By Chris Cochran
I keep going back to an excellent Mintz Group article from 2010 that I’ve used (and shared) many times over since it was first published to demonstrate some due diligence traps that can have serious impacts on businesses and investors. It’s a great supporting document when a client questions the time – and expense – a background check or other due diligence investigation is taking. The article, “Beyond Madoff: Eight Lessons from Recent Due Diligence Background-Checking Gone Wrong,” bubbled up in my thoughts recently as I continued reading installments in a seven-part series the Wall Street Journal has been publishing for subscribers on financial crimes that “rocked” the U.S.
Some of the major crimes the WSJ focuses on in this series occurred, as editors point out, at a time when investigative and forensic tools we have today weren’t available – computers or a robust online research environment didn’t exist. That’s not to say the incriminating evidence couldn’t have been discovered, just that it would have been extremely difficult and much more labor intensive, and therefore time consuming, to do.
For example, in a recent WSJ installment, I read about the McKesson & Robbins scandal of the mid-1920s to late-1930s era. The circumstances and the actions of the perpetrators were, in fact, shocking. I was familiar with the company name – it still exists and is now just McKesson, and still operates in the healthcare and pharmaceuticals markets. I was intrigued about what this big financial crime could be for a company that still exists and still has name recognition.
As I discovered, the case involved false identities, fake accounting, other bank fraud, and illegal financing of lavish lifestyles – some of the very things due diligence practitioners look to uncover to protect their clients. As I read each more fascinating detail in the progression of events, I was astounded by the audacity of the perpetrators, which mostly included members of the same family. You can read about it at the WSJ website or in this report from the SEC.
The Mintz Group article ties in nicely with this WSJ series, citing actual examples of due diligence failures in their eight lessons without disclosing the parties involved. In fact, the focus isn’t on the parties per se, but on the how and why of the due diligence failure that created problems for investors in the first place – causing deals to fail and/or money to be lost. The lessons are still relevant today, including these key points:
- Don’t be shy about doing a due diligence check of a business partner; be suspicious if they seem offended that you’re doing one.
- Don’t be naïve – a lot of people with things to cover up in their pasts lie when asked about themselves.
- If you fail to check for fraud convictions and fakes names in the target’s past, you might be in for wrongdoing in the future. Leopards frequently don’t change their spots.
You can check out the Mintz Group article for their full eight lessons discussion. Have anything to add to these lessons? Please share in the comments section below.
An Inquiring Mind 