3 Simple Lessons Private Equity Firms Can Learn from George Santos

Newly elected congressman George Santos is probably the biggest public-facing background investigation failure that the world has seen, and it’s a good reminder for the private equity community about investment due diligence and background investigations.

In case you don’t know the whole story, George Santos was elected to Congress from his district on Long Island back in November 2022. He ran as a “seasoned Wall Street financier and investor” who had worked for the likes of Goldman Sachs and Citigroup and owned a real estate portfolio of 13 properties. Santos purportedly received an undergraduate degree from Baruch College and at one point claimed to have received a degree from NYU as well. His firm, Devolder, was reportedly his “family’s firm” that managed $80 million in assets, including multiple properties.

After his election, the New York Times revealed that much of his personal and professional history was a figment of his imagination:

• Baruch College had no record of Santos’s attendance or degree.
• NYU had no record of Santos’s attendance or degree. Interestingly, it appears that he stuck with his story of graduating from Baruch, save for one instance where he indicated that he also went to NYU.
• Citigroup had no record of Santos working for them.
• Goldman Sachs had no record of Santos working for them.
• Santos was evicted twice for a few thousand dollars in rent, despite being a “seasoned Wall Street financier.”
• His “$80 million” family firm had no “public-facing assets.”

Oh, and to top it off, Santos also had a pending criminal case in Brazil for check fraud!

Subsequently, other questions have been raised about his Jewish heritage and sexual orientation, and he even lied about the death of his own mother.

Frankly, the question is whether or not he has been truthful about anything. But I digress.

Nevertheless, Santos ultimately confessed that he “never worked directly” with Goldman Sachs and Citigroup, stating a “poor choice of words.” He also never graduated from any “institution of higher learning” despite claiming to do so in multiple places. 

It’s rare to see such a pathological liar to be uncovered in such a public forum. Especially with politicians, in part because there is so much at stake in politics and ridiculous amounts of money involved, so there is plenty of motivation for various parties to dig up dirt on the opposing side and feed that information to the media.

But something clearly was amiss here.

How did everyone miss this? After all, the opposition had published an 87-page report on Santos. 

Could this have happened in a private equity investment? After closing on a transaction, would it be possible that the head of the new company was an outright liar?

Probably not. There are quite a number of protections in place during the due diligence process to not let that happen.

But there are certainly a few lessons that one can extract from this epic failure. 

Avoid Your Biases

I think it’s relatively safe to say that if any of these various embellishments, outright lies or criminal activity had come up prior to the election, it probably would have changed the outcome.

At least I hope so.

And if this had come up during the due diligence process in a private equity transaction, one would hope that it would have at least altered the deal, or possibly have killed the deal altogether. I mean, imagine if the new CEO of the company that a private equity firm was purchasing for millions of dollars was an outright liar?

Of course, if zero background investigation occurred, maybe it would have been missed. But let’s just assume that some background investigation would have been conducted.

In my experience, I have seen plenty of deals go through because of what I will call conservatism bias.

Conservatism bias is the process in which people maintain their past views at the cost of recognizing new information. In the case of private equity transactions, conducting a background investigation on the key principals is typically one of the final pieces of the due diligence process. By that time, the firm has invested months of time and tons of resources into their due diligence and investment decision process.

For example, suppose in the final weeks of a lengthy due diligence process a background investigation reveals that the founder and key future employee has a history of serious financial issues, misrepresented some details of their life and has had a bit of a messy personal life. But because the firm is so invested in the process and doesn’t want to rock the boat, they cling to their prior views that the founder is a good person, so they don’t address the issues and instead continue with the investment.

I’ve seen it happen dozens of times, where firms either ignore some pretty significant red flags or underreact to the new information, all for the sake of getting the deal done.

Sometimes it works out, but sometimes it doesn’t.

Gather Data => Summarize into Intelligence => Act on Intelligence

In the case of George Santos, the Democrats had done quite a bit of opposition research.

It wasn’t for lack of information. The Democrats had published an 87-page report on Santos. For the two people that had actually read the lengthy document, there were hordes of information on his political views, and it did reference the evictions, but it didn’t get into his degree (or lack thereof), his work history, the lack of assets for his family’s firm or his criminal history in Brazil. And someone clearly spent dozens of hours scouring through every tweet he has ever made.

But there were a couple of major failures here.

Anyone can gather data, but that data does no good if it’s not turned into succinct intelligence that is acted upon.

Clearly, few people read the 87-page report in much detail, or even the 10-page-long executive summary, which included minute details such as “Santos’s [sic] website had an issues page as of January 2021, but it was later taken down” and “Santos filed a Personal Financial Disclosure covering calendar year 2020.”

It’s just too much information, if you ask me.

How about if the first few lines of the executive summary read:

• Santos claims to have worked for Goldman Sachs and Citigroup, but we have found no information to suggest that he has ever worked at either company. Similarly, we have been unable to find any information to support his degree at Baruch College or New York University, and we have found conflicting self-reported biographies about his attendance at the schools. We have been unable to verify his degree without a signed consent form.

• Despite running his family firm with more than $80 million in assets, including multiple properties, property record databases have not shown any documents or deeds associated with him, immediate family members or his “family run” company, the Devolder Organization.

• In 2015 and 2017, Santos was the subject of two eviction proceedings in Queens County for a few thousand dollars, yet over the last few years he appears to have run into significant wealth, reportedly earning $750,000 a year from his company along with dividends in the $1 million to $5 million range, according to financial disclosures. 

Would that have caught someone’s attention? My guess is probably yes.

So the first failure was the inability to succinctly turn that data into intelligence.

And the second failure was the failure to act on the data.

This happens in the investment space pretty often.

A few years back, we worked with a small family office on an investment opportunity. Concerned about their reputation, the family office told us that we should contact them immediately on the first sight of any possible issues.

So when we found some criminal issues, some pretty significant professional history discrepancies and some politically sensitive social media posts, we thought the deal would be over.

But it wasn’t.

We never got any insight into why the deal ultimately went through, and we are not privy to every conversation that happens. But if I were a betting man, I would guess that this deal will eventually go sideways.

Get Permission, Obtain Forms and Address Issues Head-On

In a private equity transaction, almost certainly a situation like George Santos could have been avoided with a simple signed release and a background investigation form requiring an individual to disclose their personal and professional history and any known civil litigation and criminal history.

Not all firms require this, which in my belief is a major oversight (and a topic for another day).

In the case of Santos, he claimed to have worked for Goldman Sachs and Citigroup, and at points that he had graduated from Baruch College and New York University, although he reportedly never furnished any dates to substantiate the claims of his professional and educational history. (The missing dates should have been a clue!)

The New York Times was able to determine that Santos never went to Baruch College or New York University and never worked at Goldman Sachs or Citigroup by reaching out to the schools and companies to seek comment.

Sidebar: Most schools won’t publicly verify degree information without a signed release, but I suspect the reporter was able to get the school to comment due to the weight of the New York Times and the story. Technically, degree details are considered directory information and are available publicly. But you can only access the information through National Student Clearinghouse, which has a monopoly on this information; the website requires permission from the student. I’ve vehemently argued with the schools and National Student Clearinghouse about this topic, and it enrages me that we can no longer get this information! (This too is a topic for another day.)

The 87-page report relied on Santos’ public statements in referencing his professional work history; they didn’t even bother trying to verify this information. They obviously didn’t have his permission, but even without his permission, a little digging in regulatory filings would have probably raised a red flag.

In the background investigation process for a private equity transaction, there are certain crucial steps, one of which is verifying that the person is who they say they are. Some basic steps in this process are things like verifying their name, date of birth and Social Security number and that they are, in fact, an actual human being.

Among those steps would be to verify work and education history. It can be a pretty simple, straightforward way of determining if the person is actually who they say they are. Like, did the incoming CFO really go to that Ivy League school and work for one of the Big 4 accounting firms?

To verify employment and education history, you need a list of the person’s professional and education history. In most cases, however, verifying employment and education requires a signed release.

Best practices call for getting a signed authorization and a good background investigation disclosure form, which can gather all the relevant details in one place.

And while you are at it, it’s also a good practice to have the person self-disclose any criminal history, litigation history or other history that you might be interested in knowing more about. It gives them an opportunity to openly disclose the issues. You might be surprised by how many people don’t self-disclose information, which, in my view, can be pretty revealing about a person’s character.

And to further avoid any issues, a good practice is to address the issues head-on with the subject of the background investigation.

So, for example, if they failed to disclose certain issues, misrepresented themselves or have a history of litigiousness that needs some additional color, talk it through with the person.

Was it an oversight? A misunderstanding? Or did some additional context clarify things?

Or is there something more nefarious going on? A lack of clarity, deflection of blame or outright denial may lead you down a different path. 

In Conclusion

On the biggest public stage, George Santos, with everyone watching and an enormous amount at stake, was able to literally make up his entire life and get voted into Congress. The greatest trick he pulled was to convince the world that George Santos was someone that he wasn’t.

Even in this age of information, with so much available at our fingertips, don’t think for a second that there isn’t another George Santos out there, trying to convince the world he is someone he isn’t.