International Due Diligence – Investigative Due Diligence – Hedge Fund Due Diligence

Investment Fraud – The Not-So-Independent Accounting Firm

“Independent” accounting firms have played a central role in several high-profile investment frauds. Just last week the SEC filed charges against an investment adviser, alleging that the “independent” accounting firm was a complete phony.

On March 15, 2012, the SEC filed a complaint against San Francisco investment adviser James Murray of Market Neutral Trading LLC for bilking investors out of nearly $5 million.

The SEC charged Murray with providing phony audit reports to investors from the “independent” auditor Jones, Moore & Associates. It turns out that Jones, Moore & Associates was not a legitimate accounting firm “but rather a shell company that Murray secretly created and controlled.”

Murray even went to the extent of creating an elaborate website for Jones, Moore & Associates, posting press releases and listing staff members, including principals Joseph Moore and Richard Jones. The SEC says that Joseph Moore, Richard Jones and at least three other people on the staff directory don’t even exist.

Why go through all this? “An independent financial audit is one of the best protections available to investors,” said Marc Fagel of the SEC.

Accounting firms have played a central role in several other high-profile investment frauds.  Bernie Madoff used an unusually small two-person accounting firm to manage his billion-dollar hedge fund, while Sam Israel used an accounting firm run by his CFO.

Here are some tips to avoid bogus accounting firms and investment fraud:

  • Independently verify the relationship between the investment adviser and the accounting firm. And by “independently verify the relationship,” we don’t mean just make sure the firm has a nice website. Call the firm, talk to someone and ask questions. Many of the accounting firms will provide letters confirming the relationship while others will verbally verify the relationship.
  • Check the state accounting board to determine if the firm is registered as a legitimate accounting firm (Jones, Moore & Associates was not) and/or to see if it has had any disciplinary actions filed against it.
  • Review media and/or civil litigation to determine if the firm has been the subject of any derogatory media (or any media at all) or had any litigation filed against it by clients.
  • Check the secretary of state’s website to see if the company is incorporated and in good standing and to verify the identities of the principals (Israel’s accounting firm was run by the CFO of his own fund).

Enjoyed What You Read?

Join 2,000+ others to get insider tips and tricks delivered to your inbox from what has been voted the best blog in the investigative industry!

/2 Comments/by

Samuel “Mouli” Cohen Sentencing Delayed to April 2012

Samuel “Mouli” Cohen’s sentencing, which was scheduled for February 1, 2012, has been pushed to April 30, 2012. As previously reported, after a three week trial, Cohen was found Cohen guilty on 29 of the 35 counts of wire fraud, money laundering and tax evasion in November 2011.

There were some interesting revelations in recent court filings. In response to Cohen’s motion for bail, the government indicated that Cohen sought to be released prior to his sentencing “under significantly less restrictive conditions than the Court imposed before he tried to bribe a security guard, before he was convicted of multiple counts of mail fraud, money laundering, and tax evasion, and before he learned he (sic) his preliminary Guidelines range of imprisonment is 360 months to life.”  Details of the reported “bribe” were not in the court filings.

Some of the other interesting revelations in the government’s motion:

  • Cohen was renting a 9,000 square foot Beverly Hills home for $50,000 per month at the time of his arrest and had a “personal staff, including a chauffeur, bodyguards, and a personal chef.”  Prior to his $50,000 per month Beverly Hills home, he was renting a $15,000 a month residence in Belvedere, California outside of San Francisco.
  • Not only did Cohen lie to investors about owning his “mansion” in Belvedere, California he lied to investors and even his wife about owning a private jet. Cohen reportedly “went to absurd lengths” to hide the fact that the plane was rented from his wife “having the private jet rental crew clean out all evidence of it being a rented jet and filling the cabin with ‘Cohen’ china and ‘M❤S’ decals before every flight.”
  • In addition to lying about the jet, the government contends that he he married Stacy Cohen in Europe in 2003, but he wasn’t divorced from his first wife until March 2005.
  • Not only did he steal from investors and lie to his wife, he “callously stole the life savings of his father-in-law.”  Stacy Cohen’s father, who had given Mouli Cohen millions of dollars, wrote in a holiday card to Stacy and Mouli Cohen, “All I want for Christmas is for Mouli to replace my IRA’s.”  Sadly, Stacy Cohen’s father later passed away.
  • Three days after Cohen’s conviction, the government alleged that Stacy Cohen filed for an “expedited renewal of a non-standard passport (with extra pages for more frequent international travel).”

In conclusion, the government wrote that Cohen’s “incentives to flee are enormous.”

Judge Charles Breyer denied Cohen’s motion for bail.  It’s safe to say that this will not be Cohen’s last attempt to be let out on bail before his April sentencing.  Stay tuned…

Enjoyed What You Read?

Join 2,000+ others to get insider tips and tricks delivered to your inbox from what has been voted the best blog in the investigative industry!

/by

Two Simple Ways to Protect Your Email

After an 11-month FBI probe dubbed “Operation Hackerazzi,” a Florida man was indicted for accessing the email accounts of more than 50 celebrities. The hacker reportedly used public information to guess the “secret” questions and was able to access the celebrity accounts.There are news stories every day about hackers, but many of us don’t really give them a second thought.  You may be thinking to yourself, “I don’t really have anything to hide” or “Who would want to hack into my email?”  But consider how much of your life is connected to your email (bank accounts, social networks, etc.). For many of us, our email address is like our virtual home; if someone breaks into your virtual home, it can be devastating.Frankly, some of the advice we receive about protecting passwords is not particularly realistic. For example, changing your password every 30 days sounds great, but who can remember a new password every 30 days?Below are two simple yet helpful hints to protect your email.

Choose a Good Password

Does 123456, Password, iloveyou, babygirl or abc123 sound familiar to you? If so, you are one of the lucky ones who have the 20 most common passwords of all time, according to ZoneAlarm.com. There are hundreds of articles about generating strong passwords, but here are some useful tips and a handy tool.

One of the simplest things to do is to add numbers or special characters into your password. For example, take the password “ilovemom” (who doesn’t?). According to How Secure Is My Password, it would take hackers all of 13 minutes to hack this password. But if you simply capitalize the i, replace the o’s with zeros and the m’s with the # sign (Il0ve#0#), it would take 18 days to hack. Not exactly the most secure password in the world, but better than what you started with.

Use Two-Step Authentication

For years, corporate America has had access to something called two-step authentication to protect emails and documents and keep hackers from remotely logging in. For you nontechies, two-step authentication puts in an additional level of security by requiring a second form of authentication in addition to your “regular password” to access your account. The second form of authentication comes in various shapes and sizes, such as a keycard with a randomly generated password, a fingerprint or even a retina scan.

Until recently, two-step authentication was not available to the masses, but Gmail has recently rolled out two-step authentication. For the second form of authentication, Google can send you a text, a phone call, an authentication app or a single-use code that you can put in your wallet. So in addition to logging into Gmail with your email and password, with two-step verification you’ll have to go through the added trouble of entering a second code. This will “approve” the computer you’re currently logging in from for 30 days, so you don’t have to do this every time you log in.

In addition to Gmail’s service, there are a number of third-party service providers that offer services for two-step authentication.

Yes, entering an additional code is somewhat of a pain, but it may end up saving you from a “hackerazzi.”

Enjoyed What You Read?

Join 2,000+ others to get insider tips and tricks delivered to your inbox from what has been voted the best blog in the investigative industry!

/by

Investigative Lessons from The Wizard of Lies

It’s a little overdue, but I’ve just finished reading Diana Henriques’ The Wizard of Lies: Bernie Madoff and the Death of Trust.  It’s an in-depth look at the biggest Ponzi scheme in history.

Henriques goes to great lengths to document Madoff’s life and retrace the beginnings of the Madoff scam and the feeder funds that kept the fraud going for so many years.  In part, Henriques was able to pull the vast web together with Madoff’s help, having conducted two jailhouse interviews.

It’s no secret that everyone missed Madoff’s fraud – the Securities and Exchange Commission (SEC), institutional investors, and some of the wealthiest and most sophisticated investors in the world. The SEC investigated Madoff no fewer than three times; institutional investors privately questioned Madoff’s scheme and could not replicate his trading strategy; and the wealthiest, most sophisticated investors in the world blindly trusted a man who later was exposed as spouting nothing but lies.

As with any tragedy, there are lessons, some of which are easily seen in hindsight: his one-person accounting firm, a trading strategy that nobody could understand questions raised in 2001 by Barron’s and a complete lack of transparency, among other things.

As an investigator, there are several critical lessons I took from the book.

Poke and Prod Until You Get Answers

One of the most compelling stories in the book is that of a New Jersey businessman who, after a half-dozen calls, finally got a meeting with Madoff to discuss making an investment. When Madoff was ultimately presented with difficult questions about his operations and strategy, Madoff turned on the investor, telling him, “You ask a lot of questions. I just want to make one thing clear: With all due respect, once you invest, you can’t call me.  You’ll deal with someone else.”

Asking tough questions isn’t easy. Some people have a gift for it; some people don’t.  The way people react to difficult questions is as telling as how they don’t react. In the example above, this investor poked and prodded and ultimately didn’t get the answers he wanted to hear and walked away (a richer man).

If It Doesn’t Make Sense to You, It Probably Doesn’t Make Sense to Someone Else

As a student, I would always hear teachers tell their students, “If you have a question, somebody else probably has the same question.” It takes courage and a bit of guts to swallow your pride and ask questions when you don’t understand something.

Nobody could make sense of Madoff’s trading strategy, including institutional investors, quantitative analysts and some of the most sophisticated investors in the world. But very few people had the guts to question it, and this failure ended up costing them dearly.

Follow Up on Leads

The book provides several examples of the SEC not following up on leads that would have exposed Madoff years before he was turned in.  Frankly, it’s sad. The fact is that billions of dollars could have been saved if the SEC had followed up with the central stock clearinghouse to confirm Madoff’s stock trades. Even Madoff thought his time ran out in 2006, but was astonished to find that the SEC didn’t check his trades with the DTCC, which would have found less than $24 million in blue-chip stocks, not billions.

During any investigation, it’s critical to follow up on leads and to “close the loop.”  Sometimes, it’s difficult to see the forest for the trees and the small details get lost. Staying on track may be as simple as keeping a running list of action items, keeping a diary of critical follow-ups, taking a fresh look at the case every so often or discussing the case with someone not involved knee-deep, to get a different perspective.

When in Doubt, Go with Your Gut

Madoff clearly had many gifts, including a unique ability to lie to people to their faces (even to his own family). But even the most faithful Madoff followers could have found red flags, including the 2001 Barron’s article, his highly unusual fee structure or his “secretive” investment strategy.

Prior to frauds being identified, there is rarely any “evidence,” only small clues.  We all have a gut, and sometimes, you just need to use it…

Enjoyed What You Read?

Join 2,000+ others to get insider tips and tricks delivered to your inbox from what has been voted the best blog in the investigative industry!

/3 Comments/by

Samuel “Mouli” Cohen Found Guilty

After a three week trial, a jury found Samuel “Mouli” Cohen guilty on 29 of the 35 counts in the superseding indictment including 15 counts of wire fraud, 11 counts of money laundering and three counts of tax evasion.

As previously reported, in August 2010, federal prosecutors in California unsealed a criminal indictment charging Samuel “Mouli” Cohen of 19 counts of wire fraud and 13 counts of “engaging in Monetary Transactions in Criminally Derived Property.” The charges stem from allegations that Cohen defrauded over 55 investors, including actor Danny Glover, out of more than $30 million with claims that his company was about to be acquired by Microsoft Corp.

According to a press release from the U.S. Department of Justice,  Cohen falsely told prospective investors, that his company, Ecast, Inc., was about to be acquired by Microsoft and falsely told investors that first United States regulators, and later European Union regulators, were delaying the approval of the acquisition.  Over the course of approximately three years investors paid $25 million toward this purported acquisition based on Cohen’s false representations about the non-existent acquisition of Ecast.

There was “no actual or potential acquisition of Ecast by Microsoft.”  Cohen spent $6 million of investors money on private jet rentals, hundreds of thousands of dollars on jewelry, vacations and expensive cars and $15,000 a month to rent a lavish home in Belvedere, California all while reporting “almost no income on his tax returns” and “paid zero taxes.”

Cohen is scheduled to be sentenced on February 1, 2012.

Related Posts:

Enjoyed What You Read?

Join 2,000+ others to get insider tips and tricks delivered to your inbox from what has been voted the best blog in the investigative industry!

/1 Comment/by

Mouli Cohen Trial – Government to Bring Evidence of Fake Art Collection

The Mouli Cohen trial is set to begin on Monday, October 17, 2011.  The trial is on Judge Breyer’s calendar through Thursday, November 17, 2011.

As previously reported, in August 2010, federal prosecutors in California unsealed a criminal indictment charging Samuel “Mouli” Cohen of 19 counts of wire fraud and 13 counts of  “engaging in Monetary Transactions in Criminally Derived Property.”  The charges stem from allegations that Cohen defrauded over 55 investors, including actor Danny Glover, out of more than $30 million with claims that his company was about to be acquired by Microsoft Corp.

While we will be keeping our eye on the case as it progresses, some interesting revelations were made in a few filings by Cohen’s attorney and by the government last week including allegations that Cohen’s art collection was a fake:

  • In a Joint Statement of the Case filed on October 12, 2011, the government alleges that Cohen “enticed individuals to purchase shares in a company called Ecast by falsely telling those individuals that the company was about to be acquired by Microsoft and that the acquisition would result in the shares of Ecast becoming highly valuable.”  Cohen alleged that all of the money invested from 2005 through 2007 referenced in the indictment were “loans to Signet, convertible into the defendant’s Procinea stock.” Cohen controlled both Signet and Procinea.
  • The government is set to bring evidence of Cohen’s luxurious lifestyle and that he used to “fraudulently obtained money to make personal expenditures on, for example, planes, automobiles, jewelry, credit card bills, and publishing a cookbook.”  Among the evidence brought about Cohen’s luxurious lifestyle, the government is expected to bring evidence that Cohen “spent millions of dollars of investor money renting private jets for personal travel to vacation destinations.”
  • One of the government’s exhibits is 500 pages (that is not a typo) of American Express statements for Stacy Cohen (Mouli Cohen’s wife) from January 2005 through December 2008.
  • Cohen allegedly claimed a $96,234 income loss on his tax return in 2004 and “no other income” despite the fact that he sold $6.2 million worth of shares of Ecast stock during the same period.
  • Cohen reportedly boasted to investors about his  impressive art collection “telling various victims that some of his art was on loan to museums or boasting of his collection of Matisse, Calder, and other famous artists.”  The government alleges that it was fake.  The government will bring evidence that Cohen hired someone to “reproduce several paintings” and that the artist was told “not to tell anyone that they were reproductions.”  Cohen allegedly paid the artist “a few thousand dollars to reproduce paintings purportedly worth hundreds of thousands or millions of dollars.”
We will be keeping our tabs on the trial over the coming weeks so keep checking back for further updates or sign up for the our email updates to the right.

Related Posts:

Enjoyed What You Read?

Join 2,000+ others to get insider tips and tricks delivered to your inbox from what has been voted the best blog in the investigative industry!

/5 Comments/by

FINRA BrokerCheck or BrokenCheck?

Is FINRA’s BrokerCheck Broken?

Regulators have made it easier for investors to dig into financial advisors’ backgrounds, but even with the new disclosure rules, FINRA BrokerCheck doesn’t supply investors with all of the information that, in our humble opinion, they should be able to access. Furthermore, the multiple sources that investors or interested parties need to research to get a complete picture of an advisors’ disciplinary history make the current system unnecessarily burdensome and difficult to use.

Perhaps worst of all, an individual checking on an advisor will probably not be aware of the many sources or that each source can provide a very different picture.

Brief History Lesson

In this post-Madoff environment, people are more aware of the wisdom of checking up on their financial advisor’s background and for that matter, checking up on anyone in the financial industry who they are contemplating doing business with or hiring.

The most basic step is to check with FINRA’s BrokerCheck. The Financial Industry Regulatory Authority (FINRA) is the industry’s self-regulatory organization that oversees brokerage firms and brokers. It stores information on more than one million current and former FINRA brokers.

A second and less well-known step is to conduct a search through Investment Adviser Public Disclosure (IAPD). (Dig Deeper: Understanding the difference between investment advisors vs. brokers.) The IAPD database contains information concerning more than 11,000 SEC-registered and more than 14,000 state-registered investment advisors.

While most brokers are not investment advisors—and vice versa—it’s worth checking both just in case the person might have served in a different role in a previous position. The data available through BrokerCheck and IAPD includes general information about the registrant and any regulatory events, criminal convictions, and arbitrations or civil litigation that resulted in an award, decision, or judgment for a customer.

State Securities Regulators

In addition to the two resources mentioned above (and to confuse the matter even more), there are state securities regulators. State securities regulators have direct access to the Central Registration Depository (CRD) system, which is run by FINRA and used to compile the BrokerCheck Report. However, regulators collect more information—some of it critical information—on registration forms than is made available to the public on BrokerCheck. In some cases, that information is publicly available only on a CRD report from state securities regulators.

For example, BrokerCheck excludes information about the reason for termination and any comments from the formerly registered representative. As we outline below, some “disclosable” events do not get reported on BrokerCheck, but they do get reported on a CRD report.

You can retrieve a copy of a CRD report from state securities regulators, but the process is cumbersome. Most states provide investors with copies of CRD records upon request—on paper or by email—but many do not have an online system. In addition, in our experience, states will release the CRD only if the individual was/is registered in the state that is the subject of your inquiry.

This, of course, is despite the fact that state securities regulators have access to the centralized CRD system which maintains records of individuals registered in any state (if this defies commons sense, you are not alone).

SEC (and FINRA) Urge Investors to Check with State Securities Regulators

While you would think that all of the information relating to brokers would be centralized with FINRA and supplied on BrokerCheck, this is not always the case. In fact, both FINRA and the Securities and Exchange Commission (SEC) urge you to check with state securities regulators.

FINRA’s website indicates that “State securities regulators also have access to CRD and can sometimes provide more details about investor complaints.”

While BrokerCheck is a valuable tool for getting information about a firm or a registered person, even the SEC recommends that investors check with each state where the firm has done business—or where the sales person has been registered—for data about disciplinary history. A January 2007 release by the SEC encourages investors to check with state securities regulators for “a complete picture of [the advisor’s] disciplinary history.”

Case in Point

We were retained to conduct a background investigation on a native of South America who had spent more than 20 years in the United States working for an international investment bank.

Dig Deeper: Case Study: Preliminary Public Record Background Check Identifies Criminal Investigations

BrokerCheck reported only one disclosure on the individual: a $10,000 fine relating to trading unauthorized securities. Certainly that is nothing to make light of, but in the big picture, it was not a significant finding.

However, the CRD provided by state securities regulators painted an entirely different picture:

  • South American federal officials investigated three different investment banking transactions involving the candidate. One—a criminal probe by a South American federal prosecutor—was ongoing.
  • The candidate was terminated from his prior position at an investment bank due to a “loss of confidence.” According to various published reports and information provided by the candidate to our client, the candidate had “retired” from his position at the investment bank.
  • The SEC and the U.S. Department of Justice had conducted an investigation into the candidate’s trading activities regarding two different investment banking transactions.

The events described above had occurred more than two years earlier and in a few cases more than four years earlier, so any argument that FINRA might make that these events were not “disclosable” would be absurd. (According to FINRA, a disclosable event includes “criminal, regulatory and civil actions, as well as certain financial incidents.”)

In addition to the example mentioned above, we have found numerous instances in which a CRD report contained important details that were simply not available on BrokerCheck.

Changes on the Horizon

In fairness to FINRA, over the last several years it has made more information available to the public. And the SEC recently completed a study (prompted by the Dodd-Frank Wall Street Reform and Consumer Protection Act) of ways to improve investors’ access to publicly available information.

Among the recommendations are to unify BrokerCheck and IAPD search results and to increase the amount of information available on BrokerCheck.

Closing Thought

As it stands today, a significant amount of public registration data is available, primarily through BrokerCheck and IAPD. But the changes have not gone far enough toward making critical information readily accessible to investors and the general public. Navigating the databases of federal and state regulatory agencies should be easier and more user-friendly—not akin to a “Buyer beware!” experience.

The bottom line is that even the most reputable sources have their flaws. It’s critical to understand that there may be other channels for accessing crucial information before you make decisions about whom to trust.

Sources

Enjoyed What You Read?

Join 2,000+ others to get insider tips and tricks delivered to your inbox from what has been voted the best blog in the investigative industry!

/by

The Moneyball Approach to Due Diligence Investigations

This weekend, many moviegoers and avid baseball fans around the country will be taking some time away from the grind of daily life to see Brad Pitt and Jonah Hill star in the film “Moneyball,” based on the 2003 Michael Lewis best seller that catapulted the Oakland Athletics general manager Billy Beane into the most outsized, polarizing and wealthy general manager in professional baseball.

Shortly after taking his current position as general manager of the Oakland Athletics, Beane became the lead evangelist for a new baseball orthodoxy he adapted from sabermetrics, a form of analysis pioneered by Bill James that emphasizes greater statistical analysis in the scouting and development of players. Instead of hiring old-time scouts, Beane hired an Ivy League nerd, drafted players nobody wanted and turned around a flailing franchise.

His success prompted copycats who admired Beane and his approach for its reliance on credible information, the process of analysis and the ability to question previously held assumptions.

Moneyball Approach Applied Elsewhere

What others quickly learned is that general sabermetric (or “Moneyball”) techniques are applicable not only to sports but to many aspects of life and business. Since the acclaim of his philosophy, many other baseball teams, other professional sports franchises and Fortune 500 companies have partially credited their respective successes to adapting the quantitative analysis approach to their businesses, while utilizing all of the resources and information available.

In an October 2008 New York Times op-ed, Beane, along with Newt Gingrich and Senator John Kerry, wrote about using sabermetric-style techniques for improving health care by focusing on data mining, statistical analysis, reducing medical errors and cutting costs. In an interview with ESPN in 2010, Beane said:

“It’s all about evaluating skills and putting a price on them. Thirty years ago, stockbrokers used to buy stock strictly by feel. Let’s put it this way: Anyone in the game with a 401(k) has a choice. They can choose a fund manager who manages their retirement by gut instinct or one who chooses by research and analysis. I know which way I’d choose.”

Final Thought

In today’s business world, information is power. Successful professional investigators can provide their clients with both the resources and the information available to help them make better-informed decisions. Unfortunately even today, any business deals that are consummated with “collective wisdom” or “gut instinct” can end up in litigation simply because the parties failed to do their homework and turn to a professional for due diligence research.

In today’s competitive marketplace, it is no longer manageable or healthy to “fly blind” into any business deal. Yes, the familiar “Trust, but Verify” motto is still applicable here—but verify only through credible resources that can provide you with the intelligence and analysis that you might not find on the Internet.

Beane chose data over intuition, but the key point here is that your analysis of the data is only as good as the information you put into it.

Other Reading:

Enjoyed What You Read?

Join 2,000+ others to get insider tips and tricks delivered to your inbox from what has been voted the best blog in the investigative industry!

/by

ABOUT US

WHO WE HELP

RESOURCES

CONTACT US

© Copyright – 2026 – Diligentia Group Inc.

Diligentia Group Inc.
© 2026 Copyright