When I was in my master class listening to one of my risk management lecturer explaining on the importance of risk management and the emergence of enterprise risk management in businesses, suddenly a story of her personal friend getting married to an impostor cropped out and a topic of background check was discussed. We were told that this unfortunate lady only realized that her husband was defrauding her after 10 years of marriage and eventually the marriage ended due to lost of trust.
Apart from personal experiences of individuals dealing with fraudster, there were also a lot of enterprises had suffered due to their failure to carry out background check on criminals in their organization. Based on an article in www.compliancex.com, let us examine the experiences of these organizations so that we can eventually understand the importance of us conducting a background check to protect our personal or business interest:-
1. Work ethic matters. In the case of Samuel Israel III, founder of the Bayou Hedge Fund Group (please go to wikipedia “Bayou Hedge Fund Group”), a background check turned up a checkered history of short periods of employment at a variety of companies. Israel moved on from one firm after a “bad trade” and was permitted to resign from another for failing to adhere to company policy
2.Investigate the management company as well as the individual in question. John Whittier, the founder of Idaho hedge fund Wood River Capital Management, had a relatively clean background. But his former company had been sued for failing to pay rent payments and was on its third prime broker in seven months.
3.Investigate all of the principals at the company. Steven Byers, co-founder of WexTrust Capital LLC, had very few marks on his record. But his chief operating officer and co-founder, Joseph Shereshevsky, had quite a tarnished past: seven or eight traffic violations, marital discord, child support battles, and bank fraud.
4.Impressive credentials are not always indicative of good character. Absolute Capital Management Holdings fund manager Florian Homm obtained his BA and MBA from Harvard University, graduating cum laude. One would think such an intelligent, accomplished person would have no need (and too much pride) to resort to fraud. Yet Homm was accused by the SEC of portfolio pumping to the tune of $440 million.
5.Follow up on negative media. Negative press can be a sign of more bad news to come. If these stories come up in a background check, they must be investigated.
6.Pay attention to the number of red flags. A background check must pass “the scale test.” In the case of Tom Petters, founder of the Petters Group, a $3.65 billion Ponzi scheme, a background check turned up so many documents and pages of complex lawsuits that it simply did not pass the scale test. Petters was convicted in 2009 and sentenced in 2010 to fifty years in federal prison.
7.Perform service provider authentications. Bernie Madoff didn’t use any outside service providers. That was a red flag.
8.Do not rely on the SEC. “The SEC is great at filing charges and enforcing penalties,but they’re not so great at detecting fraud. Bernie Madoff passed his SEC exam.” Be proactive in doing your own investigations after a background check. Don’t be complacent. In the case of Madoff, that SEC exam was a false green flag.
9.Character matters. “They say character is what you do when no one is looking,” . And that’s how fraud happens–someone with access is dishonest when no one is looking. Pay attention to past incidents involving personal relationships and family. Grant “Gad” Grieve of Finvest Asset Management LLC, who was sued by the SEC in February 2009 for inventing fake auditing firms and creating false financial statements.
10.Perform ongoing due diligence. Develop your own processes and do one investigation every month.
In conclusion, , there are four things to keep in mind when you turn up red flags during a background check.
1. Who do you work for and what is your investors’ tolerance for negative news?
2. Is the litigation indicative of a character flaw or just related to an investment style?
3. What is the financial obligation of the manager or the worst case exposure to a suit?
4. Can a personal matter affect the operations of a company? For example, would a divorce dissolve the company?
List of all western cases above doesn’t mean that in Malaysia, it is not necessary!! Its just that the disclosure might not be right at this moment. Ask your self, Do I know the background of my future husband or wife? Can I be really sure the CEO that I appointed has a clean background?.
PAK WAN