Digging for Disclosure: Investing with Intelligence

Thorough background checks on a management team, fund manager or investment advisor are investors’ greatest tool as they provide necessary information to make sound investment decisions.


As Ponzi schemes and other corporate crimes continue to dominate the news headlines, now more than ever investors need to be properly armed with intelligence to protect their deals and investments. Before you move ahead with your next potential investment, remember that information is at your disposal. With just a few key preventative tools, such as information gathered in a background check, investors can protect themselves from a host of problems or conflicts that may not only impact their decisions but also affect how deals are structured.

p>While financial and legal due diligence are accepted norms in the investment community, appropriately thorough background checks on a management team, fund manager or investment advisor are often overlooked, leaving the investor vulnerable and subject to corporate crime. Thorough background checks are investors’ greatest tool as they provide necessary information to make sound investment decisions. Having spent over 30 years in business investigations, I can attest to the ways in which background checks can illuminate challenges investors face and ways to overcome these barriers to deals.

Sometimes background checks will uncover daunting information, like when we found a CEO spent his earlier years running a prostitution ring or the hedge fund manager who had crossed several country borders throughout Asia with the hopes his insider trading charges wouldn’t catch up with him. But, whether the information is inflammatory on its surface or implicitly conflicts with investors’ interests, the key is knowing all of this before investors get involved.

For example, we were once hired by investors who were contemplating an investment in a company founded by a group of young, Ivy League tech guys. The company was a sneeze away from going public. The founders voluntarily disclosed to the investors that they were arrested for smoking marijuana while in college. Before the investors made a commitment, they called us to run background checks on the founders.

We found that their initial “disclosure” was downplayed just a little: they were federally criminally indicted for running a national cocaine and marijuana ring. They were caught by the Drug Enforcement Agency and had each served several years in prison. Did the investors walk away from the deal? No. They removed the founders from their positions of officers and directors and allowed them to remain large shareholders in the company. The company eventually went public and remains successful.


Rigorous background checks uncover information that not only sheds light on the integrity of the executive or fund manager but also on the integrity of the deal. The most common problems investors face are material non-disclosure and conflicts of interest. Non-disclosure is when the individuals responsible with investor money choose to omit critical information about themselves or their career history, such as being disbarred by the SEC, a penchant for Driving Under the Influence or lying about the colleges they attended. And, a conflict of interest is defined by anything that would impact the life of the deal, such as an individual’s involvement in other businesses that blur the lines of commitment to the deal; a pattern of being sued by investors or lenders, and other issues.

The situations that sometimes surface in background checks can be shocking, comical and complex; investors need to be prepared to deal with anything. It is important to have the tools and people in place to recognize fraud of any color but it is also imperative to know how to interpret the information that may surface in a background check.

Some of the most notorious fraudsters in recent headlines, the likes of Bernie Madoff and Robert Allen Stanford, in retrospect, each had their own red-flags that were overlooked. If proper background checks had been done and properly analyzed many investors might have saved themselves millions, and also kept their names out of the headlines.

Everyone has a different appetite for risk. But investors should know as much about their exposure before the deal is done. We have seen clients respond nonchalantly when we discovered a fund manager had been the main perpetrator in a bank fraud scheme and other clients who have cancelled a deal because a member of the management team had an outstanding federal tax lien. A good background check does not rely on mere data; it is analysis of the facts uncovered that assists investors in making tough decisions and leveraging information to their benefit.

With the intelligence of a background check, investors can diffuse an inevitably explosive deal, resuscitate an investment that looked murky or walk away from a deal or investment that was nothing other than a disaster. Let information be your advocate.

Kenneth Springer is the author of “Digging for Disclosure: Tactics for Protecting Your Firm’s Assets from Swindlers, Scammers and Imposters” and is the President and Founder of Corporate Resolutions Inc. Mr. Springer is a Certified Fraud Examiner and a former Special Agent with the FBI.