Florida and International Private Investigators   ::   Financial Fraud Investigations  ::   Corporate Intelligence

Due Diligence
By Bill E. Branscum
Copyright 1999

"Due diligence" is like "paradigm shift" -- a really neat sounding juxtaposition of terms that altogether too many people insert in their advertisements and brochures without having any clue what it means, solely because altogether too many other people insist on using it, just because it sounds good.

Due diligence refers to the standard of care necessary to prevent the possibility of being held liable for negligence. It is a fluid concept that varies dramatically from situation to situation. For any entity, of any kind, to advertise that they market "due diligence," without a qualifying phrase, makes no sense. Furthermore, it begs litigation.

For example, suppose Ike Investor walks into the office of PI's R US and says he is thinking about investing a million dollars in XYZ, Inc., an up and coming business attempting to generate investment capital through an initial public offering (IPO). Since Ike saw that marvelously impressive, flashing neon sign outside advertising "due diligence," he knew in his heart that PI's R US was the place to go to make sure that everything was on the "up and up."

The question is, what would a duely diligent investigator do under these circumstances? If Ike walked into your office, what would you propose to do? Joe PI takes the case and does whatever he thinks he should to find out about XYZ, Inc.

A few months later, the SEC files an enforcement action alleging that XYZ, Inc. was involved in unlawful trading activities; stock values plummet and Ike loses his patootie. Ike does what every red-blooded American does under these circumstances - he goes to Larry Lawyer and starts looking for someone to sue.

Larry Lawyer doesn't need to look far. He starts with the report put together by PI's R US. Joe PI is about to learn that "due diligence" does not mean whatever it was that he thought it meant - it is all going to be spelled out for him in the Civil Complaint.

Let's start with Alfred Advisor, the financial advisor that convinced Ike Investor that XYZ was a good investment. Joe PI should have wanted to find out a little about Alfred and it would have been reasonable to expect Joe PI to review Alfred's Form ADV, the SEC form that describes Alfred, his background, experience and any allegations of impropriety that might have plagued him in the past. There are some real villains managing people's money in spite of the fact that their entire sordid history is readily available for anyone to look (or overlook).

Alfred referred Ike to his friend Bill Broker. Ike filled out the mandatory SEC filing indicating that: he had no experience in stock transactions; his total net worth was $1.2 million and he was interested in an investment vehicle that would provide income throughout his senior years and protection for his two handicapped children after he was gone. Anyone, including the guy who pulls aluminum cans out of Ike's dumpster, should know that nobody in Ike's position has any business investing his money in an IPO. Bill Broker will be the recipient of informative correspondence from Larry Lawyer too.

It would have been reasonable for Joe to check out Bill Broker. Any investigator working any case involving any broker should know that the broker's "CRD" provides information regarding the broker's regulatory history, any complaints that have been filed, and the results of any associated arbitration. Had he pulled the form, he would have found out that Bill learned all there was to learn at Stratton Tokemont (a notable villian in the world of securities) and was partners with Ned Beyerman during the hey-day of Nublin Securities (before everybody got arrested).

With regards to XYZ Inc., Joe PI should have checked a little further than the Articles of Incorporation, Amendments and Annual Reports. In addition to the inquiries he did make regarding civil litigation and criminal histories, it would have been reasonable to expect him to initiate queries focusing on the corporation and its principals through: Dun & Bradstreet, TRW/Experian, Standard & Poors, Thomas Register and so forth. He should certainly have researched SEC filings, media articles and similar sources of corporate information.

In cases of this nature, the tragic irony is that investigators usually want to do more than their client is willing to pay for. The client cuts the investigation short to save money and then claims that the investigator's failure to exercise due diligence caused his problems.

Larry Lawyer is going to argue that Joe PI was not duely diligent in his inquiries and was therefore negligent in meeting the needs of his client who suffered losses directly attributable to his negligence.

To survive in today's litigious society, a private investigator should always communicate with their client in writing and document the communications. The fax machine is the single best CYA device on the planet; it provides the functional equivalent of instant certified mail with a return receipt.

Joe PI, as I have painted him, is not the "sharpest knife in the drawer." Nevertheless, he does have a fax machine and he's been around long enough to know that those fax transmittal forms are spit out of that gizmo for a reason. He dutifully staples each and every fax receipt to the communication it was associated with - a practice that has protected and preserved his relationship with his insurance provider on many occasions.

In this case, Lucy Lawyer responds to Larry Lawyer with proffered evidence in the form of correspondence and fax receipts that say, in pertinent part:

Fax1: ". . . as I stated during our meeting yesterday evening, you really should consult with an attorney specializing in securities issues . . . I will initiate the inquiries you requested and restrict my investigative activities to the budgetary constraints you specified . . ."

Fax2: ". . . initial public offerings are complicated, . . . considering the speculative nature of IPO's in general and the magnitude of your proposed investment, I urge you to be cautious . . .although it would be impossible to fully evaluate the viability of the proposed investment within the budget allotted, I can tell you . . ."

Fax3: ". . . other avenues of inquiry could have been pursued but I understand your concern that further inquiry may not produce results that justify their expense. I will be happy to initiate further inquiries as you direct."

Three fax receipts may very well have saved Joe PI's insurance carrier a million dollars. Use your fax machine and save your fax receipts!

In sum, I would respectfully suggest that advertising "due diligence" per se is most unwise. The better course is to advertise the areas of work that you do and then document that the client had final decision making authority as to the nature and extent of the inquiries that should be made.

Bill Branscum is a licensed Private Investigator and owner of Oracle International, an investigative agency he established in Naples, Florida following his career as a federal agent. His experience includes investigations related to narcotics smuggling, money laundering, securities fraud, the unlawful exportation of critical technology, the sexual exploitation of children and contract murder.

Oracle International maintains a web site at http://www.OracleInternational.com.

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