One of the most overlooked areas in a private equity transaction is a due diligence background investigation on the key players or principals part of the transaction.  The purpose of the due diligence background investigation is to evaluate the integrity of individuals – both personally and professionally – that you are going to be doing business with. Understanding the personal and professional history of those key players can be the difference between a successful transaction and a complete failure.

People are Assets

In some cases, the key assets that are being acquired as part of an acquisition are hard assets such as a product, factory, patent  or even an idea.  But in other cases, the most important assets are the people that are going to be on board, especially in service related businesses.  If the transaction involves the acquisition of key principals that are going to be the foundation to the future success of the company, among the key issues that need to be answered as part of the due diligence investigation process is the background and reputations of the parties whom you will be doing business with.

Key issues that could be uncovered:

  • Business Interests – Corporate executives engaging in self-dealing or previous business interests that have been the subject of controversy, bankruptcy or sanctions
  • Personal History – Multiple divorce filings with allegations of personal misconduct
  • Professional History – Falsified education credentials or misrepresentations of previous work history
  • Regulatory Issues – Undisclosed regulatory complaints or disciplinary actions taken by state or federal regulatory agency
  • Criminal/Civil Cases – Multiple convictions for driving under the influence of alcohol, allegations of soliciting a prostitute or litigious past
  • Financial Status – Hundreds of thousands of dollars in federal tax liens, credit issues to grievances filed with U.S. Tax Court
  • Assets – Multiple houses and boats which could show someone living beyond their means

In Depth: Anatomy of a Comprehensive Background Investigations [Infographic]

Who should a private equity firm conduct a due diligence background investigation on?

To best answer this question, some of the key questions that you need to ask yourself is: how much capital is at risk, how much reliance is being placed on the key principals of this transaction and the nature of the business (a paper mill and an oil exploration business have two totally different risk profiles). Ultimately, it’s a choice that the private equity firm must make, but at the very least, a due diligence background investigation should be conducted on the key principals as part of the transaction, specifically those individuals whom you have identified during the transaction as keys to the future success to the company.

Final Thought

Having the wrong management in charge can be the  difference between an immediately successful acquisition or a complete failure. The goal of the due diligence background investigation is to identify relevant issues in management’s background and track record to make a well informed business decision that could impact your investment decision.

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Here are some of our favorite fraud and investigation related books from 2010.

Have another site to add to this list? Tell us about it in the comments.

The Big Short

The Big Short by Michael Lewis

Michael Lewis’ The Big Short dives into the causes of the U.S. stock market crash of 2008, overpriced real estate and bad mortgages.  The book gives some never seen before insight into the “shadowy” world of hedge funds, short sellers and investment banks and the people that got it “right” betting on a mortgage crisis.

No One Would Listen

No One Would Listen by Harry Markopolos

Harry Markopolos, who for years tried to warn the SEC about Bernie Madoff’s $65 billion ponzi scheme, writes a detailed description of what his investigation uncovered years before Madoff’s ultimate arrest in December 2008.  The Bernie Madoff scandal is arguably one of the most important fraud cases in history and has led to numerous changes in regulatory and enforcement with the SEC.

Circle of Greed

Circle of Greed by Patrick Dillon and Carl M. Cannon

Circle of Greed chronicles the rise and fall of one of the most influential class action lawyers of all time, Bill Lerach, who was ultimately disbarred and put in prison.  The book digs into some of Lerach’s most infamous courtroom battles with corporate America and describes how he became one of the “most feared and loathed lawyers in America.”

Broker Trader Lawyer Spy

Broker, Trader Lawyer, Spy:  The Secret World of Corporate Espionage by Eamon Javers

Who could resist a book about corporate spying?  Eamon Javers provides some fascinating tales of corporate espionage and investigation.  Although the book sensationalizes some of the work of corporate investigators, it’s an interesting read and gives a bit of history of the private investigator and how investigators are used in the modern day.

Private Investigator Entry Level

Private Investigator Entry Level (02E): An Introduction to Conducting Private Investigations by Philip Becnel

This book was written as an instructional guide for the course of the same name, which is required of all private investigators in the Commonwealth of Virginia. However, it covers all of the basic investigative principles and techniques that apply to investigators working anywhere. There are chapters on ethics, research, interviewing, fraud investigations, evidence, law—and many other topics.

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Looking to keep up to date on fraud and investigation news and trends?  Below is our list of favorite news and blog sources (in no particular order). And if you haven’t learned how to use an RSS reader, it’s a great way to aggregate articles and blog posts.

Have another site to add to this list? Tell us about it in the comments.

Fraud Magazine

Fraud Magazine - ACFE

Fraud Magazine, published by the Association of Certified Fraud Examiners (the world’s largest anti-fraud organization), posts information on trends and issues related to fraud.

Pursuit Magazine

Pursuit Magazine

Pursuit Magazine is an online magazine that posts articles on issues related to private investigations, marketing for investigators and legislative issues.

Financial Fraud Law

Financial Fraud Law

Financial Fraud Law makes multiple posts daily relating to news and analysis on financial fraud, securities fraud, insider trading and Ponzi schemes.



Footnoted.com takes a look at the most overlooked (but probably most important) section of SEC filing to  unearth  information buried in the fine print.

PI Now


PI Now is an online directory of professional private investigators, but they also post news and original content relating to legislative news and issues effecting private investigators.

White Collar Crime Prof Blog

White Collar Crim Prof Blog

White Collar Crime Prof Blog posts information daily on white collar crime trends, issues and news.

Professor Fraud

Professor Fraud

Professor Fraud, who is actually William Kresse, Associate Professor at Saint Xavier University of Chicago, makes a weekly posts for ChicagoNow.com about fraud and corruption.

The White Collar Fraud Blog

White Collar Fraud

The White Collar Fraud Blog is written by Sam Antar, a convicted felon and former CFO of Crazzie Eddie, Inc.  Antar, a “reformed” convict, writes blunt and insightful posts about SEC accounting frauds.

FINalternatives Halls of Justice


FINalternative’s Halls of Justice is a collection of articles relating to insider trades, short selling and hedge funds facing SEC probes or fraud charges.

PI’s Declassified

PIs Declassified

PI’s Declassified is an online weekly radio show hosted by Francie Koehler, a California based private investigator.  The radio show discusses some interesting topics including a recent show about privacy issues and online data providers.

PI Magazine

PI Magazine

Private Investigators read PI Magazine, the trade publication for private detectives, police detectives, SIU Investigators and anyone interested in learning how to become a PI.  Although you need to subscribe to PI Magazine to get any content, it’s highly recommended for any investigators in the business for its insightful articles and content.

PI Buzz


PI Buzz is the “official” blog of PI Magazine which provides links to online databases and other sources.



Investor.gov, which is run by the U.S. Securities and Exchange Commission, provides educational materials to investors to avoid fraud and ponzi schemes and updates on SEC enforcement actions.

Securities Docket

Securities Docket

Securities Docket posts information relating to FCPA compliance, insider trading, criminal probes and securities class action cases.

New York Times White Collar Watch

New York Times White Collar Watch

The New York Times White Collar Watch site tracks current White Collar fraud cases including the Goldman Sachs mortgage fraud case, recent insider trading cases and other white collar fraud prosecutions.

What else would you add?  What are you reading?

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SIPC (Securities Investor Protection Corporation) recently posted a warned about con artists who set-up i-sipc.com which fraudulently induced Bernard Madoff victims to join the site. This reminded us of how search engine marketing  techniques can be used for fraud to con people out of money or “bury” the facts and how people often trust what they find on the Internet

As a newly established private investigative firm, we have been engrossed in numerous tasks needed to start a new business including developing content for our website that has been optimized for search engines.

For those of you who are new to this, there are literally hundreds of websites that provide advice on how to best to provide information on your website so Internet searchers can easily find you or your company by using keywords, tags, headers, etc. Needless to say, there is an entire world of people who have an expertise in this process.

During the course of our investigations over the last few years, we have seen enough to know that fraudsters are using these same search engine marketing techniques to drive Internet searchers away from information on the web that may be damaging.

In fact, we know of at least one person who hired a search engine marketing firm to create content on the web so that when people searched his name, information about his past criminal history would be buried. By creating online links in social networks (i.e. LinkedIn, Twitter, Facebook, etc.), purchasing domains, publishing press releases, and publishing blogs, fraudsters can “bury” the derogatory news article, lawsuit or message board posting below the first few pages of search results – which most people don’t typically navigate past.

If search engine marketing results are getting in the way of your ability to find things, we recommend checking out out Via Search Consulting’s blog entry: 3 Ways to Stop Search Engine Optimization from Crippling Your Search.

The point of all of this is that the web has created an open forum for anyone to comment on just about anything, but by “googling” someone’s name, you are likely not getting the entire story and the information that you do view, may have been planted there. People have dedicated their lives to driving traffic to websites and in some situations, may be using these same tactics to drive people away from other websites.

The important thing to take out of this is to understand the source of the information because it may not always be what you think. Press releases, self-promotional websites and self-reported information is not always a “source” of fact-based information.

A good example whereby false marketing schemes can lead to disaster is the story of Nicholas Cosmo, who was indicted last year of a $350+ million ponzi scheme with his notorious hedge fund, Agape World. One of the pieces of marketing that was touted by Cosmo and his earliest investors was a May 2008 Entrepreneur Magazine article naming Agape Fund as number 73 in its HOT 100 fastest-growing businesses.

Evidently, people trusted this magazine, but the criteria for getting on this list was obviously quite minimal. If Entrepreneur Magazine had performed their due diligence, they may have realized that while he supposedly founded the company in 1999, he was actually in federal prison at the time for “misappropriating” $177,000 of his former client’s funds.

Some food for thought…Did you know that by some estimates, the surface web (a typical “Google” or Search Engine) accounts for less than 1% of what is actually on the web? Where is the rest of it, you ask? Well that is a whole other story!


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