| Part of a larger web...consider your prospective client's business connections in your risk assessment.
A global accounting and consulting firm ordered a background investigation of a commodities trading entity and its principals. Media searches revealed that among the subject firm's investors was a hedge fund manager whose name has been in the headlines almost daily (we will refer to him as simply a fraudster). According to the U.S. Department of Justice, this fraudster received over $35 million in ill-gotten profits as a result of a sophisticated insider trading scheme. Media outlets also reported that the fraudster had made a $5 million contribution to a Sri Lankan charity identified as under the control of the terrorist group, the Tamil Tigers; however, his name did not appear in the subject firm's filings with the Securities and Exchange Commission or in Secretary of State records. In the wake of his 2009 arrest, a partner in the subject firm acquired stakes in a foreign bank. Among the investors in the bank was an individual who had also partnered with this fraudster in 2006 to form a hedge fund management company. By canvassing media stories from several years, SI's analyst pieced together a complicated web, with this disreputable hedge fund manager at its center. In addition to these dubious business connections, public record searches uncovered state and federal tax liens in excess of $15 million against two of the subject company's executives. Furthermore, the National Futures Association (NFA) indicated that the company had withdrawn its membership, even though the firm's Web site claimed membership in the NFA.
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Predicting fraud risk doesn't take a psychic:
Last week, the SEC announced that it filed charges of securities fraud against the self-proclaimed psychic who called himself "America's Prophet." Sean David Martin allegedly raised $6 million by telling investors he could predict (and had predicted accurately) the U.S. stock market. While many of us may see that investing with a psychic is a risky venture, the charges against Martin are common types of fraud: claiming that profits were audited and certified, lying to investors about past success and liquidity of funds, and diverting investor funds into his own organization ( http://www.sec.gov/news/press/2010/2010-34.htm). Fraud cases like this one and of all types rose in 2009 and the Securities and Exchange Commission's "Select SEC and Market Data 2009" report notes that theft of funds or securities rose by 118%, that securities violators were required to disgorge illegal profits totaling $2.09 billion and that the commission halted trading of 192 issuers because of inadequate public disclosure (21, 2). The SEC's statistics from 2009 are jarring, but preventing fraud isn't magic and it doesn't take a psychic to foresee risk. A comprehensive background investigation offers insight by revealing red flags through current and past business practices. |
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April case study preview: Next month, we will bring you the incredible story of an executive's company-sanctioned "dating allowance" and the litigation that ensued.
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