They Come Out in the Daytime During Covid-19

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When times get tough, like they are now, many organizations face significant cash flow and other challenges. Covid-19 is presenting historical obstacles for organizations that rival the 2008 meltdown, not the least of which is having sufficient capital to operate. Some organizations may need to raise capital to survive, and this may involve bringing on partners or investors. This is where it gets sticky and where due diligence becomes more important than before. Consider this recent project we performed in June 2020 as a cautionary tale. When crises occur, fraudsters emerge in broad daylight.

A global law firm asked us to help a client of theirs, a national restaurant chain, in need of capital. The restaurant ownership had come upon a potential investor, a persuasive man with vast experience in the hospitality industry, and with a history of successful projects who wanted to buy into the chain. The man also hailed from a family that had built dozens of successful restaurants and hotels. The project: perform due diligence on the investor.

Due diligence is perhaps most known as a process for connecting information with decisionmakers, a way to assure that information about a business or person is available to those charged with taking on investors or others. Since most of us are not Nostradamus, the famed seer into the future, due diligence is a critical means of looking to the present and backwards at people or businesses to understand what is likely to come into the future. While finding previous lawsuits, bankruptcies, crimes, frauds and worse don’t guarantee a repeat, those cannot help provide guidance to decisionmakers about what is likely coming down the road.

Assembling facts to inform upon decisions is rather underrated today, and many of us overrate our ability to look into the souls of others to understand their histories or motivations. In-person meetings actually tell us little about a business or person. A long history of fraud and failure will tell us a lot more.

In the project we just completed, of course we found the potential investor was, in the words of someone who had been defrauded by our target before, a major “con man.” This con man had done time in jail for fraud, had consistently engineered the same fraud schemes over and over again, using abandoned properties as business addresses, and dissolved companies as evidence of success. He had been sued many times and lost. His family connections and claimed history were completely false in virtually every respect.

Why is due diligence needed regarding an investor one might ask? In previous frauds, the con man had convinced many of his wealth and connections, and his victims gave him money, months of their time, and access to valuable assets, all of which would never be gotten back. Blood from a stone and all of that. Few con men have assets to satisfy victims.

During Covid-19 many organizations will need investors and other business partners for a wide variety of reasons. Fraudsters, like our con man, are now out in the daylight, not bothering to take cover, seeking organizations to victimize. Due diligence, more than any other practice, will protect organizations from a host of adverse consequences, including fraud and harm to reputation.

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