines ranked 104th in the Heritage Foundation’s Economic Freedom Index, with the organization noting that “[c]orruption is perceived as pervasive. The Philippines ranks 131st out of 179 countries in Transparency International’s Corruption Perceptions Index for 2007. A culture of corruption is long-standing. Enforcement of anti-corruption laws is inconsistent, and the public perception of judicial, executive, and legislative corruption remains high.”

LEARNING THE RULES OF THE ROAD: RESOURCES FOR INVESTIGATING FOREIGN BUSINESSES

Against this anarchic, Wild West backdrop, how can an American company take advantage of the promise of global investment without being pilloried as being associated, however unwittingly, with unsavory conduct overseas? While standard due diligence tools certainly apply – thorough analysis of news articles, litigation, third-party corporate record databases, to name but a few – a few other approaches may yield fruit, such as a thorough review of U.S., and intergovernmental “watch lists,” particularly of sanctioned exporters, contractors, and person or groups whose U.S. assets have been frozen by the U.S. Treasury.

Additionally, link analysis of a person’s business dealings will flesh out a picture of who they know and have known, and where their interests really lie. If a country’s former defense minister has partnered with several other government officials in forming a transportation company while that minister also partners with your company in a mining venture, you don’t want your first knowledge of the transportation company’s existence to be when your joint venture is billed by that company for services. bearing in ind that cultural norms and laws vary between nations – and such conduct may not be illegal or even frowned upon – knowing about the possible conflicts and risks ahead of time can help your client or company manage the public perception across multiple cultures and contexts. Our firm has performed hundreds of such inquiries before clients considered investment in foreign companies, avoiding embarrassment and maximizing our client’s return on its global investment.

IN THE NEXT ISSUE

In the February issue, as the Congress works toward passage of a unified health care bill, we’ll revisit the issue of health care fraud and abuse, and look at areas where the new legislation may create or increase opportunities for abuse.

December 2009

IN THIS ISSUE

— Fruitful Trees Grown From Bad Seeds: The Tom Petters Case
— Blurring the Lines: The Effects of Fraudulent Funds Invested in Real Companies
— In the next issue

GREETINGS!

Welcome to the December edition of our newsletter! In this issue, we’ll examine the case of Tom Petters, who is accused of using the proceeds from his Ponzi scheme to buy stakes in legitimate companies.

FRUITFUL TREES GROWN FROM BAD SEEDS: THE TOM PETTERS CASE

While Bernie Madoff was the face of modern-day Ponzi schemes — literally, with Halloween masks bearing his likeness being a hot seller this year — months before Madoff’s arrest another accused fraudster, Tom Petters, was quietly indicted on 20 counts of mail and wire fraud, money laundering and conspiracy related to a Ponzi scheme that allegedly reaped $3.5 billion.

What makes Petters unique? Not his entities arranged under the umbrella of his firm, Petters Worldwide, based in Minnetonka, Minnesota. Nor the allegation that Petters’ firms reportedly solicited investments from hedge funds and others by purporting to be a high-end electronics reseller while actually shipping no such products. No, what makes Petters’ fraud unique is that while Madoff appears to have turned his scheme’s proceeds into lavish personal items, such as real estate and watercraft, Petters used large portions of the scheme’s proceeds to invest in ailing, legitimate companies, such as Polaroid Corp. and Sun Country Airlines.

BLURRING THE LINES: THE EFFECTS OF FRAUDULENT FUNDS INVESTED IN REAL COMPANIES

Petters’ scheme came to light only after a business partner, Deanna Coleman, became an informant for the government. While prosecutors were aggressive in attempting to punish Petters, seeking life in prison if he is convicted, the commingling of legitimate firm investments with ill-gotten gains has reportedly caused some confusion among jurors as they deliberated before the Thanksgiving holiday, asking the judge if Petters’ investments in Polaroid and Sun Country were made through Petters Group Worldwide, which they were. Petters’ defense team also seized on the legitimate business investments as an attempt to bifurcate Petters from the Ponzi scheme, which Petters’ defense said was carried out by business partners without his knowledge.

Those investments, meanwhile, began to suffer even before Petters was indicted, with Sun Country Airlines telling employees they would only receive half pay in the last quarter of 2009 due to a “cash crunch” related to Sun Country becoming independent of Petters’ firm.

By using the gains of his electronics Ponzi scheme, at least in part, to fund investments in legitimate, often publicly traded companies – according to the prosecution – Petters was able to give the appearance of being a legitimate businessman who was defrauded by less scrupulous partners – the ultimate fall guy. While jurors continue to weigh his fate, it’s important to note that trained fraud examiners can trace the proceeds of the Ponzi scheme, helping litigators and jurors alike determine exactly how non-existent DVD players could become stakes in America’s first instant camera company and other legitimate concerns.

IN THE NEXT ISSUE

We’ll kick off the new year by looking at the recent corruption cases in the Philippines and examining how best to protect yourself from Foreign Corrupt Practices Act exposure when dealing with overseas partners.

November 2009

IN THIS ISSUE

— Someone Has Your Number: Social Security Numbers and Identity Theft
— Chasing Shadows: Investigating Identity Theft
— In the next issue

GREETINGS!

Welcome to the November edition of our newsletter! In this issue, we’ll examine the hazards posed by the ubiquitous nature of Social Security Numbers as a “national identifier,” and steps that can be taken to both prevent identity theft and investigate it after the fact.

SOMEONE HAS YOUR NUMBER: SOCIAL SECURITY NUMBERS AND IDENTITY THEFT

When it was first instituted in the 1930s, the Social Security system was not envisioned as something to be interwoven into the fabric of America’s personal information infrastructure. Yet as the 20th century came to a close, the nine digit number meant to identify recipients of retirement benefits is used in everything from job applications to department store credit cards, and is often used to verify one’s identity. But what can you do when your Social Security number is no longer secure?

The problem of identity theft, most often by means of stealing a Social Security number, cost businesses $48 billion and consumers $5 billion in 2004, according to a report by the House Ways and Means Committee. This figure did not include the time spent attempting to mitigate the damage done, such as closing fraudulently opened accounts.

CHASING SHADOWS: INVESTIGATING IDENTITY THEFT

In recent years, particularly after the terrorist attacks of September 11, 2001, many federal government agencies have stepped up efforts to police access to and use of Social Security numbers, attempting to regulate dissemination of the data by credit reporting agencies and other private sector businesses. While the Social Security Administration said the physical theft of a wallet or purse containing this sensitive information is still possible, the most likely means of obtaining someone else’s number is via a “phishing” scam where an individual unwittingly volunteers the information to a phony institution posing to be a bank or other legitimate party. Various agencies have taken proactive steps to limit dissemination of the data, such as showing only the last four digits of a number on a federal tax lien, which is a public record.

While the Social Security Administration will review your earnings records to make sure someone else who uses your number does not report their earnings as your taxable income, they cannot assist consumers in remedying the theft. The Federal Trade Commission and Internal Revenue Service both have reporting agencies to help mitigate the effects of such fraud, and credit reporting agencies regularly employ both in-house and contract-based Certified Fraud Examiners to assess the damages caused, develop time lines of events once the crime is committed, and develop further internal controls to better respond to these issues. While it may not be possible to retain a CFE to prevent identity theft in your organization in all cases, a review of your company’s information retention policies would be a good start to ensuring the safety of one of your employees’ most important pieces of personal information.

IN THE NEXT ISSUE

In the next issue, we’ll look at the Ponzi scheme of Tom Petters, who used his illegitimate gains to take positions in several legitimate companies.

October 2009

IN THIS ISSUE

— A New Era of Responsibility? Gauging Efforts to Fight Mortgage Fraud
— Progress or Success? Sizing Up Reform Efforts
— In the next issue

GREETINGS!

Welcome to the October edition of our newsletter! In this issue, we’ll examine ongoing efforts to combat mortgage fraud one year after the financial markets collapsed, and analyze what lessons have been learned by regulators and financial institutions in its wake.

A NEW ERA OF RESPONSIBILITY? GAUGING EFFORTS TO FIGHT MORTGAGE FRAUD

On September 15, 2008, Lehman Brothers sought bankruptcy protection, a move that would later be credited with shocking the global financial system to the brink of collapse. The underlying cause of Lehman Brothers’ failure, as with the problems at other institutions, was its unprecedented exposure to, and subsequent losses from, the subprime mortgage lending market. President Barack Obama seized on the one year anniversary of the collapse to chide, perhaps too politely, the investment banking community and warn them not to rev up their old machinations. But were they listening, and can Obama really stand up to them?

“We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis,” Obama said. “There are some in the financial industry who are misreading this moment,” he continued. “Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them. They do so not just at their own peril, but at our nation’s.”

To that end, Treasury Secretary Timothy Geithner was joined by Attorneys General from several states in vowing to fight the types of mortgage fraud which precipitated the crisis. Geithner noted that the Federal Trade Commission has filed 22 actions related to mortgage fraud or loan modification scams since the crisis began.

PROGRESS OR SUCCESS? SIZING UP REFORM EFFORTS

The FTC has been part of a multi-agency program to combat false or misleading advertising regarding mortgage programs, including several referrals to the Justice Department for prosecution.

Yet reports of mortgage fraud rose 36 percent from 2007 to 2008, according to the Federal Bureau of Investigation, suggesting that much enforcement work remains to be done. As desperate homeowners sought to cling to their way of life from the boom years, scam artists made them easy prey. “These combined factors uncovered and fueled a rampant mortgage fraud climate fraught with opportunistic participants desperate to maintain or increase their current standard of living,” the Bureau said in its report.

Administration efforts to create independent councils to monitor and supervise financial firms have also met with stuff resistance from the banking and financial services industry, despite the passage of a $490 million bill in May 2009 which included creation of an independent review panel to review causes of the crisis whose results will be released next year, as well as increased numbers of prosecutors and investigators trained to spot such fraud. Banking industry clout is in full force against these efforts: Commercial banks spent more than $37 million making donations to political campaigns in the 2008 campaign season, while securities and investment companies spent more than $653 million lobbying elected officials from 1998-2009, according to the Center For Responsive Politics. As the Obama administration pushes forward against this backdrop to implement promised reforms, banks and investment companies will need to utilize resources like fraud examiners and compliance investigators to better anticipate concerns in what will likely be a more tightly regulated marketplace.

IN THE NEXT ISSUE

In the November issue, we’ll look at how the imitations regarding Social Security Numbers can contribute to identity theft, and what is being done to curtail these trends.

September 2009

IN THIS ISSUE

— Raise the Red Flag: Civil Debt Records as Fraud Motivators
— An Unsettling Past: Every Record Tells a Story
— In the next issue

GREETINGS!

Welcome to the September issue of our newsletter! In this issue, we’ll examine how civil records can be predictors of potential employee fraud or misconduct.

RAISE THE RED FLAG: CIVIL DEBT RECORDS AS FRAUD MOTIVATORS

Virtually every human resources department knows enough to run a criminal background check, often involving fingerprints and a nationwide history check by the Federal Bureau of Investigation, coupled with acquiring a consumer credit report. While these methods detail activity within approximately the previous ten years, various other civil records can tell the story of an employee’s spending habits, lifestyle, and potential motivators for embezzlement or other financial fraud.

Take, for instance, the case of Dr. Conrad Murray, the personal physician of the late entertainer Michael Jackson. Murray, who attended to Jackson prior to his death and summoned help in the singer’s final moments, is not yet named as a suspect by police, but the media scrutiny of the case revealed that Murray and his medical practice have $680,000 in various liens or judgments against them, as well as Murray having numerous student loans, credit card and child support payments.

While there is not yet any evidence that Murray would benefit financially from Jackson’s death, possible motivations could have included the ability to market a “tell all” book recalling Murray’s first-hand account of Jackson’s daily life.

AN UNSETTLING PAST: EVERY RECORD TELLS A STORY

Even though many of the records against Murray and his practice — maintained at various courthouses and clerk’s offices — are open items for which collection is currently being sought, closed records also indicate patterns of behavior for a prospective employee. In many cases, people in the thrall of various addictions – such as gambling, or drug dependency – will try to kick their habit by relocating to another part of the country and “starting over.” Even if such a person is able to succeed in spite of their various vices to the point where they can pay off the debts they have incurred, the recording of the debts can serve as evidence of problems that may resurface.

What should a company do if a potential employee shows promise and talent yet also a troubled past and pattern of irresponsible or destructive behavior? Possible solutions can include segregation of duties to be sure that, for instance, any access to petty cash or disbursements requires one or more approvals from trusted supervisors, as well as regular audits of that employee’s department financial data. If the employee is truly valued, the additional vigilance of internal auditors would be worthwhile — and if suspicion of fraud does arise, a fraud examiner can assemble the time line necessary to demonstrate that the misconduct is not an aberration but part of a pattern and practice of improper activity.

IN THE NEXT ISSUE

In the October issue, we’ll examine the progress — or lack thereof — in the efforts, spearheaded by the U.S. Treasury Department to combat mortgage fraud and improve disclosure in the process of buying a home.

August 2009

IN THIS ISSUE

— The High Price of Doing Business Abroad? Defining Bribery and Incentives
— All Stick, No Carrot: Increased FCPA Enforcement Efforts
— In the next issue

GREETINGS!

Welcome to the August 2009 edition of our newsletter! In this issue, we’ll examine the finer points of transacting business with foreign entities and complying with the U.S. Foreign Corrupt Practices Act.

THE HIGH PRICE OF DOING BUSINESS ABROAD? DEFINING BRIBERY AND INCENTIVES

Although it has only been 32 years since the United States passed the Foreign Corrupt Practices Act, which defined bribery in an international commercial context, as well as the sanctions and penalties for such behavior, graft and influence peddling may be one of the world’s oldest professions. Against the centuries of such behavior taking place, as well as the differing cultural norms and values in each country or region, simply defining bribery can be seen as a daunting task, let alone combating it. Yet the FCPA tries to do so, making exceptions in some instances, such as allowing payments when a private entity pays a government official an “incentive” to expedite completion of a transparent, already agreed upon contract. “Payments to foreign officials may be legal under the FCPA if the payments are permitted under the written laws of the host country,” according to one article on the subject. “Certain payments or reimbursements relating to product promotion may also be permitted under the FCPA.”

The basic statute itself is intentionally broad as to what is prohibited, generally barring any attempt by a U.S. business person “to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value” to a foreign official. This line can be very murky in countries such as Nigeria, where many ministers maintain interests in private companies even while serving in office; in instances where these companies do business with U.S. interests or form joint ventures with U.S. firms, the line between compliance and illegal behavior can seem hopelessly blurred.

ALL STICK, NO CARROT: INCREASED FCPA ENFORCEMENT EFFORTS

Much like any sweeping, multi-national enforcement action emanating from Washington, the FCPA has been a slowly evolving creature. As early as 1980, a Government Accountability Office study found “extensive dissatisfaction with the clarity of the act’s accounting provisions. Controversy exists over whether the provisions contain a materiality standard – a threshold for financial disclosure that limits management’s reporting responsibilities to only material items. The GAO survey shows that business believes compliance is unreasonable without a materiality standard. The act’s anti-bribery provisions have also been criticized as being vague and ambiguous.”

In a 1999 report, the Congressional Research Service noted, “Opponents have argued that ‘grey’ areas of the law, where what is permitted may not be clear, have had a chilling effect on United States export trade because many companies have ceased foreign operations rather than face the uncertainties in the Foreign Corrupt Practices Act,” potentially impeding as much as $1 billion in trade annually.

The FCPA was amended in 1988 to include the “expediency” clause noted earlier, but also raising penalties from $1 million to $2 million. The U.S. reluctance to loosen FCPA seems to have had an influence on the Organisation for Economic Co-operation and Development, or OECD, a consortium of largely highly developed nations. In November 1997, the 29 OECD member states were joined by five other nations in adopting standards which were very similar in scope and severity to FCPA.

Enforcement actions undertaken by the U.S. Justice Department and Securities and Exchange Commission have risen from five in 2004 to 33 in 2008, with another 19 reported in the first half of 2009 alone. The cost of non-compliance is measured beyond fines, in terms of reputational damage. We have performed pre-transactional compliance checks from Ireland to Ghana and many points in between, often altering our clients to “business as usual” in the home country that would not sit well with U.S. regulators. As with any transaction, foresight of potential risks is priceless, and this is never more true than when conducting business in our increasingly globalized world.

IN THE NEXT ISSUE

In the September issue, as authorities continue to investigate the circumstances of Michael Jackson’s death, we’ll look at how reports of his physician’s financial troubles have shed new light on the importance of civil records when conducting pre-employment screening.

July 2009

IN THIS ISSUE

— Bring Check and Skepticism to Closing: Signs of Mortgage Fraud
— The Effectiveness of Ongoing Reform Efforts
— In the next issue

GREETINGS!

Welcome to the July 2009 edition of our newsletter! In this issue, we’ll examine ongoing efforts to crack down on mortgage fraud, their effectiveness and possible areas for improvement.

BRING CHECK AND SKEPTICISM TO CLOSING: SIGNS OF MORTGAGE FRAUD

As the housing boom that began in earnest in the mid-1990s crested, the amount of transactions involving real estate – whether transfers or refinancing – skyrocketed. As activity surged, predators intent on making a quick, often dishonest buck stepped into the marketplace. These can include using outdated or misleading photographs as part of the appraisal process, or using related parties as “straw buyers” to inflate a home’s perceived worth before “flipping” it to another, unrelated party. As the Federal Deposit Insurance Corporation noted, filings of Suspicious Activity Reports related to mortgage fraud surged from nearly 5,000 in 2002 to more than 25,000 in 2005, and were only expected to increase.

As home foreclosures have skyrocketed, typically involving over-leveraged homeowners desperate to get out from under their four walls of debt, the opportunity for fraudsters has also surged. Although many mortgage brokers ply their trade fairly, simply acting to get their client the best possible deal, others see their insertion into the process as a means of making money at the expense of either party in the transaction.

THE EFFECTIVENESS OF ONGOING REFORM EFFORTS

The need for reforms within the mortgage industry to combat fraud is nothing new, but recent events have certainly placed its importance at the forefront of American domestic policy. When he was still a U.S. Senator – prior to announcing his national candidacy — President Barack Obama (aided by his future running mate, Joe Biden) authored the Stop Fraud Act, which would make a “mortgage professional’s” knowingly misleading a client for financial gain a criminal act, punishable by up to 35 years in prison and/or a $5 million fine. This sounds useful, but there is language similar to that near the bottom of every loan application that implies some measure of criminal penalty for fraud in mortgage applications, and this policy has been in place for several years.

While Obama touted when in the White House that his bill “requires the Government Accountability Office to evaluate and report to Congress on various state lending practices so that state regulations that undermine consumer’s rights can be identified and hopefully eliminated,” as of this writing no such report has been issued, either nationwide in scope or using regional case studies. This suggests that lawmakers don’t yet have an adequate way of understanding how their laws can and cannot be used effectively by the regulators charged with enforcing them, leaving the marketplace still ripe for fraud. Fraud examiners can determine the disciplinary and regulatory history of mortgage brokers and independent originators to give clients any history of a pattern and practice of questionable behavior.

IN THE NEXT ISSUE

In the next issue we’ll look at the tools an investigator can use when performing international compliance checks for due diligence and Foreign Corrupt Practices Act, as well as why and how various companies are sanctioned.

June 2009

IN THIS ISSUE

— Fudging the Numbers: Pension Fraud Allegations at GM Months Before Crisis
— Keeping an Eye on the Gatekeepers in Auto Overhaul
— In the next issue

GREETINGS!

Welcome to the June 2009 edition of our newsletter! In this issue, we’ll look at episodes of fraud concerning the pension plans at some of the large U.S. automakers who are currently fighting for their continued existence.

Fudging the Numbers: Pension Fraud Allegations at GM Months Before Crisis

General Motors has announced its bankruptcy at the urging of the federal government. While many commentators have at times maligned the United Auto Workers for the role their compensation packages may have played in revving up the costs at Chrysler L.L.C., the actual management of some of those benefits — particularly pension fund obligations — merits closer scrutiny as automakers “teeter on the brink” or are in bankruptcy.

At General Motors, for instance, recent news has not been positive about the management of retirement benefits. In January of this year, the U.S. Securities and Exchange Commission announced that it had reached a settlement with G.M. after an investigation of more than four years found that the automaker had under-funded its pension plan by $10 billion as early as 2001, and had mis-stated its rate of return from the funds, which in 2003 would have reduced its pre-tax earnings by 20 percent – almost $680 million. Analysis of Form 5500 filings – reports of profit-sharing and pension plans — can be a good starting place for a fraud examiner’s inquiry.

KEEPING AN EYE ON THE GATEKEEPERS IN AUTO OVERHAUL

As the federal government attempts to revive or parcel off Chrysler and GM – two of the most indelible American brands and integral parts of its economy – the “car czar” tapped to liaise between the government and automakers during restructuring efforts is fending off questions about his own involvement in a different type of pension problem.

Steven Rattner, who headed the Quadrangle Group investment firm before accepting the Treasury Department post in late February, is under an ongoing investigation into whether his firm engaged in “pay to play,” giving kickbacks to win investment business from the New York State pension fund. All told, 20 firms are alleged to have made payments of a “finder’s fee” to a “politically connected consultant”: in return for $122 billion worth of investment advisory business. David Logislici, the investment manger of the pension fund, met with a “senior executive” at Quadrangle reportedly identified as Rattner, and Quadrangle later reportedly made payments to Henry Morris, who formerly had been the pension fund’s “top fundraiser.”

Rattner has reportedly cooperated with the ongoing investigation, but it calls into question the integrity of the restructuring overseer – even as the actions taken by those he is now policing also draw scrutiny.

IN THE NEXT ISSUE

In the next issue, we’ll look at differing types of mortgage fraud and assess the likely effectiveness of a new law aimed at curbing such fraud.

May 2009

IN THIS ISSUE

— Paper Trails in Unlikely Places: Following Hidden Assets
— Piercing the Veil: Tracing Assets and Recent Reform Efforts
— In the next issue

GREETINGS!

Welcome to the May 2009 edition of our newsletter! In this issue, we’ll look at how to locate “hidden” assets in disclosure-unfriendly (and often exotic) locales such as the Cayman Islands, Switzerland and elsewhere.

PAPER TRAILS IN UNLIKELY PLACES: FOLLOWING HIDDEN ASSETS

Entire countries, indeed entire industries, count on being able to make a client’s records unavailable – through perfectly legal means – for public inspection, whether by auditors, journalists, or curious citizens. While such circumstances exist in the United States (Hello, Delaware!), where only a registered agent (often an attorney) will be affiliated with a company’s records, the ability to mask true ownership and activity of a business is even greater overseas (even in Delaware, private companies have to list a business address separate from the registered agent’s address, which can allow researchers to potentially identify owners.)

So, what can be done against this backdrop? We have often followed the chain of ownership from various shell companies in places such as Belize and the Cayman Islands to find the ultimate owner of a chain of companies. The advantages to the scheme are many: by saying that XYZ Belize Ltd. is the true owner of ABC Ltd. in the United Kingdom, it may provide tax benefits and a layer of secrecy to the individual owners of XYZ Belize Ltd. (who, in this hypothetical instance, would likely be the same U.K.-based officers and directors operating ABC Ltd. from a London office.) By channeling the ownership chain through Belize (and, most likely, from Belize to another haven country), the cost and effort for regulators to determine who is ultimately culpable should something go awry becomes onerous.

PIERCING THE VEIL: TRACING ASSETS AND RECENT REFORM EFFORTS

Whether discussing the jungles of Belize or the tony chalets of Switzerland, for much of the last century the rules have been the same: pay government officials modest registration fees and an often significant corporate tax, and they’ll hide the details of your companies’ operations. While this is true much of the time, ultimately accountability can be discovered. Suppose an individual has a Delaware company that maintains bank accounts or real property in Turks and Caicos meant to be hidden from a business partner during litigation. The Turks and Caicos assets, meanwhile, are held by a Swiss company, whose partners in turn are three Isle of Jersey partnerships. Again, ultimately, by following the maze of shell companies to find addresses (if not individual identities) of the partner companies, a skilled investigator can link the individuals at the end of the chain to the assets at the beginning, making the case that the various entities are nothing more than dummies which, when knocked down, reveal who actually benefits from the assets involved.

As with many aspects of the financial world, offshore tax havens have been affected by the present credit crisis and its effects. Swiss financial services firm UBS was recently forced to disclose the names of 250 clients for whom it held secret Swiss bank accounts. UBS reached a $780 settlement when faced with allegations that it helped these clients evade U.S. taxes, but the clients have sued UBS in Swiss court alleging a breach of Swiss secrecy laws. The outcome of the case could have ramifications far beyond the Swiss financial community and, if Swiss bank secrecy laws are modified or weakened, could herald a sea change for disclosure laws worldwide.

IN THE NEXT ISSUE

In our June issue, we’ll look at how pension fraud at companies large and small can affect the fortunes of every employee, from the executive suite to the assembly line.

April 2009

IN THIS ISSUE

— A Unique Trust: the Need for Background Screening of Administrative Candidates at Universities
— An Ounce of Prevention vs. A Pound of Cure: Reasons to Run Background Checks
— In the next issue

Welcome to the April 2009 edition of our newsletter! In this issue, we’ll examine cases of fraud and unacceptable conduct by university personnel that should have been detected and prevented in advance. We’ll also look at the main reasons many universities do not screen senior administrators, faculty, and even graduate student applicants.

A UNIQUE TRUST: THE NEED FOR BACKGROUND SCREENING OF ADMINISTRATIVE CANDIDATES AT UNIVERSITIES

“The unexamined life is not worth living for men.”   –Socrates, according to Plato’s Apology, 38-a5.

Life is itself a process of continual examination, as Socrates knew, but the genesis of that process truly begins at our nation’s universities, as young minds learn how to question what they see and delve into new areas of thought. Nowhere else is such trust placed in the hands of employees, tasked with teaching young people how to think and challenge themselves to be successful. When that employee can be trusted to do the job well and not be a disruptive force, the students flourish, the research gains the right kind of attention, and the university raises its profile and its endowments. But when the faculty member happens to attract negative attention – either due to actions taken on campus or embarrassing facts about the person’s past surfacing while in the university’s employ – the reputational and actual harm can be deeply damaging. In these instances, the old adage that an ounce of prevention is far preferable to a pound of cure has never been truer.

Unfortunately, the academic landscape is littered with people given significant measures of trust by universities who abused that trust and damaged their employer’s reputations for years to follow. Whether the case of the dean of admissions at the Massachusetts Institute of Technology who admitted in 2007 that she had lied about having degrees at not one, not two, but three schools — 28 years after she was first employed by the school — or the shooter in the April 2007 Virginia Tech massacre who had been accused of stalking and declared mentally ill by a court, the consequences of not checking out relevant personnel are simply too great to ignore.

AN OUNCE OF PREVENTION VS. A POUND OF CURE: REASONS TO RUN BACKGROUND CHECKS

University campuses are incubated communities, with many functions of the business world, but often fewer of the accountability issues and consequences for bad behavior. Whether an administrator who has served for several decades or a tenured professor, there is a tendency to protect one’s own on campus. That trust is exactly what criminals and fraudsters prey on, whether an associate dean in over her head in debt and looking for an easy way out or a professor with a history of inappropriate behavior around students of the opposite sex, the risks to the university and student body can be severe if such “problem cases” are not caught in time. Recently, a medical school student in Sweden who falsified his records to hide the fact that he was a convicted murderer was admitted to a second medical school after the first dismissed him. Such cases also exist within the United States, and may be more prevalent than anyone expects.

So, given that, why do only ten percent of colleges conduct background screening on students seeking to live on campus, and possibly fewer screen the administrators in positions of authority? One possible reason for the latter is opposition from employee trade groups such as the American Association of university Professors, which said in a statement that it saw some need for background investigations, but without compromising the privacy of a candidate. “The privacy of a candidate [for employment] should be compromised only as necessary in order to secure information that may ensure that applicants are qualified to meet the particular obligations of specific positions,” the AAUP said in March 2004.

This position seems a bit spurious, as many of the relevant records – criminal history, civil judgments, sex offender registries, etc. – are openly accessible to members of the public. A seasoned fraud examiner can synthesize all of the relevant public records to create an accurate profile of a candidate’s past without infringing upon privacy rights, painting a picture far more complex than a credit check can provide.

IN THE NEXT ISSUE

In the May issue, we’ll examine the nuances of conducting asset searches both within the United States and abroad – including some jurisdictions that have made their names by not giving up the very information you’re seeking.

March 2009

IN THIS ISSUE

— Change We Can Believe In? Promised Steps to Police Bailout Funds May Fall Short
— Words and Deeds: What Obama Has and Hasn’t Done Thus Far on Transparency
— In the next issue

GREETINGS!

Welcome to the March 2009 edition of our newsletter! In this issue, we’ll look at how the Obama administration is attempting to change the bank bailout program’s level of transparency — and analyze whether it can get the results it has promised.

CHANGE WE CAN BELIEVE IN? PROMISED STEPS TO POLICE BAILOUT FUNDS MAY FALL SHORT

President Barack Obama swept into the White House on a platform promising change, and his desire to usher in that change certainly seems sincere. Yet, like most presidents new to the office, there may be disconnect between his goals and the immediately achievable reality. as President-Elect, Obama told ABC’s This Week about the remaining $350 billion in bank bailout funds, “We can regain the confidence of both Congress and the American people that this is not just money that is being given to banks without any strings attached and nobody knows what happens, but rather that it is targeted very specifically at getting credit flowing again to businesses and families.” To restore that confidence, one measure the Obama administration enacted was a cap on pay of certain executives at banks that received bailout funds. Yet some of the broader oversight measures meant to instill confidence have met strong resistance.

One month before Obama took office, the Government Accountability Office – Congress’ investigative agency — issued a report criticizing the Bush Treasury department’s initial handling of the bailout funds with respect to publicly stating how the monies were spent. “Specifically, Treasury should work with the bank regulators to establish a systematic means of monitoring and reporting on whether financial institutions’ activities are consistent with the purposes of CPP [capital purchase program] and help ensure an appropriate level of accountability and transparency.”

Thus far, non-profit watchdogs have stepped in to fill the void, such as our friends at the Sunlight Foundation. As Ellen Miller noted last November, This is a real opportunity for the Obama team. Make reporting on the bailout a model of the transparent government that they have so strongly advocated. Daily reporting, online in usable data formats would be a good place to start.”

WORDS AND DEEDS: WHAT OBAMA HAS AND HASN’T DONE THUS FAR ON TRANSPARENCY

While instituting executive compensation caps on bailout recipients won some headlines and channeled populist anger into goodwill, much more will need to be done to make the bailout process a transparent one. While new Treasury Secretary Timothy Geithner promised in his February 10 statement introducing the Financial Stability plan that bailout recipients and the rules that govern them will be tracked on www.financialstability.gov, as of this writing the site is “coming soon.”

Yes, initiatives take time, but the web whiz kids in the incoming Obama administration made www.change.gov a reality in record time, only one week after the election results were finalized, and shepherded the stimulus bill through a friendly but skeptical Congress in a matter of weeks. We hope it’s not a matter of motivation, or backroom dissent from the special interests that helped create the “financial weapons of mass destruction” that helped get us into this mess. As President Obama said in his inaugural address, it’s time to roll up our sleeves and get to work. Let’s hope his financial watchdogs got the message.

IN THE NEXT ISSUE

In the April issue, we would normally talk about taxes. But that subject, frankly, is too morose for the welcoming of spring, so instead we’ll look at the benefits of screening educators at all levels before they are trusted with the responsibility of shaping young minds — and what can go wrong when thorough due diligence is not done before such hires are made.

February 2009

IN THIS ISSUE

— Pay No Attention to the Man Behind the Curtain: How Ponzi Schemes Flourish
— Looting the Store as the Night Watchman Napped: Missed Signs in the Madoff Case
— In the next issue

GREETINGS!

Welcome to the February 2009 edition of our newsletter! In this issue, we’ll look at an age-old favorite fraud that finds new (though not always inventive) ways of re-creating itself: the Ponzi scheme.

PAY NO ATTENTION TO THE MAN BEHIND THE CURTAIN: HOW PONZI SCHEMES FLOURISH

There are times when events seem to interconnect with an almost cosmic sense of timing, as if sending a message to the broader population. When the fraudulent “investments” of financial adviser Bernard Madoff were made public in December 2008, resulting in investor losses estimated to be at least $50 billion, the financial crisis triggered by credit default swaps and the securitization of subprime mortgages was in full swing across the globe. The fact that Madoff, a former chairman of the Nasdaq stock exchange, had fooled celebrities, charities and even his own family members out of billions struck a global nerve.

Yet, as with most con men, what Madoff did was ultimately unoriginal, and only noteworthy for its breathtaking scope and arrogance (as well as the ignorance of regulators to allegations made as early as 1992.) The origins of the Ponzi scheme began nearly 20 years before Madoff was born, in 1919, when an Italian fraudster named Charles Ponzi realized he could profit from the variations in currency between countries by buying International Postal Reply Coupons in a weak currency country (Spain, at the time), and sell them in the United States for a tidy sum.

Using these proceeds as seed capital (and the IPRCs as the alleged vehicle for generating profits), Ponzi began to solicit investors with the promise of 40 percent annual returns, eight times the interest rate. Ponzi paid the promised returns to initial investors as more money poured in, but could not keep up with paying handsome returns as more investors took part.

His scheme lost Boston area investors at least $10 million; while on bail awaiting appeal of his state mail fraud conviction, Ponzi relocated to Florida, where he brazenly operated scam selling worthless swamp land (yet another of his famed legacies.) After a failed escape attempt from his Florida prison sentence, Ponzi served seven years in prison, was released, and tried to continue scams in Italy and Brazil before his death, destitute, in Rio de Janeiro in 1949.

LOOTING THE STORE AS THE NIGHT WATCHMAN NAPPED: MISSED SIGNS IN THE MADOFF CASE

Ponzi was infamous for his braggadocio and cavalier confidence, and Madoff followed suit, christening the 55-foot fishing boat he bought “Bull.” While Madoff knew his “investment firm” was full of bull, regulators at the SEC missed some key opportunities to look inside his false profits. (yet even the investment firm of his mother, Sylvia Madoff, had run-ins with federal regulators in the 1960s.)

To this day, Madoff Securities remains suspended — but active — with FINRA, the self-regulatory agency. Although FINRA (then NASD) first censured Madoff Securities in 1963, and also fined the firm in 2005 and 2007 for failing to display limit orders in a timely fashion, it appears that none of these inquiries analyzed how Madoff was generating the promised rates of return. Madoff Securities, which traded on the London Stock Exchange and was domiciled in the United Kingdom, said in its SEC 2005 Investment Adviser filing that it had more than $17 billion in assets under management for 23 accounts, solicited principally from charities and high net worth individuals. Yet between one and five employees — as we now know, only Madoff himself — was responsible for investment decisions at the firm, which said it employed between 51 and 250 people.

The recently known indicators of potential fraud are troubling, but the signs that the SEC was made aware of these indicators date back to 1992, when the SEC shut down three small investment firms that were working with Madoff, after the firms promised returns in excess of 20 percent. Madoff had to return the $454 million his partner firms had raised — “somehow, he got it done over a weekend,” a source reportedly said — but he was not sanctioned. Years later, after the SEC found no wrongdoing at Madoff Securities in 2005, an SEC compliance official, Eric Swanson, married Madoff’s niece.

From red flags raised in filings Madoff personally signed to coincidental, if embarrassing, family ties, regulators simply were not looking closely enough as Madoff made off with millions from reputable persons and charities. Significant regulatory reforms, such as requiring investment firms like Madoff’s to process client statements through an independent clearinghouse, are sure to follow after the revelation of this gargantuan fraud.

IN THE NEXT ISSUE

In the March issue of our newsletter, we’ll look at the Obama administration’s pledges of increased transparency regarding use of Troubled Asset Relief Program funds — what they’re trying to do, who supports and opposes the measures, and likely winners and losers.

January 2009

IN THIS ISSUE

— Hard Times and Financial Crime: The Basics of Bankruptcy Fraud
— Other People’s Money: How Creditors can Detect a Potential Bankruptcy Fraud
— In the next issue

GREETINGS!

Welcome to the January 2009 edition of our newsletter! In this issue, we’ll discuss indicators that a company — whether a client, a vendor, or business partner — entering bankruptcy is not all that is appears to be.

HARD TIMES AND FINANCIAL CRIME: THE BASICS OF BANKRUPTCY FRAUD

There’s a reason the adage about a few bad apples spoiling the whole bunch continues to ring true: whether we’re discussing employee conduct, taxpayer behavior or a company’s ability to pay its creditors, many participants play by the rules. Those that do not, however, throw the entire system into flux as it adjusts to understand and regulate them. With bankruptcies (and federal bailouts) reaching seismic levels in 2008, it seems like a good time to review the red flags that a bankruptcy may not be a company’s last resort to stay operative or as a means of paying off debts via liquidation.

In the past, we have been familiar with “bust out” bankruptcy scams where perpetrators will rent office space, hire employees (although typically only a few, often relatives or friends), and buy significant, possibly excessive, amounts of inventory on credit. After establishing a good credit history for, say, the first six months of operation, often selling inventory at steep discounts if the buyer will pay cash up front. (This type of scheme work best for high volume retail sales products, like prepaid gasoline or telephone cards.) having pocketed the cash from the sales, the scammer then defaults on his credit obligations, files for bankruptcy and leaves creditors high and dry.

OTHER PEOPLE’S MONEY: HOW CREDITORS CAN DETECT A POTENTIAL BANKRUPTCY FRAUD

At least 10 percent of all bankruptcy petitions “contain some elements of fraud,” according to U.S. Justice Department data provided by the Internal Revenue Service. Although new and creative ways to perpetrate these frauds are cropping up every day, there are signs you can look out for to see if a client or partner (once again, particularly in a high-volume retail space) may be prone to this kind of fraudulent behavior.

Many times individuals or businesses will create shell companies, both within the United States and abroad, to hide assets (whether cash obtained from vendors as in the example above, or legitimate payments funneled out of the company.) For domestic subjects, a cross-reference of businesses with an individual’s personal address history (and, importantly, that of his immediate and extended family) can likely turn up a number of limited partnerships or other entities which may hold the title to personal property or even other, legitimate businesses.

If the subject claiming bankruptcy is a client or business partner, a review of annual report filings may yield good interview subjects as well, such as former business partners or shareholders. Similarly, a review of an individual’s personal history, such as civil litigation, can yield key informants, such as former spouses. By digging into a bankruptcy filer’s personal and professional past, you can detect their motives of hiding funds from inclusion in bankruptcy, as well as their opportunities to do so over time. A Certified Fraud Examiner can review public documents and any internal company records to determine the patterns of fraud, both those that were realized and any that were planned but later scuttled.

IN THE NEXT ISSUE

In the February 2009 issue, we’ll revisit an old favorite by analyzing Ponzi schemes in the wake of the massive, ongoing scandal regarding financial adviser Bernie Madoff.

December 2008

IN THIS ISSUE

— Taking on Frauds, Politicians and Other Undesirables: Enacting the Bailout’s Regulatory Changes
— “How Costly Hidden Risk Can Be”: Efforts to Protect Investors
— In the next issue

GREETINGS!

Welcome to the December 2008 edition of our newsletter! In this issue, as a tumultuous 2008 draws to a close, we’ll examine what the investigative and enforcement agencies charged with overseeing the new regulations of the bailout have done since it became law.

TAKING ON FRAUDS, POLITICIANS AND OTHER UNDESIRABLES: ENACTING THE BAILOUT’S REGULATORY CHANGES

It’s a simple axiom of American life: there is no way to regulate or out-legislate human ingenuity. The same drive and talent that has fueled so many legitimate enterprises also motivates fraudsters and unscrupulous actors of all kinds. When the intellect of the average American is geared towards nefarious ends, it can be a very difficult obstacle to overcome. What can regulators and law enforcement officials do?

The true answer to that question is an ever-evolving one, and this process is made more fluid by the crisis-level situation America finds herself in today. In an atmosphere of unrepentant fear, doubt and uncertainty, the natural advantage goes to the shyster looking to prey on those fears, whether in equity markets or mortgage refinancing. But regulators have several tools at their disposal to prosecute frauds that have occurred as well as preventing them from happening in the future.

“HOW COSTLY HIDDEN RISK CAN BE”: EFFORTS TO PROTECT INVESTORS

For even the most free-market thinkers, like Securities and Exchange Commission chairman Christopher Cox, the crisis has been a clarion call that market regulation is not always analogous to restraint of commerce. ” Investors have a right to know the truth – and the risks – about the securities that trade in our public markets,” he said in a statement. “Never in this agency’s history has this fundamental mission been more relevant, and more urgent. The current credit crisis has shown the importance of transparency to a healthy marketplace – and how costly hidden risk can be.”

To that end, the SEC has increased prosecutions and civil penalties regarding market manipulations, as well as massive settlements regarding the sale of “auction rate securities,” a lesser-known market that paralleled the subprime mortgage linked credit default swaps discussed in our last newsletter.

Other agencies have stepped up their efforts as well: in a recent speech to his board of managers, the head of the Office of Comptroller of Currency, John C. Dugan, said valuable lessons were learned regarding flaws in previous risk management systems. “CDOs backed by subprime mortgages were the prime example” of lax risk management, he said. “There, the triple A ratings for super-senior tranches lulled banks and their regulators into a false sense of security, notwithstanding the inherent risk of the underlying collateral. Some of the exposure was masked in off-balance sheet vehicles in ways that clouded the full extent of exposure for senior management, the Board of Directors, and us. Indeed, some senior bank management thought they had avoided subprime risk by deliberately choosing to avoid originating such loans in the bank – only to find out after the fact that their investment banks had purchased subprime loans elsewhere to structure them into CDOs. … The lessons to be learned from all this regarding complex instruments: too much reliance on triple A ratings; not enough transparency and risk aggregation; and too much tolerance for concentrations.” To that end, Dugan emphasized thorough evaluations of a bank’s viability in both the short and near terms, before the OCC would recommend closure of any institution.

Where does that leave your individual and corporate clients, who have been at risk as this process has unfolded? Perhaps still uncertain, but hopefully confident that the right people are starting to do the right things to help unravel the processes that helped create this mess. Retention of a fraud examiner to work with regulators making inquiries to your clients can bolster their confidence that they will navigate the changing landscape in the best manner possible.

IN THE NEXT ISSUE

In our January 2009 edition, we’ll look at the role fraud can play at companies that enter the bankruptcy and liquidation process.

November 2008

IN THIS ISSUE

— The Regulatory Gang That Couldn’t Shoot Straight: Why Promised Disclosure Faltered
— Dear Fox, Please Care For My Henhouse: Congress Yields to Paulson
— In the next issue

GREETINGS!

Welcome to the November edition of our newsletter! In this issue, we were going to discuss how the bailout provisions would affect disclosure regulations in various lending markets, but a funny thing happened on the way to that thesis.

Which is to say, nothing happened.

So we’ll look at what was supposed to happen, why it didn’t, and what else didn’t happen.

THE REGULATORY GANG THAT COULDN’T SHOOT STRAIGHT: WHY PROMISED DISCLOSURE FALTERED

The subprime mortgage crisis that has badly damaged America’s financial markets has its roots in a simple problem: a failure to manage risk based on a near-total collapse in disclosure of an asset’s true value and the lack of truthful evaluation regarding the risks inherent in holding that asset. Both sides involved in these transactions, buyers and sellers, were steeped in an often willful denial of the “reality on the ground,” as politicians are wont to say. While the parties transacting business are at fault, a “dishonorable mention” ought to go to credit rating agencies that aided and abetted in the spiral of denial that exacerbated this situation.

The lack of disclosure has led to a lack of trust, the fundamental principle behind functioning credit markets. This pattern has only recently begun to ease, and will not be corrected quickly.

This situation would be a daunting one for any Congress, and members from both parties pledged swift corrective action, including increased transparency and disclosure. Democrats took the populist tact of insisting, especially to any television cameras present, that the pay for any senior executive whose bank was involved in the program be both capped and publicly disclosed.

Yet while Congress excoriated the tycoons who created this mess, they left almost all disclosure authority in the hands of Treasury Secretary Henry Paulson. In fact, the only party truly mandated to disclose its activities under the new plan is the government buying up the toxic assets — not the banks who packaged and sold the assets. Even those hedge funds whose short selling had battered the stock market were able to report their short positions to the Securities and Exchange Commission confidentially, rather than expose them to public scrutiny, during the SEC’s ban on short sales meant to restore confidence in battered investment markets.

DEAR FOX, PLEASE CARE FOR MY HENHOUSE: CONGRESS YIELDS TO PAULSON

What will the investing public — which is to say, every taxpayer who has “invested” in this program, whether they like it or not — learn about many of the troubled assets their hard-earned dollars have bought? The answer may be “not much.” As the final version of the bill reads, the Treasury “Secretary shall determine whether the public disclosure required for such financial institutions with respect to off-balance sheet transactions, derivatives instruments, contingent liabilities, and similar sources of potential exposure is adequate to provide to the public sufficient information as to the true financial position of the institutions.

“If such disclosure is not adequate for that purpose, the Secretary shall make recommendations for additional disclosure requirements to the relevant regulators.”

Note the phrase “derivatives instruments” — the key cog in this messy problem’s engine. In their most basic form, these were “side bets” placed by investors who did not invest in whether the banks packaging the loans would succeed or fail — rather, these investors wagered whether the bundles of mortgages sold across the globe by investment banks would perform or default. You may know how that turned out — but, unless Secretary Paulson deems it necessary, you won’t know what, if anything, has been done to regulate and provide accountability to the class of investments at the heart of this problem.

Independent oversight will be the key to compel transparency into the marketplace and provide incentives for parties to amend their trading and valuation habits. While the government will have its hands full, as we’ll discuss next month, independent fraud examiners and forensic accountants will likely be called upon to help sort out the details and provide accountability as execution of this plan takes shape.

IN THE NEXT ISSUE

In the December issue, we’ll look at how the government’s investigative agencies — notably the Federal Bureau of Investigation, various U.S. Attorneys and the Treasury Department’s investigators are probing how the problems happened, and what the patterns discovered can tell us about how best to prevent their recurrence.

October 2008

IN THIS ISSUE

— Down in the Muck: The Role of Opposition Research
— Peddling Influence: The Elephant (or Donkey) in the Room
— In the next issue

GREETINGS!

Welcome to the October edition of our newsletter! In this issue, with the presidential debates underway and the election slightly more than a month away, we’ll look at how opposition research is conducted and how it can help — and harm — political campaigns on all levels.

DOWN IN THE MUCK: THE ROLE OF OPPOSITION RESEARCH

Let’s face it: politicians in 2008 rival used car salesmen in terms of popularity. The widespread notion that the U.S. Congress is a group of squabbling do-nothings is firmly held in the American consciousness.

Until, of course, America looks at what its political leaders are actually doing.

This is where opposition research comes in. Having advised candidates in the past regarding preemptive vetting of donors to be aware of and prepare for controversies before they happen, we can speak from first-hand experience of the importance of knowing every black mark on your opponent’s record — and, just as importantly, knowing where the weak spots are in your own candidate’s background.

PEDDLING INFLUENCE: THE ELEPHANT (OR DONKEY) IN THE ROOM

In the case of long-serving public officials, investigating every aspect of their personal and public lives can seem daunting. As the Ted Stevens and Antoin “Tony” Rezko cases have recently illuminated, the dividing line between a candidate’s personal life (such as the homes they own, the cars they drive, and the company they keep) can be blurred by those seeking to gain from an officeholder’s public duty. Most often, these influence seekers use wealth to gain their edge, offering to benefit a politician’s campaign — or the politician himself — financially in exchange for a favorable letter to a regulatory agency, a key vote or a meeting with a committee chairman.

The sources of information available can be staggering, but a good place to start is by looking at a subject’s campaign contributions received. While the mainstream media has become more attuned to looking at this source in the last decade, primary records are best, and very few political reporters follow campaign expenditures as closely. Knowing where your opponent spends his money is as essential as where he gets it.

Timelines are also a key component to research political activity — overlapping contributions received, personal financial situations, and key votes or letters written can paint a picture that, once placed in a 30-second commercial, can be damning and difficult to refute. Lest your candidate think himself above the fray, we recommend “integrity audits” to all of our political clients, in an effort to determine the issues their opponent is likely to raise.

Politics has always been a contact sport, but with the right approach, tools and personnel, your client can win the battle for positive public perception every time.

IN THE NEXT ISSUE

In the November issue, we’ll examine how — and whether — the fallout from the subprime-mortgage inspired financial crisis has affected corporate attitudes toward detecting fraud, and what innovations the recent crisis might usher into action.

September 2008

IN THIS ISSUE

— Everyday Thieves: What Makes Honest People Do Dishonest Things
— Indicators of Financial and Emotional Stresses That Can Motivate Fraud
— In the next issue

GREETINGS!

Welcome to the September 2008 edition of our newsletter! In this issue, we’ll examine the role civil records play in serving as potential predictors for embezzlement or asset misappropriation.

EVERYDAY THIEVES: WHAT MAKES HONEST PEOPLE DO DISHONEST THINGS

It’s something that has happened to everyone at some point — an employee abuses their position, often acting seemingly out of character. The water cooler starts to buzz with shock and innuendo. “Did you hear what Johnny did?” “I never thought he was capable of doing something like that …” “Why would he steal from the company?”

That last question is the most important, and often the most difficult to answer. Most white-collar criminals do not have prior criminal records, and are often motivated by a variety of reasons. While there is no fail-safe approach to identifying the stresses that motivate people to defraud their company, there are ways to identify ‘red flags’ that may make someone more likely to commit fraud.

Most employees, multiple surveys have shown, consider themselves honest people, and are further deterred from dishonest behavior by the shameful regard in which their community — be it religious leaders, neighbors or colleagues — would hold such actions if they were caught. Yet several factors can drive someone to override this pressure, to do what had previously been unthinkable — these pressures often build over time, and are often documented as they escalate.

INDICATORS OF FINANCIAL AND EMOTIONAL STRESSES THAT CAN MOTIVATE FRAUD

The two main types of stressors that can lead someone to commit fraud are financial and personal, or emotional, stresses. Financial stresses for someone who is gainfully employed can include maintaining a lifestyle beyond his means, sudden and/or prolonged illness or other medical issues, even having to send several children to college in a short period of time. Personal and emotional issues that may lead to fraud would include divorce, which could in turn lead to loss of communally obtained assets, such as houses and investment portfolios.

Detection of these stressors can be difficult to obtain – for instance, if an employee just moved to the area and had a divorce in another state two years ago from which he was still reeling, you would need to check records in every county in which he had lived to be thorough. Liens and judgments levied against someone can indicate levels of unsecured debts that someone might need to repay, while a multitude of automobiles, homes or watercraft might be unusual depending on an employee’s income. Finally, civil litigation — often a step taken if a lien or judgment is issued and left unpaid — can offer greater details as to how someone got into a situation where they owed far more than they could repay, and would thus have reason to attempt financial crimes.

While outstanding debts are not – in and of themselves – proof that a person is likely to commit fraud, annual or bi-annual review of such public records, along with interviews when such red flags appear, would help to protect against fraud. It is best to obtain consent for such reviews when the employee is hired, or as a condition of continued employment for existing employees. Also, by cooperating openly with employees about that process, their perception that the company is looking out for fraud will be heightened and fraud will be less likely to occur.

IN THE NEXT ISSUE

In the next issue, we’ll look into detecting fraud and corruption among public officials, on both local and national levels.

August 2008

IN THIS ISSUE

— Broken Trust: The Problem of Elder Care Financial Fraud
— The ‘Red Flags’ of Elder Care Financial Fraud
— In the next issue

GREETINGS!

Welcome to the August 2008 edition of our newsletter! As the dog days of summer creep upon us, we’ll look at an oft-overlooked and vulnerable segment of the population — senior citizens. Routinely seen as ideal victims for various fraudulent schemes, we’ll look at some of these schemes and how caregivers or relatives can spot ‘red flags’ before it’s too late.

BROKEN TRUST: THE PROBLEM OF ELDER CARE FINANCIAL FRAUD

Entering your “golden years” should not mean that someone in your life should see you as a golden goose, ready to be taken advantage of for their financial gain. Yet for many seniors, the time between retirement and, sadly, even up to the funeral can be a time fraught with fraud and deception.

Statistics about elder care fraud are incomplete at best; given the pride people feel in accumulating a lifetime of assets, admitting that you’ve been had is not an easy task.

The “pride factor” which keeps victims from aggressively pursuing scammers has often allowed unscrupulous caregivers, relatives and others on whom older people depend a means to operate without fear of retribution. Many states, however, have set up various programs to help raise awareness of his issue and alert senior citizens that they can do something about it. From Montana to Maine, various non-profit groups have set up task forces to inform and advise elderly victims, often assisting in preparation of documentation for criminal referrals to county prosecutors.

THE ‘RED FLAGS’ OF ELDER CARE FINANCIAL FRAUD

How do perpetrators commit financial fraud against older persons? The simplest answer is by earning someone’s trust, then betraying that trust to rob the older person of dignity as well as property and cash. Concerned relatives, friends and attorneys should be on the lookout for the following signs:
• Power of attorney filings. If a caregiver or formerly alienated relative suddenly appears claiming power of attorney over the would-be victim’s affairs, even if the older person has consented, that person should be vetted to determine their own financial need and motivations.
• Excessive withdrawals. Review the bank statements of an older person who needs care on a regular basis — any discrepancies may merit further research. If a normally frugal retiree is suddenly “spending” hundreds or thousands of dollars more than in the past, this may be an indicator of fraud.
• Contact with caregiving agencies. If an older person is in a nursing home, and those concerned about him are made aware that several payments have not been made on his behalf, this may indicate that those entrusted with tending to his financial affairs have other plans for the funds. Such groups are likely to know what visitors an older person has had while in their care as well.
Additionally, government officials with the Social Security Administration may be able to help if there is a suspicion that an older person’s checks have been diverted from their intended recipient. Other schemes may include over-charging of rent or for services, in which case a check of litigation (and with the Better Business Bureau) may help identify companies that have used these practices in the past.

The process of entering old age is a delicate one — after a lifetime caring for yourself and your loved ones, the last thing you’re ready to do is to cede authority of your financial affairs over to a person or company. Caution and vigilance, both by older persons and those who are genuinely concerned for their well-being, can be sufficient to prevent any victimization, but only if the right steps are taken.

IN THE NEXT ISSUE

In the September issue, we’ll examine the nuances of properly interpreting the myriad types of civil litigation when looking into a subject’s background.

July 2008

IN THIS ISSUE

— Speaking Out: How Whistle-blowers Can Save Your Company
— Protecting Whistle-blowers While Protecting Your Company
— In the next issue

GREETINGS!

Welcome to the July 2008 edition of our newsletter! In this issue, we’ll look at how whistle-blowers in your company can help ferret out fraud, waste and abuse.

SPEAKING OUT: HOW WHISTLE-BLOWERS CAN SAVE YOUR COMPANY

Secrets. Everyone has them. Since organizations are simply collective groups of people working toward the same goal, the chances are that your company has its fair share of secrets. Sometimes these secrets can be costly if they aren’t exposed before a major fraud or defalcation occurs. This is where whistle-blowers, named after the English “bobbies” who would blow their whistle to alert the neighborhood to a crime in progress, step in.

Some whistle-blowers, such as Sherron Watkins of Enron and Dr. Jeffrey Wigand of Brown & Williamson Tobacco, gain fame and notoriety for their willingness to expose the wrong-doing going on at their company. Most whistle-blowers aren’t named TIME Magazine’s Person of the Year, however (as Watkins was), and risk their livelihoods simply to have truths made known. In so doing, most whistle-blowers make their case in relative obscurity, and at a potentially high personal cost. Next, we’ll examine some of the protections available to them, and ways the system can be abused.

PROTECTING WHISTLE-BLOWERS WHILE PROTECTING YOUR COMPANY

While many companies have set up employee fraud hotlines, which we have discussed in earlier newsletters, most do not actively encourage employees to “spill the beans” about operations a company might condone that the broader public might not — the marketing of tobacco to young children, for instance. Because companies may not have an interest in protecting employees who disclose various operations, the federal government has established a series of whistle-blower protections. Principal among these is the ability to be a “relator” in a federal civil suit, where an employee would work with the relevant government agency, to aid that agency in making a case for impropriety and seeking a civil remedy. Under the False Claims Act, persons who bring a “qui tam” action against a company can, if the company is found liable, receive as much as 30 percent of the amount of civil penalties. The risks can be great, however, as “qui tam” filers make their identity known to the defendant company, their (often former) employer.

In fiscal year 2003, $2.1 billion was received in settlements or judgments arising from whistle-blower claims. There is a downside to this level of accountability, however: it can be abused. We have investigated cases where serial “qui tam” filers have, for personal and financial reasons, filed multiple, often spurious actions against their employer. These actions resulted in many man-hours of wasted time, both on the part of the government agencies assisting in the case and the employers who had to rebut the charges. Our background check revealed that the whistle-blower in question had fraudulently obtained the licenses required to perform his job in the first place, and his claims were dismissed.

This is not to say that a few isolated cases should diminish the importance of how whistle-blowers help maintain corporate accountability. If your company is faced with an action brought by a whistle-blower, a thorough background check of the employee, specifically targeting whether the employee had a history of such claims at previous jobs, would be in order. On balance, the whistle-blower system allows employees to feel safe in disclosing improper practices, but like any system it can be subject to abuse.

IN THE NEXT ISSUE

In our August 2008 issue, we’ll examine the risks posed by elder care fraud and Medicare fraud.

June 2008

IN THIS ISSUE

— In Employees We Trust? The Effects of Embezzlement
— Means, Motive and Opportunity: Red Flags of Embezzlement Schemes
— In the next issue

GREETINGS!

Welcome to the June 2008 edition of our newsletter. In this issue, we’ll look closely at various types of embezzlement schemes, how to spot the red flags of such abuses, and create a culture that inhibits these costly infractions from happening in the future.

IN EMPLOYEES WE TRUST? THE EFFECTS OF EMBEZZLEMENT

Much has been made of the ethical makeups of top executives at large companies, some of whom reaped fortunes in salary and stock-based compensation by inflating earnings and using other machinations to set their company up for a spectacular fall. In these cases, much has been justifiably said of the employees whose pensions and other investments in “their company” were squandered.

Yet rank and file employees can do significant damage to a company’s bottom line, as well as their corporate culture. Whether it’s a cashier skimming a few dollars into her pocket every time a pair of sneakers is sold, or an employee setting up a fictitious vendor to “earn” kickbacks from his own department, the results are serious: some estimates claim that U.S. businesses lose $400 billion to various types of embezzlement. Next, we’ll discuss how to detect this dangerous practice in its various forms.

MEANS, MOTIVE AND OPPORTUNITY: RED FLAGS OF EMBEZZLEMENT SCHEMES

Although there are exceptions every paradigm, the typical employee is not motivated to commit fraud such as embezzlement. Yet when various stresses enter a person’s life, whether the financial and emotional pressures of a divorce, sending kids to college, or rising housing payments, the seeds of corrupt behavior can be planted. Suddenly unthinkable acts seem not only possible but, to some, necessary as a means for getting out of a tough spot.

Of course, to commit a crime, an employee must be able to pull off the caper. This means a cashier needs to be able to access the register easily, or a supervisor needs to be able to enter vendors into the accounts receivable system, whether real service providers or ones simply created to siphon company funds.

The means of prevention and detection vary with each of the differing embezzlement schemes, but for the examples here several rules apply. Most notably, segregation of duties for accounting and management personnel is key, so that no one individual has to much responsibility — and thus, too much opportunity for fraud. Making sure department heads must approve purchases with accounting personnel and even a third party will decrease the possibility of collusion to commit a fraud.

With respect to a cashier, making sure that each cashier must enter a code to show who was using which register at a given time is a good practice, as well as installing cameras near the register banks, to give the impression — perceived or real — that employees are being overseen at all times.

Finally, it is always a good preemptive practice to perform thorough background screening on potential hires, especially those with access to cash as part of their duties. Indicators of significant financial pressures, a history of personal financial mismanagement, and any past citations for misconduct or theft are reasonable factors for denying employment in the first place.

IN THE NEXT ISSUE

In our July issue, we’ll look at the role of whistle blowers in detecting fraud and malfeasance, and also examine the evolving protections meant to inhibit retribution.

May 2008

IN THIS ISSUE

— When Good Nest Eggs Go Bad: Cases of Pension Fraud
— Protect the Nest: Combating Pension Fraud
— In the next issue

GREETINGS!

Welcome to the May 2008 edition of our newsletter. In this issue, we’ll examine the various motives behind pension fraud, and offer some suggestions for how to detect & prevent it.

WHEN GOOD NEST EGGS GO BAD: CASES OF PENSION FRAUD

As the 20th century came to a close, some of the ideals that made it such a dynamic era of American prosperity seemed to fade away as well. As stalwart companies like Ford, General Motors and multiple airlines struggled, their long-time employees could take comfort in the belief that, after their decades-long careers were at an end, they would have the security of a hardy pension fund to see them through old age.

Right?

Unfortunately, as we have seen in the first years of the 21st century, pension have been a casualty of union battles and cost-cutting measures. But they have also fallen prey to outright fraud.

We have seen several pensions evaporate as an effect of other frauds, as in the case of Enron, where several thousand employees’ once robust retirement savings dwindled to pennies on their investment dollar. This had nothing to do with manipulation of the pension funds themselves, but in other cases the pension is arena of choice for fraudsters. Some, such as one we investigated many years ago, are not terribly complex: an investor openly flouts pension contribution limits, shoveling millions into the tax-deferred retirement vehicles, showing a far less profitable business on paper than in reality. In another instance, a pension fund official steered $65 million in investments to a savings and loan he partially owned, thus profiting from its management.

PROTECT THE NEST: COMBATING PENSION FRAUD

What can be done to prevent employee retirement savings from disappearing? Surprise audits of pension records are always a good idea, but one of the country’s largest public employee retirement programs, the California Public Employee Retirement System (CalPERS) has pushed even further, asking the California legislature to attach criminal penalties to pension fraud, in addition to existing civil remedies, as well as to re-examine the medical examination criteria for employees claiming disability benefits. This latter category is a common source of pension frauds.

There are several other steps you can take that will help you prevent pension fraud, whether the company is large or small. One is to cross-reference the business addresses of investment holdings with employee addresses to determine if any shell companies may be used to embezzle assets by internal employees.

Regarding external investment managers, a review of their disciplinary history with FINRA / NASD is a wise step to take before retaining outside investment help. You can also consult the IRS Form 5500 filings of other pension funds an investment manager has handled to see their annual performance and other details.

IN THE NEXT ISSUE

In the June issue, we’ll focus on various embezzlement schemes, how to detect them and how to create a culture that discourages them from happening.

April 2008

IN THIS ISSUE

— Friends in High Places: When Divided Loyalties Can Lead to Fraud
— Taking Action Against Contract & Procurement Fraud
— In the next issue

GREETINGS!

Welcome to the April 2008 edition of our newsletter. In this issue, as the presidential campaigns take shape, we’ll examine a shadowy problem plaguing state and federal governments: contract and procurement fraud.

FRIENDS IN HIGH PLACES: WHEN DIVIDED LOYALTIES CAN LEAD TO FRAUD

Darleen Druyun had been an anonymous member of a faceless Air Force bureaucracy during most of her decade as a military procurement officer. If she had any reputation, it was one for toughness, so much so that her nickname was “The Dragon Lady.”

Beneath that Dragon Lady’s tough exterior was an equally cunning fraudster that was looking out for herself and her family — rather than the taxpayers that paid her salary and may still pay her retirement pension. Over her career, Druyun steered contracts for tanker aircraft (which has again become a hot-button issue) and other projects to Boeing, in exchange for jobs for herself, her daughter, her daughter’s fiance, after her retirement from civilian government service. In June 2004, after a federal trial in Virginia, Druyun was sentenced to nine months in prison and fined $5,000. More recently, after a series of recent cases of contract fraud related to the Iraq war, the U.S. military opened 83 separate contract fraud investigations.

TAKING ACTION AGAINST CONTRACT & PROCUREMENT FRAUD

The Druyun case spurred the U.S. Justice Department into greater action in combating contract fraud, often investigated by a federal agency’s inspector general. Paul McNulty, who prosecuted the Druyun case as U.S. Attorney for the Eastern District of Virginia, spear-headed the formation of the National Procurement Fraud Task Force in October 2006. The office has yet to compile national statistics on the impact of contract fraud but, as McNulty said, “At a time of heightened concern for our nation’s security, every tax dollar is precious.”

The question remains: what can your organization do to keep from being harmed by contract fraud when soliciting bids? One step may be to prepare investigative profiles of companies submitting bids, to determine if the companies or individuals running them have been sanctioned for bid-rigging or influence peddling in the past. In addition to analyzing litigation and media about competitors, one good resource to consult is the federal Excluded Parties List System, which lists contractors no longer allowed to solicit federal contracts. If individuals associated with a current company were previously associated with a debarred company, but not debarred themselves, that can be a predicator of future contract fraud.

IN THE NEXT ISSUE

In the May issue we’ll examine the growing field of pension fraud, how to detect it and ways to keep retirement savings safe.

March 2008

IN THIS ISSUE

— From the Water Cooler to the Big House: Detecting Employee Fraud Through Hotlines
— Case Studies in Hotline Effectiveness
— In the next issue

GREETINGS!

Welcome to the March 2008 edition of our newsletter! In this issue, we’ll examine the effectiveness of employee tip hotlines in detecting and deterring fraud, as well as their cost and implementation.

FROM THE WATER COOLER TO THE BIG HOUSE: DETECTING EMPLOYEE FRAUD THROUGH HOTLINES

Most large companies have one, and in the post-Enron, Sarbanes-Oxley environment, the employee fraud hotline referenced in your company’s Standard Operating Procedures manual could be a key way for your employees to combat fraud on the job.

In its 2006 Report to the Nation, the Association of Certified Fraud Examiners said 44 percent of frauds with potential or actual losses of $1 million were detected using tips from employees or the public. This percentage was far ahead of detection via internal or external audit.

Read on…

CASE STUDIES IN HOTLINE EFFECTIVENESS

Development of a 24-hour, completely anonymous hotline for reporting potentially fraudulent activity has led many organizations to usher in significant reforms in their internal controls or other policies once the fraud was uncovered. In its 2006 annual report to Congress, the Inspector General for the Social Security Administration reported receiving nearly 47,000 allegations of fraud regarding Social Security numbers or other violations. Of these, more than 8,000 were from anonymous tips, while law enforcement referrals resulted in double that number of inquiries. The anonymous inquiries led to successful investigation of fraudulent disability benefit claims, for example.

In the past, we have successfully worked on employee harassment and fraud cases where employee tips were an important part of the equation. While the ACFE operates its own hotline service, EthicsLine, many private operators do as well. The start-up costs can be somewhat daunting, but the cost savings realized by deterrence of fraud is likely to be far greater over time.

IN THE NEXT ISSUE

In the April issue, we’ll examine government contract fraud, a hot button issue this election season.

February 2008

IN THIS ISSUE

— Investigations, big and small, into mortgage fraud crisis
— Investigating the Business of Mortgages
— In the next issue

GREETINGS!

Welcome to the February 2008 edition of our newsletter. In this issue, we’ll examine how you can research potential mortgage fraud and abuse.

INVESTIGATIONS, BIG AND SMALL, INTO MORTGAGE FRAUD CRISIS

In a possible denouement to a crisis that has made major headlines for much of the last year, also affecting the American economy and millions of victims, the Federal Bureau of Investigation has announced that it has launched a criminal investigation targeting 14 companies which securitized mortgage bundles. Additionally, New York officials sued 26 underwriters that worked with Countrywide Financial, alleging that they assisted in the once-powerful company’s massive mortgage fraud.

While the feds examine the banks which bought and sold these pools of often-speculative mortgages, often reselling to investors as far away as Korea or Singapore, there are a few steps you can take to assist clients or others in scrutinizing the brokers and banks who may have made questionable loans to them.

INVESTIGATING THE BUSINESS OF MORTGAGES

Many persons who were persuaded to take on loans that would convert to unacceptable terms may not have done their homework on who they were dealing with at the bank of brokerage where they bought their mortgage. Many states – but not all – require mortgage brokers and mortgage bankers to be licensed, often either with a state regulation department or banking / finance department. The National Association of Mortgage Brokers also has a directory of its members, as well as a listing of its certified members, although this is a trade group and not a regulatory body.

Most state regulators of mortgage professionals, in our experience, have been eager to share the results of any disciplinary action taken against regulated members. Of course, many of the worst offenders may operate without licenses in the first place, in which case a review of county and federal litigation where the company purports to be based may be useful, as would a check with the Better Business Bureau.

IN THE NEXT ISSUE

In the March issue, we’ll look at how employee hotlines can deter accounting fraud, and examine the best ways to create this form of internal oversight.

January 2008

IN THIS ISSUE

— Corporate governance and shareholder proposals
— Shareholder proposals as a research tool
— In the next issue

GREETINGS!

Welcome to the January 2008 edition of our newsletter. We’ll kick off the new year looking at the usefulness of shareholder proposals for research, and how the recent SEC decision to allow companies to bar shareholder proposals from going before all shareholders for a vote may affect these research efforts.

CORPORATE GOVERNANCE AND SHAREHOLDER PROPOSALS

The voices of large institutional shareholders, and also smaller individual shareholders, have always been key components in agitating for change at publicly traded companies. Sometimes this process can be abused by so-called “activist shareholders” (also called “distressed investors,” or less charitably “vulture investors”) who buy a minority stake in a company they see as under performing, agitate for change at shareholder meetings, then sell out their stake as the company turns around, even if that turnaround is brief and ultimately unsuccessful.

It was against this backdrop that the U.S. Securities & Exchange Commission decided to amend its “longstanding policy on shareholder proposals” to specifically allow companies to decide whether shareholder proposals relating to “to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election” could be put to a vote before all shareholders.

SHAREHOLDER PROPOSALS AS A RESEARCH TOOL

It is somewhat unclear at the moment whether shareholder proposals that are not put to a vote would still be recorded in proxy statements. If they are not, a valuable tool for detecting the extent of self-dealing and fraud at company may be lost. In the past, we have documented how executives of public companies, particularly founders who still saw their once-private enterprise as a personal piggy bank, have acted against shareholder interest in setting up subsidiaries and other arrangements to enrich themselves and their family. In one such instance, a shareholder proposal to strip a company’s founder of his “B” class shares documented many of the abuses which had not been otherwise publicly disclosed. This proposal was also ultimately successful, and the founder was forced to accept a buyout of his shares that resulted in his losing majority control of his company’s stock.

Shareholder proposals for changes in board makeup and corporate governance have been an essential tool in combating fraud and publicizing abuses, as witnessed by the more than 34,000 letters the S.E.C. received after announcing it was considering the revision. Hopefully corporate governance at public companies can adapt to allow greater shareholder input for both large and small investors, while preventing “activists” from abusing that privilege.

IN THE NEXT ISSUE

In the February edition, we’ll examine the current efforts to combat mortgage fraud in the wake of the collapse of the sub-prime lending market.

December 2007

IN THIS ISSUE

— Building a Profile of a Publicly Traded Company: The Basics
— Connecting the Dots to Take the Research to Another Level
— In the next issue

GREETINGS!

Welcome to our December newsletter. In this issue, we’ll look at the different types of documents filed by and about publicly traded companies within the United States, as well as the types of information each can yield to aid researchers in their efforts.

BUILDING A PROFILE OF A PUBLICLY TRADED COMPANY: THE BASICS

Each year, a publicly held company’s filings disperse a vast array of facts into the public record. The relevance of many of these facts will depend on the type of investigation you’re pursuing, so we’ll highlight a few of the more common types of investigations and the information you’re likely to encounter.
• Conflict of interest investigations. When looking at the independence of officers and directors, Form DEF14, commonly known as a proxy statement, can yield a great deal of information. Pay particular attention to related party transactions and shared outside affiliations, such as charitable organizations or other directorships.
• Asset searches. Proxy statements can detail an officer or director’s holding of company stock, options, and also disclose any loans made between officers and the company.
• Pre-investment due diligence. Analysis of a company’s annual report, both as a “glossy” annual report to shareholders and as a Form 10-K annual report, can help identify sectors where a business is strong and also discloses the risks the company feels merit attention.
• Adverse actions / bad acts. Correspondence between the company and the U.S. Securities and Exchange Commission’s enforcement division can yield a great deal of bad acts information. There are typically two types of letters, enforcement actions and “no-action” letters where the SEC decided not to sanction a firm.

CONNECTING THE DOTS TO TAKE THE RESEARCH TO ANOTHER LEVEL

Gathering facts about the company is a good first step, but it’s not the only one. Be sure to review proxy statements for turnover among officers and directors, as they may be good interview candidates as you get deeper into the investigation.

Depending on what the initial filing review yields, it may be worthwhile to examine litigation, regulatory records or other public documents that may contain additional details about the controversies that arise in the course of research. Questioning every fact and testing every theory is a lengthy but ultimately rewarding process.

IN THE NEXT ISSUE

In the next issue we’ll analyze issues raised by the SEC’s recent ruling to allow companies to keep shareholders from putting forth proposals about the makeup of a company’s board of directors.

November 2007

IN THIS ISSUE

— Small Talk, Big Results: Differing Interview Approaches
— Reaping the Whirlwind: How to Handle Hostile Subjects
— In the next issue

GREETINGS!

Welcome to the November 2007 edition of our newsletter. In this issue, we’ll discuss in greater detail the techniques used to either elicit information or, in cases where wrongdoing is suspected, gain an admission of culpability from an interviewee.

SMALL TALK, BIG RESULTS: DIFFERING INTERVIEW APPROACHES

While gathering information from public sources is an important tool in any investigative effort, most often witnesses hold key information to what really happened that will affect your client’s investment, or point you toward the perpetrators of a fraud that could cost your company millions. In the past, we’ve discussed the importance of a good interview. Now we’ll discuss the differing approaches to interviewing.

There are a variety of approaches, but there are two fundamental items an interviewer seeks, either information or an admission. Although it can be useful in rare instances to seek information through a more aggressive stance — think of serial police dramas like “Law & Order” — most often informational interviews are conducted in a professional but less intense manner. Typically in admission seeking interviews, after evidence has been gathered and fact patterns have been established, a more aggressive approach may be warranted, but this is hardly ever a necessity.

REAPING THE WHIRLWIND: HOW TO HANDLE HOSTILE SUBJECTS

Many types of subjects, such as disgruntled former employees, may happily “spill the beans” on former colleagues or supervisors, especially if they left under duress and their former colleagues are suspected of some wrongdoing. Given the politics of these situations, it is essential to delicately press for more impartial evidence, such as correspondence and other records, to help refute or confirm a witness account that may be colored by their own agenda.

Some witnesses, of course, look to hide their own involvement, whether real or imagined, in the subject being investigated. While some simply will not talk, particularly if they have no obligation to do so, others can be convinced to speak after a great deal of time is taken to refute their defenses and rationale for not speaking. Always break down a witness’ defenses in a calm, courteous and professional manner. Remain persistent and polite, but always focused on the goal of gaining information. Active listening is always important, but seldom more so than in a hostile interview where little information may be offered and a small bit may be used as a thread to determining what the interviewee has to say. remember, only courts can grant immunity or total confidentiality, so never make absolute promises to gain cooperation.

IN THE NEXT ISSUE

In our next issue, we’ll examine the different types of information available in analyzing various filings made by publicly traded companies, including various types of correspondence between these companies and the agencies which regulate them.

October 2007

IN THIS ISSUE

— Looking Over the Hedge: The Basics About Hedge Funds
— Managing Risk When Clients Consider Investing in a Hedge Fund
— In the next issue

GREETINGS!

Welcome to the October edition of our newsletter. In this issue, we’ll explain how to research private equity entities such as hedge funds. While many of these groups operate in an ethical manner, some use deceptive means to achieve high rates of return, and there are some relatively simple checks you can perform which will help determine if the hedge fund in which your client is considering an investment is acting in good faith.

LOOKING OVER THE HEDGE: THE BASICS ABOUT HEDGE FUNDS

A “hedge fund” is an unofficial term of art used to describe a limited partnership whose investment strategies differ somewhat from more traditional investment pools like mutual funds. Each hedge fund has its own strategy, but many are more aggressive than mutual funds, employing techniques such as “short selling” (buying a position in a stock where profits will be made if the stock’s per share value falls, essentially betting against the stock’s value over a period of time), or arbitrage strategies that seek to exploit pricing differences between similar financial instruments. This can often be done, but is by no means limited to, investments made in foreign markets dependent upon currency exchange rates.

By law, hedge funds must have no more than 100 investors, and this limitation tends to draw high net worth individuals and organizations as investors. These investors, which can also include not-for-profit institutions, seek extraordinarily high rates of return. (To determine if a charitable organization is investing in a hedge fund, you can analyze their Form 990 filings made with the Internal Revenue Service.)

MANAGING RISK WHEN CLIENTS CONSIDER INVESTING IN A HEDGE FUND

Although hedge funds have a public image of being a mysterious and super-secret investment playground for the very wealthy, there is information available to the public. Each investment partnership, at least those based within the United States, must be officially formed with the secretary of state where it plans to exist as a legal entity. (Be careful to note that where a company exists legally can, and often will, differ from where it does business, although it is often required to file with that state’s secretary as well.)

On the federal level, many hedge funds are considered “investment advisers” and are thus registered with the Securities and Exchange Commission, which maintains a database providing basic information from Form ADV, including initial assets under management, the structure of the company and general information about its initial investors.

As noted before, some hedge funds act unscrupulously to drive down a stock and profit from short-selling or convertible debt arrangements. We have investigated many of these tactics, which are often successful if a fund can, often through an intermediary, spread false or misleading information about the target company, either through bogus press releases or anonymous postings on message boards, similar to “pump and dump” schemes described in a previous issue. Most hedge funds do not do this, of course, and many that do are disciplined by the SEC or taken to federal court by the other investors whose stock lost value because of these actions. A Certified Fraud Examiner will be able to make discreet inquiries with these entities and others to determine whether a hedge fund has employed such techniques.

IN THE NEXT ISSUE

In the next issue, we’ll look at the importance of obtaining good information from customers, former employees and other persons of interest when conducting due diligence work.

September 2007

IN THIS ISSUE

— Increasing accountability, or just accountants fees? Sarbanes-Oxley debated
— The pros and cons of detecting corporate cons
— In the next issue

GREETINGS!

Welcome to the September edition of our newsletter. As we commemorate the fifth anniversary of President Bush signing the Sarbanes-Oxley Act into law in July 2002, we should assess what it has improved, what negative effects it has had, and how the law might evolve.

INCREASING ACCOUNTABILITY, OR JUST ACCOUNTANTS FEES? SARBANES-OXLEY DEBATED

When Sarbanes-Oxley swept into action in the summer of 2002, the nation’s investors were still reeling from the effects of scandals at Enron, Tyco, and others, where the officers and directors treated the shareholders’ monies as their own piggy bank. Yet in their zeal to clean up a corrupted system, many think Congress may have gone too far.

The first complaint heard about Sarbanes-Oxley was that the costs of compliance would be seen as onerous. On estimate said that increased costs of compliance associated with the law could be as much as one percent of a firm’s overall revenue when discussing smaller firms (those with $2 billion or less in annual revenue.) This can significantly affect a business’ bottom line, with most of the increase reportedly going into the pockets of auditors who have been given an increased workload because of the law’s regulations.

THE PROS AND CONS OF DETECTING CORPORATE CONS

Proponents of the Sarbanes-Oxley bill hailed it as a means of changing a corrupt corporate culture. Yet like other recent reforms, most notably campaign finance reform, there appears to be a growing consensus that legislation only changed the landscape, not the attitudes of the players on the field. A 2005 survey of Certified Fraud Examiners conducted by an Atlanta research firm found that while the law is an effective tool in fraud detection efforts, its regulations likely won’t deter anyone from attempting to commit fraud in the future. Only 17 percent of respondents in the survey said Sarbanes-Oxley’s regulations would change the corporate culture in any lasting manner; most respondents, trained to detect and deter fraud, said perpetrators would instead opt to maneuver around the law’s regulations as they gained more clarity.

Most respondents in Oversight Systems’ survey of fraud examiners, in fact, said that fraud was more prevalent in 2005 than it had been in the “new economy” daze of 2000. One unintended consequence of Sarbanes-Oxley may have been the surge in private equity buyouts of public firms, leery of the increased scrutiny of being a public company in a U.S. market overseen by such regulation. Another consequence? According to a September 2006 column in The Economist, one result is a shift in foreign investment, with firms from countries with less transparent corporate cultures opting to list their shares in London rather than New York.

No wonder, then, that last year legislative efforts began to attempt to alter Section 404 of the act, dealing with internal controls. While few doubt that Sarbanes- Oxley was a good step in raising corporate accountability, its effectiveness as a fraud deterrent is far from a settled topic.

IN THE NEXT ISSUE

In the next issue, we’ll look at how to research the actions of private equity vehicles such as hedge funds and other closely-held investment partnerships.

August 2007

IN THIS ISSUE

— Not so Idle Chatter: Pump and Dump and “Cyber Smears”
— The Truth Squad: How to Identify Scammers and Fight Back
— In the next issue

GREETINGS!

Welcome to the August edition of our newsletter. In this issue, we’ll examine the threat posed by market manipulators who employ various tools to inflate or drive down the price of common stock issuances by spreading misleading statements about the stock. This is commonly known as a “pump and dump” scam.

Your clients are likely heavily invested in several types of financial vehicles, some of which may be vulnerable to the feeding frenzy mentality that can grip the stock market. We’ll show you some examples of how “pump and dump” is done, and suggest ways to detect who is behind the schemes.

NOT SO IDLE CHATTER: PUMP AND DUMP AND “CYBER SMEARS”

In many ways, Jonathan Lebed seemed like an ordinary teenager of the 1990s. Yet when he would return home from school starting in 1999, according to the U.S. Securities and Exchange Commission, the fifteen year old Lebed engaged in one of the most prolific “pump and dump” schemes in history, essentially becoming the Doogie Howser of stock price manipulation.

Lebed would purchase “large blocks of thinly traded microcap stocks and, within hours of making such purchases, sent numerous false and/or misleading messages . . . over the Internet touting the stocks he had just purchased,” according to the S.E.C. Although his ultra-positive messages about the stocks were “generally devoid of substantive content,” speculative traders who trawl message boards looking for “the next big thing” would buy into the hype, ultimately netting Lebed more than $275,000 in gains on his investment.

THE TRUTH SQUAD: HOW TO IDENTIFY SCAMMERS AND FIGHT BACK

The anonymity of the Internet can make identifying the perpetrators of “pump and dump” and its negative sister, “cyber smearing,” (where message posters say negative things about a stock to drive its price down) very hard to detect. This is further complicated by the emerging network of spam “botnets”, computer programs designed to proliferate electronic mail messages promoting supposedly hot stocks to millions of users under false or hijacked electronic mail addresses.

As most of these schemes and perpetrated via the Internet, you can use Internet tools to start to track down the culprit. There are several good tools to find out what someone with a particular alias, say “flashystox1”, has been saying online, and he may even give away clues to his identity. Google’s blog search tool searches millions of web logs and message boards to find information. If our fictional culprit is posting to areas monitored by the search tool, it will generate results.

The next step would be to look for accidentally placed identifiers: did the culprit end a post with their real first name or full name, if only once or twice? Also, you can look at the post’s header information carefully to determine the Internet Protocol or “IP” address from where it originated, which can be done by using search tools like ARIN’s whois lookup. Thus, with a little luck and some forensic work, the anonymous message poster and their general location can be revealed.
IN THE NEXT ISSUE

In the next issue, we’ll discuss the still controversial Sarbanes-Oxley Act passed in 2002, including its effects and costs.

July 2007

IN THIS ISSUE

— Going Abroad: Keys to Investing in Foreign Companies
— Bring More Than Your Atlas: Researching Foreign Companies
— In the next issue

GREETINGS!

Welcome to the July edition of our newsletter. In this issue, as we reflect upon the heritage of the United States in the summer holiday season, we’ll look abroad for the risks and benefits to your clients when the subject is overseas investment.

The benefit of investing in international markets can be huge — niches like natural resources in the Middle East or Africa present great opportunities for return on investment, and emerging markets like China and India can present a chance to utilize cheap labor and new technologies to grow an existing business. Yet there are several caveats when considering such investments.

GOING ABROAD: KEYS TO INVESTING IN FOREIGN COMPANIES

When most people think of the risks inherent in overseas investments, the first item on their agenda is likely to be the volatility of the currency exchange rates. Yet there are a number of more significant items which can affect such investments, including:
• Political volatility. One potential trade-off for cheap labor or access to new markets could be having to deal with governments that change leadership in matters of years, or even months. Such change can result in increased corruption or an ever-changing regulatory environment.
• Anti-market political philosophies. While some have argued whether the United States has fallen into this category in the last few decades, there is little question that some governments which oversee emerging markets favor a strong central government with a tight rein on the activities of its markets. Be aware of the environment, and any likely changes to tariffs and other measures, before you proceed.
• Cultural differences. Understanding differences between Western cultures and others is key, not only at the political level but at the popular level as well. After all, employees are people too, and if their new, Western employer does something offensive to their cultural norms and mores (however unintentional), negative press and possibly a work stoppage could result.
• Political corruption. Enforcement of the Foreign Corrupt Practices Act has once again hit the U.S. Justice Department’s radar, with 84 percent of FCPA violations in one study being reported by violators to Justice, in hopes of leniency. Some resulted in fees as much as $44 million.

The best way to make these assessments is two-fold: thorough researching of public records, and (whenever possible) interviews with former employees of the company, industry consultants, political figures, etc. We’ll discuss the basics of approaching each avenue of investigation.

BRING MORE THAN YOUR ATLAS: RESEARCHING FOREIGN COMPANIES

There are several tips for successfully researching potential overseas investments or partners. We have performed due diligence on dozens of potential acquisitions or business partners in Africa, the United Kingdom, Canada and elsewhere. The first advice, which could well apply to any research assignment, is to think broadly and never think “we can’t do that” or “we could never find that out” until all avenues of investigation are exhausted.

There are several sources of information that are somewhat unique to companies outside the United States, including:
• Foreign public company exchanges. If the subject company is publicly traded in Canada, the United Kingdom, or other Western markets, there is a good chance it files documents both with its home regulatory authority and the U.S. Securities and Exchange Commission (if it is traded in the United States as well.) While different from U.S. company filings, many foreign regulators insist upon a high level of disclosure. This generally declines once you leave the confines of Western markets.
• Private company reports. Privately held companies often report information to a central regulator, such as Companies House in the United Kingdom, and often self-report to third parties like Dun & Bradstreet, though the quality of this latter source’s information can vary greatly from one country to the next.
• Trade publications. Many local trade publications specialize in a region or nations’ dominant markets, such as oil in the Middle East or mining in Africa. These reports can be a valuable source of information about how well your potential investment has fared and what the competitive landscape is like.
• U.S. Justice Department Foreign Agents Registration Act (FARA) filings. Has your potential investment retained lobbyists to position itself within the United States? This will give you an indication of what its current management sees as opportunities or areas of concern in U.S. markets, as well as giving an indication of its existing clout — or lack thereof.

The other source of information is, naturally, driven by the people who have interacted with the company. These can include former employees and consultants, as well as former government officials who would have overseen that company in their official capacity. Finally, several non-governmental groups, both global and local in scope, can provide somewhat objective assessments of the political and industrial makeup of the country or region where your subject company conducts business.

IN THE NEXT ISSUE

In our August issue we’ll examine the problems posed by false statements in the marketplace, from wildly overstated expectations to insider trading and “pump and dump” schemes.

June 2007

IN THIS ISSUE

— Acquiring or Investing in Privately Held Companies
— Conducting a Thorough Check-up: Researching Private Firms
— In the next issue

GREETINGS!

Welcome to the June edition of our newsletter. In this issue we’ll examine the process of researching a potential acquisition or partner that is privately held, and the pitfalls that can occur if that process is not handled correctly.

Your clients, customers or colleagues may see investment in smaller, private firms as the engine that will drive their business growth. Follow these simple steps to be sure they aren’t led astray.

ACQUIRING OR INVESTING IN PRIVATELY HELD COMPANIES

Privately held companies present a world of opportunity for large and small firms alike. Growing companies, especially those in innovation-driven markets like biotechnology, can seek out a complementary partner to further their research and development efforts. For larger companies, the opportunity is more likely to arise in the form of acquisition or investment in the smaller company, melding the resources of a large company with the quicker reaction time, efficiency and unique perspective a small company can provide.

Yet many risks exist when considering whether to invest in or acquire a private company. Unlike publicly traded companies, private firms are regulated solely at the state level, and thus must not disclose nearly as much information as those regulated by the U.S. Securities and Exchange Commission.

CONDUCTING A THOROUGH CHECK-UP: RESEARCHING PRIVATE FIRMS

Despite less regulatory oversight than publicly traded companies, there are several resources to investigate private companies, including:
• The Better Business Bureau, www.bbb.org. This non-profit body compiles and investigates complaints filed by customers against companies. This is a nationwide organization with a presence in every state, most often in major cities.
• State Attorney General’s offices. While many complaints filed by the Attorney General against a company will become the subject of litigation, this office may also hold records for complaints that were investigated but not ultimately prosecuted.
• Secretary of State’s offices. The most traditional source of information, in most states companies are only required to file annual reports listing officer and director turnover after they file their articles of incorporation or formation.
• Dun & Bradstreet. Although reported by the companies themselves, Dun & Bradstreet has become rather reliable because of the volume of information they collect, including payment histories, public records and banking information.
• Litigation and other public records. As with most research, checking for litigation against a company, or unpaid tax bills, liens, and the like, is always a good idea before considering an investment.

Following these steps can help you get a sense of whether a company might be a good investment. Remember to keep things in perspective — even a series of minor problems at a company might present more of an opportunity than a risk, depending on your client’s risk tolerance and willingness to turn potentially troubled companies around as a value proposition.

Of course, should your client start seriously considering an investment, it is always best to retain an independent Certified Fraud Examiner to conduct research and thorough interviews with former associates and employees to get the full picture. We have several years of experience researching privately held companies for both pre-acquisition due diligence and competitive intelligence purposes.

IN THE NEXT ISSUE

In the next issue, we’ll look into the pluses and minuses of partnering with or investing in foreign companies.

May 2007

IN THIS ISSUE

— Taming the Corporate Wild West: Fighting Financial Statement Fraud
— Warning Signs of Financial Fraud
— In the next issue

GREETINGS!

Welcome to our May newsletter. In this issue, we’ll examine the matter of financial statement fraud, from the difficulties in detecting it to the proactive steps your company can take to prevent it from happening.

TAMING THE CORPORATE WILD WEST: FIGHTING FINANCIAL STATEMENT FRAUD

At the dawn of the 21st century, a rash of corporate scandals made big headlines and generated even bigger shareholder losses. From Enron and Worldcom to Tyco, Adelphia, and dozens of others, these scandals had at least one thing in common: at the heart of each were fraudulent financial statements.

Some, like Enron and Tyco, kept many of their misdeeds off the books entirely, affecting shareholder value without any disclosure whatsoever. Enron maintained questionable partnerships with science fiction names like “Raptor” and “Jedi” to artificially inflate its position, while onetime Tyco CEO L. Dennis Kozlowski hid $170 million in loans which the company made to him, essentially at his direction, away from prying eyes.

WARNING SIGNS OF FINANCIAL FRAUD

While some corporate frauds were simply kept off the books, only to be discovered after close examination (when it was often too late to remedy), some financial statement frauds involve, appropriately enough, altering of financial statements. Former WorldCom chief Bernard Ebbers and his cohorts, for instance, mischaracterized millions of dollars in expenses as assets, making a company that was drowning in accrued debt, such as lease obligations, seem far more profitable than it actually was.

Some key signs to look out for when reviewing a company’s financial statements from one period to the next:

• Significant fluctuations in profits, losses, or other key indicators like accounts receivable. Every business can have good or bad periods, but wide deviance from industry norms warrants scrutiny.
• A long list of “related party transactions” between officers and directors and the company itself. For public companies, these details can be found most often in a company’s proxy statement or annual report.
• Disclosures made in an auditor’s notes. If an auditor disagrees with a client’s method of accounting or other decision making, they are required to note this disagreement, even if they still issue an opinion, either qualified or unqualified.
By being aware of these and other red flags, you may be able to avoid scandal and maintain your company’s good name.

Maintaining a truly independent board of directors with a strong audit committee will help to create a culture where management at all levels know that financial statement fraud will not be tolerated.

IN THE NEXT ISSUE

In the June issue, we’ll look at steps your clients can take to protect themselves from fraud when considering acquiring a privately-held company.

April 2007

IN THIS ISSUE

— Cruel Intentions: A History of Charitable Organization Fraud
— Protecting Yourself Against Charitable Organization Fraud
— In the next issue

GREETINGS!

Welcome to the April edition of our newsletter. In this issue we’ll look at the risks involved with charitable giving, and offer some ways to manage that risk. As the tax filing deadline approaches, many clients may be looking for ways to minimize their tax burden while promoting good works. Giving to lesser-known charities can be very rewarding but can also carry greater risks.

Your clients — whether corporations, charitable endowments, or high net worth individuals — have done well, and now they want to do good for others. Yet not every “charitable organization” is working in the interest of the less fortunate, and money meant to improve the world can go to waste.

CRUEL INTENTIONS: A HISTORY OF CHARITABLE ORGANIZATION FRAUD

When the last member of the royal Hawaiian family passed away in the late 1800s, she left her vast wealth to a foundation she had created to educate the children of Hawaii, which was known as the Bishop Estate. The Estate’s goal was to give every native Hawaiian child an education, regardless of their family’s financial means, that would provide the foundation for success in their future.

As can often happen when vast sums of money are left in the care of a select few, however, the Bishop Estate’s board ultimately lost sight of their noble purpose, instead enriching themselves and their cronies, siphoning off financial largesse meant to better the lives of their state’s indigenous children.

The trustees even sought to move the organizations’ headquarters to a South Dakota Indian reservation, thousands of miles away from its constituents, to avoid Internal Revenue Service oversight. The board desired that lack of oversight because it had, among other items, illegally lobbied Congress and spent thousands of dollars at adult entertainment venues, even investing in an Internet-based adult film directory. Finally, as school budgets were cut, many of the trustees gave themselves lavish raises and appointed friends to nominal, high-paying jobs.

PROTECTING YOURSELF AGAINST CHARITABLE ORGANIZATION FRAUD

For well-intentioned donors, either individuals or corporations, few events carry a sting as strong as being duped by a fraudulent or dishonest charity. When John G. Bennett founded his charity, The Foundation for New Era Philanthropy, in 1989, he immediately became the toast of the town in Philadelphia social circles, widely acclaimed for his charitable efforts. What wasn’t known at the time was that he was running a dressed up Ponzi scheme, using initial donors’ money to secure a sizable loan and draw in new investors, using the new money to pay off the old investors. By the time the scheme unraveled and New Era filed for bankruptcy in 1999, it had accumulated $550 million in debt.

While a thorough and professional vetting of all potential recipients of charitable donations is always best, there are some simple steps you can take to avoid being misled.

• Contact the local Better Business Bureau to determine if others have filed complaints.
• Check county records to determine if there are any unpaid liens in the name of the organization or its principals, and contact the lien holders to assess what happened.
• Check county and federal litigation records to determine if the charity has been the subject of litigation for nonpayment or other abuses of trust.
• Where applicable, analyze the Form 990 filed by the organization with the Internal Revenue Service. Most public charitable organizations which receive less than $25,000 in grant money annually do not have to file reports.

Taking these simple steps can provide some peace of mind before your clients make donations. If the stakes are high and large donations are being considered, however, it is always best to have a professional fraud examiner interview former employees and grant makers in addition to taking the steps above to make sure the charity is a reputable one.

IN THE NEXT ISSUE

Next month, we’ll look at how various financial statement frauds — including mischaracterizing expenses and the use of related party transactions to sweeten the pots of relatives and others — can affect your company’s bottom line, and offer tips on how to detect and prevent these types of frauds.

March 2007

IN THIS ISSUE

— Using Electronic Records to Fight Fraud
— Caught in the Act: Examples of Successful Electronic Data Analysis
— In the next issue

GREETINGS!

Welcome to the March edition of our monthly newsletter. In this issue we’ll address the efforts to detect fraudulent activity by using various electronic records — telephone logs, electronic mail messages, analysis of hard drive contents and keystroke loggers — to determine the scope of various employee frauds, from embezzlement and conflicts of interest to employees using company time and resources to maintain a side business.

USING ELECTRONIC RECORDS TO FIGHT FRAUD

Trust can be a difficult trait to possess in oneself, let alone grant to others. Yet millions of companies do that every day when they allow their employees to use company cars, computers, expense accounts and other property. Much of the time these issuances of trust are rewarded by employees who work hard and put in productive efforts that drive their company’s bottom line. Yet the number of employees who abuse this trust for their own ends has grown in the last decade, as have the losses incurred by their companies. We’ll look at how employees can get away with fraud at their employer, and steps you or your clients can take to recover losses and create a culture of transparency.

Nearly every aspect of an employee’s working day can be documented, from cameras in the breakroom to software that logs each keystroke they input while on the job, to records of outgoing and incoming calls to and from their office phone and records of their computer’s hard drive contents and electronic mail messages. While there is some cost associated with monitoring employees in the workplace, and several privacy concerns of which to be aware, the potential to deter high-end employee theft and fraud greatly outweighs possible legal battles or cost concerns.

CAUGHT IN THE ACT: EXAMPLES OF SUCCESSFUL ELECTRONIC DATA ANALYSIS

From 1996 through 2004, the median loss caused by employee fraud rose from $400,000 to $660,000, according to the Association of Certified Fraud Examiners. As median losses have risen, so have the methods available to would-be fraudsters. Whether it is a mailroom clerk stealing corporate checks which he could then make out to associates who would reward him with a portion of the cash gained, or an employee using a corporate relocation account to pay off personal expenses, fraud can happen anywhere and be committed by anyone.

Fortunately, methods for detecting and documenting frauds are as numerous as the means by which they are committed. In the past, we have documented instances where a government employee had, on company time, maintained a real estate venture while neglecting his duties at his official position. By analyzing his telephone records and electronic mail as well as outside sources such as corporate records and property documents, we were able to show that the employee spent hours making calls to tenants and his wife, who acted as his outside liaison and property manager.

In certain instances, privacy concerns can be an issue. While most employees do not enjoy an explicit right to privacy while in the workplace, both unionized employees and government employees typically have certain rights, including having counsel present during any searches of their offices, so be sure to consult with your company’s legal counsel before taking any action if appropriate.

Only through carefully documenting the nature and extent of frauds, and putting into place measures to combat them, can your company impress upon its employees — at all levels — the importance of exercising due care and honoring their duty of loyalty to the employer while on the job. Although investigations can be costly and potentially cause unease within the workplace, if done in a discrete and professional manner they can help to recover lost monies and convey to your employees the need to be honest at the workplace.

IN THE NEXT ISSUE

Next month we will look at the risks involved in contributing to charitable organizations, and highlight some useful steps that can help both corporations and individuals make certain their chosen charities are reputable.
Contact Information

February 2007

IN THIS ISSUE

— Digging up the Dirt: How to Gather Competitive Intelligence
— Rules of the Road: What Not to do in Gathering Intelligence
— In the next issue

GREETINGS!

Welcome to the February edition of our newsletter. In this issue, we’ll look at the role competitive intelligence can play in giving your clients a strategic advantage versus peers of all sizes, which will translate into increased market share and revenues for them — and for you as well.

Knowing why your competitors succeed — especially in areas where you may not — can be crucial to long- term strategic planning. Since your competition likely won’t turn over their playbook, you need someone who can effectively — and legally — gather information about their operations to give you the edge. In this issue, we’ll show you how we can make that happen.

DIGGING UP THE DIRT: HOW TO GATHER COMPETITIVE INTELLIGENCE

Running a successful business can seldom be done without leaving some kind of footprint in the public domain. A public company’s growth strategies can be seen, on some level, through the progress they report in material event filings, quarterly and annual statements, and proxy filings. Private companies are somewhat more shrouded in secrecy, yet even they will usually report to third parties such as Dun & Bradstreet, and often they are also the darlings of their industry’s trade publications as well. Details about their growth via mergers and acquisitions is often recorded with the secretary of state where they do business, giving a glimpse of how their acquisitions could affect their long-term outlook.
Yet the real substance of competitive intelligence lies not with paper, but with people. Knowledgeable people. Sometimes, these are also irritated people. These people, the competitor’s former employees, possess a fountain of knowledge, from the recently booted chief financial officer with an axe to grind to the call center employee who left when their company was acquired. Each, once they are found, has a tale to tell, and will often eagerly tell their story to someone who knows how to make them comfortable and open to talking about their experiences.

RULES OF THE ROAD: WHAT NOT TO DO IN GATHERING INTELLIGENCE

The ethics of conducting competitive intelligence, as in many other fields, reside in an area where the predominant color is not black or white, but gray. Yet there are some basic notions, particularly inspired by recent events, that can guide us to successful intelligence gathering without violation of applicable privacy laws. The first guiding principle is that, most often, only former employees are most willing to be interviewed. Aside from the fact that many companies make new hires sign non-disclosure agreements meant to protect their treasured trade secrets, current employees know how thin their office walls are and are keenly aware of the trouble which they can get into if their boss learns that they were sharing company information — from personnel gossip to earnings expectations, what happens in house is meant to stay in house, so typically it is best to talk with former employees who no longer have an allegiance to the company.
The other major principle to remember is that the interviewer must represent himself honestly and fairly. Certain companies have come under fire recently for allowing their investigators to solicit information under the pretext of being someone else, such as Hewlett – Packard’s external investigator obtaining phone records by claiming to be either board directors or journalists in an attempt to identify the source of media leaks. We have performed several competitive intelligence assignments by simply identifying ourselves as consultants to an interested party — no pretext needed. Follow the rules and you can gain a decided advantage without risking costly litigation and bad press later on.

IN THE NEXT ISSUE

In the March issue, we’ll look at the importance of electronic records, from telephone logs to electronic mail and computer hard drive evidence, in ferreting out fraud and abuse at companies.

January 2007

IN THIS ISSUE

— Catching Financial Criminals with Forensic Accounting
— Get People Talking: The Art of the Interview
— In the next issue

GREETINGS!

Happy New Year and welcome to the first issue of our newsletter for 2007. In this issue we’ll focus on how forensic accountants can help detect and deter financial crime in your company or that of your client.

As certified fraud examiners and forensic accountants, we can assist your company and your clients in making certain company assets are accounted for and that internal controls work to prevent employee theft or deception.

CATCHING FINANCIAL CRIMINALS WITH FORENSIC ACCOUNTING

By its very nature, accounting is both a routine process (usually taking the form of quarterly and annual audits, tax preparation, etc.) and one based on subjectivity (finding ways to massage the tax code and accounting rules, both in a state and federally, to a client’s advantage.) As a result, when that client is victimized from within by an employee (or by a vendor outside the company), auditors and outside accountants may not be ideally suited to handle the situation. On certain occasions, the fraud in question may have been perpetrated by a company’s internal accounting employees as well.
Enter the forensic accountant, a relatively new breed of professional trained in accounting principles and techniques yet grounded in the realm of adversarial, investigative fraud detection. Forensic accountants can review a company’s books and records to detect irregularities and suspicious patterns that may well lead to identifying the pervasiveness of fraud and, ultimately, provide a chain of evidence indicating who perpetrated the financial crimes that, on average, cost corporations of all sixes an average of 5 percent of their revenues in 2005, according to the Association of Certified Fraud Examiners’ 2006 Report to the Nation. The process of investigating such crimes can be time consuming and potentially costly, but recovering tens of thousands of dollars secreted away by fraud — and putting a company’s employees on notice that such behavior will not be tolerated — make the rewards worth several times the cost.

GET PEOPLE TALKING: THE ART OF THE INTERVIEW

While many financial crime and fraud investigations start with a paper trail, after successfully collecting and analyzing evidence, one question typically remains — “whodunit?” The answer lies in interviews. While documents can indicate potential culpability, very rarely are there “smoking gun” documents that can provide direct evidence of the intent to commit a crime. (Electronic mail messages can sometimes be the exception to this rule.) More often, if documents indicate that a person may be guilty of a crime, that person’s peers, supervisors and vendors — past and present — will hold the key to answering how the potentially responsible party was able to undertake the fraud.
Most people are more willing to provide information than they think, and good fraud examiners and forensic accountants know how to make an interviewee feel at ease while keeping them focused on the details that are critical to any investigation — who did what, when, where, and how they did it. Only by receiving thorough, honest answers to these key questions can your client learn what happened, who did it, and how to stop it from happening again.

IN THE NEXT ISSUE

In the February issue we’ll look at the role competitive intelligence plays in giving your client’s business an edge over its rivals of all sizes.

December 2006

IN THIS ISSUE

— Not so Sweet Charity Begins at the Office: How to Avoid Employee Crime
— What you can do to curtail employee crime among your clients
— In the next issue

GREETINGS!

Welcome to the December edition of our newsletter. In this issue, we’ll focus on the problem of employee fraud, financial crimes and misconduct, and how best to both resolve existing problems and to prevent them from happening in the future.

NOT SO SWEET CHARITY BEGINS AT THE OFFICE: HOW TO AVOID EMPLOYEE CRIME

A busy dental practice depends as much on the skill of its support staff, particularly the secretaries and bookkeeper, as it does the dentist’s years of experience. Yet a trusting dentist in Washington, D.C. found that his faith in his bookkeeper would cost him dearly – at least $130,000 within a two-year period. The bookkeeper had claimed she worked 50- hour weeks and given herself a $20 per hour raise without his knowledge.

In another instance, a marketing manager in a Dallas Home Depot ordered company-issued gift cards to be used for “legitimate Home Depot business and marketing-related purposes.” In fact, the manager sold or intended to sell nearly 2,400 gift cards through an online auction site, carrying a total value of $269,350.

In an era where the economic landscape is affected by a wide range of factors beyond an employee’s control, the portion of the population that feels the effects of a downturn most often are working employees. The gap between average wage increases and the rate of inflation is expected to narrow further in 2007 – most employees’ raises were expected to increase by 3.5 percent in 2007, the same rate as in 2006; the rate of inflation, meanwhile, is expected to rise from 3.1 percent in 2006 to 3.3 percent in 2007, according to The Conference Board.

Faced with the prospect that their stagnant wages will buy fewer goods, what do some employees do to recoup the shortfall? This holiday season, they may well look to the “Scrooges” in the executive suite and decide to give themselves an early holiday present, courtesy of their employer. While many may think of the looting of large corporations by their top executives when they think of employee crime, nearly two thirds of all employee thefts analyzed by the Association of Certified Fraud Examiners involved amounts of less than $100,000. While the type of fraud perpetrated by top executives in attention-grabbing scandals – most often financial statement fraud – was responsible for the highest median dollar loss ($2 million), misuse or theft of an organization’s assets by employees was present in an astounding 91.5 percent of cases, resulting in the smaller – but far more frequently occurring – median loss of $150,000.

The size of businesses affected most often by employee asset misappropriation also defies the conventional wisdom that Fortune 500 companies most often fall prey to such schemes. In fact, organizations with fewer than 100 employees were victimized 36 percent of the time, nearly double the rate at which companies with more than 10,000 employees fell victim to employee theft.

At other times, the asset being misused is not a tangible item, but the employee’s time itself. In the past, we documented how an employee used his company’s resources – and the business hours during which he should have been working – to operate a wide-ranging real estate business.

WHAT YOU CAN DO TO CURTAIL EMPLOYEE CRIME AMONG YOUR CLIENTS

Whether you represent a Fortune 500 company or a Silicon Valley startup, one thing is clear: employees must receive proper training on use of company assets and be aware of significant penalties should violations occur. Maintaining a clearly stated written policy that is reinforced verbally in appropriate situations, such as at new employee orientation meetings, is a good first step toward curtailing employee crime.

Most important, however, is the need to engender a culture where employees are rewarded for disclosing any instances where they see others misusing or stealing assets. This can be best done through an anonymous employee hotline. Once thought to be too cost-prohibitive, hotlines can now be staffed for 24 hours a day, seven days a week at very reasonable expense.

Human nature is a very fickle thing, however, and some employees may always feel that they aren’t paid enough, acknowledged enough or given enough responsibility. As a reaction to this perception, they will thus feel a need to “take something back” from their employer to gain confidence and reassert their intelligence and self-worth. If your clients have become the victims of employee crime, despite their best efforts, there are several measures they can take:

• Analyze the delegation of duties. If one person has responsibility for complementary functions, such as purchasing and accounts payable, these duties should be split among two people who have not had a long-standing working relationship, so that one party makes a request and the other must sign off on it.

• Encourage openness among the staff. Loose lips have sunk ships for ages – while this holds true for companies of any size, it is also a fact of life for employees. If assets are missing or misused, make further efforts to encourage dialogue between middle management, employees and executives.

• Hire outside experts to discreetly determine culpability. While establishing clear, strict rules and creating an environment where infractions can be discussed are two key elements, once a crime has been committed the most important step is to determine the extent of the crime and also uncover the perpetrator(s.) As Certified Fraud Examiners, we have witnessed many cases where an employee, seeking to right some perceived wrong committed by the employer, works on his own or with others to “make things right” by filing bogus expense reports for business meals where no business transpired; created dummy corporations to “buy” inventory from the employer for which it never paid, and which the employee also sold to reap pure profit; and skimmed cash from retail operations to increase his own income. Whether through surveillance cameras, employee interviews or electronic record analysis, each of these schemes can be detected, the perpetrators prosecuted, and damage minimized before a difficult problem becomes a business crippling one.

Employee crimes can be large or small, but all can significantly disrupt your clients’ business. While preventive measures like those described above are critical, after a crime has occurred the most essential goal for any organization is to minimize the damage caused and identify the offender before he can strike again.

IN THE NEXT ISSUE

In January’s issue, we’ll look at the skills forensic accountants bring to an investigation and analyze how they can add value to your investigations.

November 2006

IN THIS ISSUE

— Look Before You Leap
— Making your decisions better: success stories in due diligence
— In the next issue

GREETINGS!

Welcome to the first edition of our monthly newsletter. Each month, we’ll highlight trends in fraud that are of importance to your firm and your clients. This month we’ll take a closer look at what’s involved in performing more thorough and careful due diligence before signing off on a transaction or making a new hire.

LOOK BEFORE YOU LEAP

Trust. It’s an essential part of both your client’s lives and your client’s business. Yet all too often, your clients don’t know enough about the party sitting across the table – and a lack of knowledge can cost them dearly.

Suppose your client is an engineering firm looking to grow by acquiring an engineering software company and incorporating the software into its consulting business. Having failed to interview the software company’s existing customer base extensively, the engineering firm missed out on knowing how dissatisfied customers were with the bug-riddled software and the poor customer service. By the time the deal closed, most of the software company’s customers had migrated to a competing product, making the software company’s customer base far less valuable than it had been when negotiations began.

These scenarios occur all the time. While a thorough analysis of financial data – both past performance and forward-looking projections, models and assumptions – is critical, the human element – trust – is key, and is often overlooked.

Several of our past cases have hinged on seemingly modest deceits, the notion that someone would simply try to hide an unfortunate part of their past from a potential acquirer, partner or employer. In one case, a candidate for a high-level position at a financial services firm failed to disclose a manslaughter charge that happened 20 years earlier on the other side of the country. In another case, a potential vendor to a client failed to disclose that he was fired from two separate financial services executive posts because he bypassed the firm’s routine due diligence procedures when making loans to persons of questionable character – who then used their financial positions to secure an automobile and other perks for the executive’s family at deeply discounted rates.

At other times, due diligence can seem more routine, but can be just as critical to your firm or your clients. Suppose the chief financial officer of a company in which your client has invested heavily resigns abruptly. What were the true reasons for his departure? Who will replace him? Most importantly, how will this affect the overall direction of the company and its ability to meet stated goals? The answers to such questions can be vital to the success of your client’s investments, and the odds are great that the answers will not lie in the company’s 8-K (if, in fact, it’s a public company.)

The best way to find these answers is two-fold: first, a thorough examination of public records involving the persons or company on the other end of the deal, including news articles, litigation, and an analysis of publicly available financial information (for companies, payment histories; for individual, bankruptcies, liens and property records.)

After available information has been assessed, the next step is to cultivate a list of former supervisors, colleagues, or friends involved with the individual or the company in question. Do they have any explanations for the events that came up in the public record? Do they support or refute the claims made in news articles? Do they know anything beyond what is in the public record that sheds light on the subject company or individual’s reputation and ability to make good on promises?

These are tough questions to ask, and difficult questions about which to get an honest answer. Using a Certified Fraud Examiner trained in both public records analysis and interviewing techniques will help you avoid the many potential pitfalls that will otherwise await you on the road to that next big deal.

MAKING YOUR DECISIONS BETTER: SUCCESS STORIES IN DUE DILIGENCE

A client looking to invest in a market research company wanted to know how the new CEO, on the job less than a year, was being received by more tenured subordinates. After lukewarm to negative feedback we gained from interviews, the client decided not to invest, and the new CEO abruptly resigned a short time later.
Another client sought to acquire a small business that had a positive reputation among its clients and community. The target company also had a habit of entering into agreements to be acquired and backing out when the primary owner would get nervous or feel that he wasn’t ready to let go of “his company.” Our client was armed with this vital information before beginning negotiations.

IN THE NEXT ISSUE

With the holiday season fast approaching, next month we’ll look at employee fraud and crime: why it happens, how to stop it in its tracks and the steps necessary to fully investigate offenders once a crime occurs.