Character Counts Know Who You’re Investing With

Randy ShainVP of First Advantage Investigative Services, BackTrack Reports Group

ArecentarticleinThe New Yorker recounted J.P.Morgan’s1912testimonybeforeCongresswherethefinancialtitanexplainedhismostimpor-tantinvestingpolicy:“Thefirstthingischaracter.AmanIdonottrustcouldnotgetmoneyfrommeonallthebondsinChristendom.”Mr.Morgan’swordsarenolesstruetoday.Nomatterwhatyou’redo-ingwithyourmoney–whetheryou’reinvestinginahedgefundorprivateequityfund,buyingoutacompany,purchasingvaluableartworks,orhiringsomeonetorunyoursinglefamilyoffice–itises-sentialthatyouknowthebackgroundandcharac-teroftheindividualwithwhomyouarelookingtodobusiness.

Recenthigh-profileblowupsinvolvingSamIsraelandTomPettersprovidevaluablelessonsabouthowandwhyyoushouldconductduedili-gence.Ifyouhavefollowedthehedgefundindus-tryinrecentyears,thenyoulikelyknowthatMr.IsraelwastheheadofBayouSecurities,apurportedhedgefundthatallegedlymadeoffwithmorethan$300millionofitsinvestors’money.Afterfakinghisownsuicideandfleeingauthorities,he’snowserv-ingtimeinfederalprison.Similarly,Mr.PetterswasrecentlyarrestedforallegedlyrunningamassivePonzischemethatmayhavedefraudedinvestorsofbillionsofdollars.Unfortunately,therearealwaysgoingtobecriminalswearingreallyniftythree-piecesuitsandtryingtotakeadvantageofyouandyourmoney.Thatdoesnotmeanyoushouldstuffyourcashinyourmattress.Bytakingthefollowingstepseverytimeyoumakeaninvestment,youcanprotectyourwealthfromthelikesofMessrs.IsraelandPettersandensurethatyourwealthcontinuesto grow.

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onlyworkedFINRA)Websiterevealedthathehadonlyworkedtherefrom1993toJune1995.Cer-tainlynoteveryonewholiesorexaggeratesontheirrésuméisacriminal.Butifsomeoneiswillingtolieorexaggerateontheirrésumé,itbegstheques-tion:Whatelsearetheywillingtolieorexaggerateabout?

2. Search Court Records

Searchingcivil,criminalandbankruptcycourtrecordsonthestateandfederallevelsinalljurisdictionswheretheirsubjecthaslivedandworkedalsoprovidesvaluableinsightintoanindividual’sbackground.Manylegaldatabasesandso-calledduediligencefirmssimplyprovideyouwithalistoflawsuitscitingpeoplewhoshareyoursubject’sname,soitisessentialthatyouinsistonretrievingcourtrecords.Atfirstglance,retriev-ingthesedocumentsmayseemlikeacostlyandtimeconsumingmeasure,butinvestorswhotookthissteppriortoinvestingwithMessrs.PettersandIsraeldiscoveredadisturbingpatternintheirlegalhistoriesthatwouldnothaveotherwisebeenrevealed.InMr.Israel’scase,courtrecordsshowedthatatage34,andnotlongbeforeformingBayou,hewassuedbyaformerlandlordforfailingtopay$12,000inrent.Recordsalsorevealedthata

underacademicsuspension,andhadattendedschoolforlessthanthreeyears.Althoughheneverclaimedtohavegraduated,doublecheckinghisbackgroundrevealedanimportantcomponentofhispastthathehadneglectedtoreveal.

Résuméerrorsofcommissionareworthyofevenmorescrutiny.Examplesofthisincludealteringdates,jobtitles,schoolaccomplishmentsandperformancerankings.PeraDun&Bradstreetrecord,Mr.PettershadgraduatedfromSt.CloudStateUniversityinMinnesota.Uponafurthercheck,itwasdeterminedthatheactuallyonlyat-tendedforonesemester.Mr.IsraelhadclaimedonabiographythatheworkedatafirmcalledOmegaAdvisorsfrom1992to1996.AsearchontheNa-tionalAssociationofSecuritiesDealers(NASD,nowknownasFINRA)Websiterevealedthathehad

1. Verify Credentials

Beforeinvesting,youshouldseektoverifyallofanindividual’seducationalandworkcreden-tialswithformeremployers,schools,regulatorybodies,etc.Asyoumayknow,résumésandbiog-raphiesareoftenrifewitherrorsofomission.Toomitaneducationalpursuitoremploymentcanbeaconvenientmistake,butamistakenonethe-less;whilethereasonsforomissionsarenotalwaysobvious,thereisalwaysareason,onethatneedstobeexplored.Tothispoint,somebiographicalasser-tions,whilenotincorrect,aresimplyvague.Forex-ample,Mr.Israelhadindicatedonabiographythathe“attended”TulaneUniversity.Duringaninves-tigationintohisbackground,aquickconversationwithaUniversityofficialaboutMr.Israel’srecordsrevealedthatatonetimehehadbeenplaced

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formeremployeehadsuedMr.IsraelandBayouinLouisianaforbreachofcontractand“anunlawfulvio-lation”ofLouisiana’s“WhistleblowerStatute,”inregardtohistermination;thisemployee’sclaimseerilymatchedthoseofprosecutorsseveralyearslater.Additionally,whenhewas40yearsold,Mr.Israelhadbeenarrestedfordriving“undertheinfluenceofalcohol”andchargedwith“criminalpossessionofacon-trolledsubstance.”InregardstoMr.Petters,courtrecordsshowhewassuednumeroustimes,inmultiplejurisdictions,forfailingtopaybackloansorpayforproducts.Healsohadbeenaccusedofpassingbadchecks.Hadyouconductedanarrowsearchofjustoneortwojurisdictionsorsimplyseenacitationoftheselawsuitsonadatabasepage,withnoadditionalinformationabouttheircontent,thisvaluableinsightintotheircharacterswouldhavebeenmissed.

Evenifyoursubjectdoesnothavealengthylitigationhistory,searchingcourtrecordscanstillpro-videvaluableinsightintohischaracter.Onesuchexampleistheoverlylitigious–or“sue-happy”–subject.Wouldyoucareifthemanageryouwerelookingtodobusinesswithsuedhislandscaper,exterminator,plumber,rooferorpoolmaintenanceman?Probablynot.Butwhatifhesuedallfive?Thispersonisseem-inglynotafraidtousethecourts,andwouldlikelynothesitatetousethemagain,possiblywithyouasthetarget.Asimilarlysignificantthreatisthemanagerwhowasthedefendantinlawsuitsfiledbyallfiveofthosecontractedtodoworkforhim.Aseriesof$2,000judgmentsnamingthemanagerasdebtor,atfirst,mayseemtrivialgiventhedollaramount.However,whyisasuccessful,assumedlywealthymanagernotpayingthepersonwhocutshisgrass?Anotherlessobviousexampleiswhenalegalissuemayleadtothemanager’sdistraction.Themoststandardsituationisanongoingdivorce.Thismaybethehardesttorec-oncileasitseemsunfairtomakeadecisionbaseduponapersonalmattersuchasdivorce,butit’suptoyouandthelevelofundividedattentionyouwanttoensure.

3. Read the News

Therearemultiplereasonswhyyoushouldsearchnewsdatabasesforinformationaboutyoursubject.Newsarticlescanbeagreatwaytocross-referenceyourresearchandlearninformationaboutanindividual’stitlesandgeneralemploymentdates.Newssearchesalsocanhelpyoufindinformationaboutlawsuitsthatmightnothavepoppedupwhileconductingyourlegalchecks.Withaccesstotherightdata-base,anewssearchonMr.PetterswouldhaverevealedaJune21,2001articleinThe Star Tribune,whichstatedthatwhileinhighschoolhestartedamailorderelectronicsbusinessfromhisbedroom.Whenhisparentsmadehimshutitdownhewas$7,000indebt.Beyondyouthfulindiscretions,thearticlefurtherrevealedthatMr.Pettershadboughtfivestoresfromabankruptconsumerelectronicchain.Thedecisionsreportedly“costhimhisassetsandhismarriage,”forcinghimtospend“mostof1988livinginanolderbrother’ssparebedroom.”

Searchingthenewsalsocanbeaneffectivewayoflearningthenamesofpeoplewhomyoursubjecthasworkedwithinthepast,whichcanbeessentialwhenseekinginterviewsources.EventhoughMr.Israelwasnotprominentlyfeaturedinthenewspriortohisfund’sblowup,thesenewsquerieswerestillvaluable

becausetheyidentifiedseveralformercoworkers.Wheninterviewed,aformerbossdisputedMr.Israel’sassertionthatheworkedasaheadtrader.Anotherformercolleagueindicatedhe/shewouldnotinvestwithMr.Israel.(Seebelowformoreinformationonconductinginterviews.)

Noteverythingyoufindwillnecessarilybenegative.Sometimessearchingthenewsisausefultoolforreinforcingwhatyoualreadyknow.Forexample,ifsomeoneisclaimingtobeanexpertininsurance,andthey’requotedin50newsandmagazinearticlesdiscussingtheinsuranceindustry,itcanbeasignthatothersconsiderthemknowledgeabletoo.Ofcourse,theconversealsoistobeconsidered;i.e.,aso-calledinsuranceexpertwhoisnotmentionedinanyperiodicaldiscussingthistopicmightleaveyouwonderingabouthisexpertise.

Finally,beawarethatconductingeffectivenewssearchesmeansdoingalotmorethansimplytyp-ingtheperson’snameintoaWebsearchengine.Thinkofitlikeinvesting:Justasitisimportanttodiversifyinvestments,inordertoascertainalltheavailablenewsstoriesonanindividualyoumustsearchnumerousdatabasestomakesureyoucaptureasmanystoriesaspossible.

4. Beyond Reference Checks – Conduct Interviews

Whenyou’relookingtohiresomebody,they’realmostalwayswillingtoprovideyouwithalistofreferences.Sincethesecontactsarepre-selected,it’slikelyyou’renotgoingtohearparticularlycandidinformation.Togetaclearpictureofsomeone’sprofessionalabilitiesyoualsomustspeaktopeoplewhohaveworkedwiththesubjectinthepast,butwhohavenotbeencitedasareference.Theseinterviewscanhelpyoulearnthingsaboutthesubjectthatreferencesdonotwanttoelaborateon,orsimplydonotknow.

Whenconductingtheseinterviews,onedoesnotnecessarilyhavetobeWoodwardandBernstein.Oftentimes,it’sassimpleasaskingopenendedquestions,suchas: When did you first meet this person? In what capacity did you work with him/her? What are his/her strengths? Weaknesses? Would you work with them again? Explain why. Would you invest your money with them? Asindicatedabove,whenoneofMr.Israel’sformerassociateswasaskedwhetherhe/shewouldinvesthim,he/shesaid:“Idon’tthinksoandI’lltellyouwhy.I’mabigoneforliquidityandtransparencyandyoucan’tgetitfromhim.Idon’tworkwithanyonethatIcan’tsee.”InMr.Israel’scase,hislackoftransparencywasindicativeofalargerprob-lem–hewasstealinghisclient’smoney.Thesource’scommentswouldhavegivenanypotentialinvestorpausebeforesigningovertheircash.

Again,notalltheinformationgleanedfrominterviewsisnecessarilynegative.Youmightdiscoverthattheindividual’sformercoworkersthinkhewasgreatatwhathedidandwouldbetherightfitforyourjob.Hopefully,bythatpointyouareconfidentthatyouknowenoughaboutyoursubject’scharactertomakeasounddecisionregardingyourmoney.

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Tolearnmoreaboutconductingduediligenceinvestigations,contactRandyShainat(212)620-9700,ext.6507orrshain@FADV.com.Mr.ShainisvicepresidentofFirstAdvantageInvestigativeServices,BackTrackReportsgroup,andauthorofthebook“HedgeFundDueDiligence:ProfessionalToolstoInvestigateHedgeFundManagers.”

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any investment in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

This document is not an invitation to subscribe for shares in any fund and is intended for informational pur-poses only. Hedge funds and other alternative investments are speculative investments and are not suitable for all investors, nor do they represent a complete investment program. The funds are only open to qualified investors who are comfortable with the substantial risks associated with investing in alternative investments.

FOA Newsletter Guest Columnist To learn more about conducting due diligence investigations, contact Randy Shain at (212) 620-9700, ext. 6507 or rshain@FADV.com. Mr. Shain is vice president of First Advantage Investigative Services, BackTrack Reports group, and author of the book “Hedge Fund Due Diligence: Professional Tools to Investigate Hedge Fund Managers.”

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