By Bill E. Branscum
"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
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
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.
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.
International maintains a web site at http://www.OracleInternational.com.
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