3. We Call That a Clue

So what does a background check really find? We hear that all the time. The answer is: anything.

A typical background check goes through numerous research steps and utilizes hundreds of public record and proprietary sources to collect information. While the Internet and LexisNexis are both bonafide sources of information, you cannot rely on any one source. The key is knowing not only how to effectively gather information but also how to interpret and analyze the facts.

Some common things we find in our research are résumé fraud or exaggerated credentials. While we may have uncovered this hundreds of times, there have also been some publicized examples: the RadioShack CEO who embarrassed the company when it was discovered that he lied about receiving his degrees; the former dean of MIT who claimed she received three degrees but in fact received none; the Notre Dame football coach who resigned five days after he was hired because he lied about his academic and athletic credentials; and the Veritas CFO who resigned after it was discovered he had not received that coveted MBA from Stanford.

Dried Up Dreier

Another recent example of a minor exaggeration on a résumé that led to a major disaster is Marc Dreier. He was a Yale undergrad, got his law degree from Harvard, and worked for several well-known law firms before he started his own practice, Dreier, LLP. The firm, located on Park Avenue in Manhattan, represented high profile clients from celebrities to executives. With this glimmering Rolodex, Dreier offered his clients the exclusive option to buy promissory notes. But what was so special about these notes was that they were fake. Through the ploy of selling these notes, Dreier stole more than $380 million of investors’ money. In 2008, Dreier was arrested and charged with multiple counts of fraud, and in January 2009, he was indicted for conspiracy to commit securities fraud and violation of SEC rules, among other charges. His law firm was forced to file for Chapter 11 bankruptcy protection, and Dreier remains behind bars.

We now know that Dreier ran his law firm like no other: He was the only equity partner in the firm, he was the only one who knew all of the details of every case the firm handled, and he was the only one in control of the firm’s finances. Dreier reportedly told his employees that he chose to run his firm this way, essentially like a dictatorship, in order to allow his trusting employees to focus on the law.

We also found that Dreier’s corporate biography, which was posted on his website and elsewhere, stated he was admitted to the Arizona Bar Association. But the Arizona Bar has no record of ever admitting Marc Dreier. Arizona, like many other states, has a searchable online database to find registered attorneys—and there was no listing for Dreier.

The Situation: Banking With a Binge

Following is an example from our own case history that illustrates why background checks should become a mandatory component in the investment process.

A guy who was supposed to be an investment banking superstar, let’s call him Chris Speed, had negotiated several high-profile deals while working for a big-name bank. A private equity firm was eager to woo Speed away from the weary hours of mergers and acquisitions. The private equity firm had met with Speed, offered him everything shy of a $6,000 shower curtain, and was about to put his name on its letterhead before they called us. Within three days, we learned that Speed relied on more than coffee to keep him awake through his deals: He had a troubling affinity for cocaine as well as a court-documented sexual interest in the illegally younger generation. Our client quickly decided they were no longer looking for a superstar.

The Tactic: Dirt In the Documents

Speed’s drug and sex problems were uncovered in court documents we found. The interesting thing about Speed was that he managed to keep a stable job and a clean criminal record despite his addictions. Yes, Speed had never been arrested for drugs (or anything else). When we reviewed civil records to see whether Speed had been involved in any lawsuits, we found a case filed against him by a member of his family. Lawsuits involving family members often relate to estate disputes or insurance claims. When we looked at all of the documents filed in the case (which, again, are available for public review), we found Speed had given a deposition wherein he admitted to the cocaine problems and his struggles with child pornography. Finding a person has been involved in a lawsuit is only the first step; reviewing the documents filed in these lawsuits often gives you more information than you expected.

The Situation: The Subversive CFO

In the case of Stumped, Inc., a portfolio company fraud, the board of directors of the computer hardware company noticed during a surprise audit that millions of dollars were missing. The board called a meeting with the CFO, Howard Deepart. Deepart, who had been with the company for about a year, excused himself from the meeting to smoke a cigarette. He never came back.

Shocked and nervous, the board called us to find the money and Deepart. While the search for Deepart went on for months, we tracked down the cash in no time. As part of our research into the missing funds, we scoured accounting ledgers, journals, and a multitude of public record sources. We found that Deepart had formed a company called Stumped, LLC—only a minor difference in name from his legitimate employer, Stumped, Inc.

We began to piece together Deepart’s scheme: If Stumped, Inc. purchased 100 computers, Deepart would return 50. When the refund check came in for those returned 50, Deepart would take the check and deposit it into the account of “Stumped, LLC,” his personal bank account. Because of the nature of the business of Stumped Inc., there was a large amount of turnover of computers, so it was difficult for the auditors to reconcile the inventory at any given time unless the auditors stopped the workflow. The auditors just skipped the inventory count altogether, thus creating an opening for Deepart’s fraud.

Your next question would be: How did he get access to the mail to snag the refund checks? Well, Deepart had recently modified the internal postal policy so that he was the only one who would open the company mail—not the office manager, as had been the policy before Deepart arrived. He justified this change by saying that he wanted to obtain a better understanding of the mail traffic that came into the company every day.

Deepart assumed, and was right for quite some time, that no one at the bank or within the company would notice the differences. Once we identified the name of the bank account, the appropriate information was passed off to the FBI. The FBI subsequently froze Deepart’s bank accounts, and they have been looking for Deepart ever since.

Stumped was missing millions of dollars. But just as important, the company was also missing a policy of checks and balances that could have prevented this disaster. Deepart knew the company had no oversight and exploited the gap.

During the course of our research on Deepart and while we were preparing a report to Stumped’s insurance company so they could file a fidelity claim, we found plenty of reasons why the board should never have hired him.

When Deepart was hired he had given the board the names of three references. The board never called these references. When we tried to reach the references, we found out that one reference had died years before Deepart took the job; the other was a fictitious name that belonged to no one; and the last reference, when contacted, was shocked that he was on the reference list because he stated he never liked and did not trust Deepart.

Next, Deepart’s résumé listed an undergraduate degree that we found he never received and a Certified Public Accountant accomplishment that we determined was another lie. Of course, this information would have been handy before the board hired Deepart, but it was a lesson that unfortunately the company learned the hardest way.

The Tactic: Collecting Corporate Records

We found out about the separate company with the similar name through reviewing corporate records, which are available through LexisNexis and other data sources. Some states have websites that allow you to search their corporate record databases (then you are obviously limited to companies filed in that specific state). Delaware and New Jersey do not outsource their corporate documents and, as such, you need to conduct a separate corporate records search in those two states, but both have websites that allow you to search their records.

To find out whether Deepart was a licensed Certified Public Accountant (CPA), we contacted the accountancy board in the states where Deepart lived and worked. Many states allow you to search online to confirm that someone is a licensed CPA. Other states simply require a phone call to get the same information.

To confirm (or, in Deepart’s case, deny) educational credentials, most colleges and universities throughout the country use National Student Clearinghouse, a third party, to manage their records and handle degree verification requests. National Student Clearinghouse has a website, www.studentclearinghouse.org/, and provides information on dates of attendance and degrees received. Some schools, like Harvard, do not have their records available through this website, and in these instances you must contact the school registrar directly to confirm educational credentials.

“Caveat emptor” is no longer acceptable. The risk involved in every business transaction is so high that there has become an unspoken corporate mandate for information. Investors, board members, employers, investment bankers, investment advisers, and recruiters know that the “buck” now stops everywhere. Background checks are the most reliable way to compile relevant information on a person or company because they tell you where a person has lived and worked; what his or her business interests are/have been; how many times he or she has been involved in civil litigation, criminal cases, or bankruptcy filings; if the person has had any problems with regulatory bodies or been the subject of any controversial or scandalous publicity; whether the person went to college/graduate school (and did he/she lie about it?); and a host of other information. In essence, background checks tell you what you need to know about a person. If someone lied about where they went to school or what degrees they received (as was the case in Deepart), then there is no guarantee that the person will not lie in other professional circumstances. Sometimes the information gathered confirms what you already knew. But other times what is revealed in a background check rescues you from future problems.