5. Sometimes, You Just Gotta Ask
As we all know, there is often more than one side to any given story. Many inquiries will uncover information that requires more clarification than what can be interpreted from a public record document. Clarification can come from a variety of different sources, and most of the time the clarification is achieved by contacting appropriate individuals. The people we talk to include references, former business associates, vendors or customers, regulatory authorities, attorneys on both sides, former law enforcement officials, or even, when warranted, the subjects themselves. While you can interview the subject yourself, it is often more beneficial when professionals like us conduct the interview and serve as impartial, independent third parties who document the individual’s explanation of the facts. The interview also sometimes serves as part of the “reps and warranties” in a contract.
Interviewing people is a critical component of what we do. Interviews elicit information that goes beyond information developed in the public domain. As a former FBI agent and expert in the field of intelligence, I (Ken) can tell you that the personal gestures and behaviors of the interviewee are as telling as the information spoken. While in the FBI, I conducted thousands of interviews of criminals and innocent people. As I did in the FBI, you should pay attention to where the person is looking when certain questions are asked; what topics the person avoids or what statements are volunteered; and try to determine if the person is nervous, arrogant, or dismissive. All of these personality traits help paint a more complete portrait of the person with whom you are about to do business. In the FBI and in the private sector, the interviews are always approached and initiated diplomatically and professionally. At Corporate Resolutions, we employ a number of tactics to elicit the most information as possible. No, water-boarding is not one of our tactics. (We discuss details of how to get the most out of an interview in Chapter 9, “Never Too Late: When Problems Arise Post-Investment.)
The Situation: Protecting the Innocent
A fund-of-funds was interested in investing in a mid-size hedge fund in the Southwest and hired us to conduct a background check on the primary hedge fund manager, Steven Freenclear. As with any background check, we reviewed court records in the counties and states where Freenclear had lived and worked. We found he had been divorced for six years and, at the time of the divorce, Freenclear was arrested for assaulting his wife. The details in the court documents were murky. The client had to make a decision: Move forward with Freenclear or move on to another deal.
Board members and members of the investment committee gathered in a crowded conference room to discuss the situation. After presenting the information to the group, they decided to go the democratic route and take a vote: Half of the officers of the firm wanted to back away from the deal, and the other half argued that enough cash had already been committed that it was worth moving ahead. One board member even said, “Life’s too short to back a wife beater.” With an even split on the table, we offered to talk to Freenclear to hear his side of the story and determine whether he was, in fact, a “wife beater.”
As many clients do, the fund-of-funds told Freenclear that Corporate Resolutions needed to interview him to close the loop on some due diligence issues. These interviews have always been an ideal venue for us to act as a buffer for our client and ask the sensitive questions that the client obviously does not feel comfortable broaching with the individual.
So we interviewed him. And no, our first question was not, “Are you still beating your wife?” We asked about his career history and whether he had been involved in any civil litigation. Freenclear immediately disclosed his involvement in an “ugly” divorce. We asked him to elaborate.
Freenclear explained that one night he was arguing with his wife, and when he grabbed his keys to leave, she confronted him, and he pushed her out of his way and walked out the door. He said he knew it was wrong, but he swore it was not assault and was simply a heated moment. According to Freenclear, it was only hours after he left the house that she filed assault charges against him and he was immediately arrested when he returned home later that night. When asked how we could confirm his explanation of the story, he told us to call his ex-wife.
When we called her, the ex-wife corroborated Freenclear’s story. She explained that on the night of the incident her attorney had called to discuss an upcoming hearing, and at that time, the ex-wife explained what had happened earlier with Freenclear. Her attorney then advised her to file assault charges with the hopes that it would give her leverage in gaining more alimony. She reiterated that Freenclear had not, in fact, assaulted her. The ex-wife even gave us the name of her attorney at the time and suggested we call her to verify the story. Well, that call did not go as smoothly as the others.
The attorney did not want to talk. She aggressively tried to dismiss the reasons why we had called and stated for privilege purposes she was unable to discuss any of the facts. We told her that because we had permission from her client, we had reason to believe she was knowingly withholding information. We even said we would approach the appropriate bar association to apprise them of the situation. She then said, “OK, OK. Are you tape-recording this conversation?” No, we were not. And with that she essentially admitted that the legal advice she gave to her client (Freenclear’s ex-wife) was not the most sound; she supported the story the ex-wife told and also informed us that she had already filed papers to have the arrest record expunged.
The Tactic: Ask And Ye Shall Receive
Sometimes, you just have to ask. In the instance of Freenclear, asking the right questions saved the deal. Our client was thrilled that we were able to resolve the issue and did not rely solely on the documents filed in the divorce case. You cannot always rely on the allegations made in a civil or criminal case. You need to learn more to get the real story.
When we conduct background checks on hedge fund managers and others, our interviews focus on a range of issues that we believe impact the success of your investment. We ask whether the individual is fully vested in the fund. If the fund manager has faith in the fund, then he or she will have personal monies devoted to the fund as well. It is often not a good sign when the fund manager is seeking investors but will not be an investor himself.
Another issue that is often overlooked is health. You need to know that a fund manager or CEO of a portfolio company is in good health and is physically able to perform. When we conduct our interviews, we delicately broach the topic of personal health and, with all of the statements made during the interview, we document what the person says. Of course, we do not ask whether the person flosses twice or day or had a cold in the most recent winter season. Our concerns are whether the person has any health problems that would impede their performance. Also determining whether there is, or will be, a “key man” policy on the individual is another way to address health issues (a key man policy is an insurance policy on a specific officer or employee of a company).
The Situation: Baby Proofed Résumé
We did a background check for a fund-of-funds client that was seeking to invest in a female hedge fund manager. During the course of our research, we identified media articles and Internet postings that stated the manager left her former employer for “health reasons.” Some of the sources even referred to the fund manager as having “ill health.” But none of these media sources gave specifics about the fund manager’s health issues. When we took a closer look at her resume, we realized she had been out of employment for more than two years. Fearful that these health issues would impact her ability to successfully execute her duties at the fund, we asked the client if he was aware of any health problems the fund manager had. Our client did not know anything about the fund manager’s health or even the gap in the fund manager’s employment history, and so with our client’s approval, we talked to her. The fund manager explained she was working at one of the investment banking houses at the time she got pregnant, so she took a leave of absence to have the baby. She jokingly admitted that the “leave of absence” lasted for a year and a half longer than she anticipated, but, in essence, the time she spent out of the financial industry was devoted to raising her child. So the media articles and Internet postings were exaggerated and raised unnecessary concerns. Our client was relieved that we got to the bottom of the issue and that there were no real concerns about the fund manager, and his investment in her hedge fund has been successful to date.
The Tactic: The Friends and Family Plan
Talking to the subject is just one way to get relevant information. We often identify former employees of a company who also can be great resources of information. When conducting background checks, clients routinely reach out to references provided by an individual in order to confirm employment history and to hear what the references say about the individual. But we all know that references are usually just a list of friends. Rarely will people give references that will not be glowing; why would they? Sometimes people provide names of references hoping the references will not be contacted. (Remember the case of Howard Deepart in Chapter 3, “We Call That a Clue”? The reference did not even exist.) So we design our research to identify individuals who have worked with the person being investigated. To achieve this objective, we review lawsuits, comb thousands of media articles, websites, blogs, and social networking sites, such as Facebook. We also sift through our internal proprietary databases and catalog of industry sources. We find people who were not listed as a reference but did work in the same company or department as the person being investigated. These former associates often provide more candid reviews than references. Interviews with these former colleagues evoke detailed information about an individual that directly relates to the professional demeanor and reputation of the person we are investigating. Through these interviews we have found both negative and positive information about a person that was not otherwise obtained through a background check or just contacting references—from allegations of drug abuse and abuse of power to detailed accounts of superb ability to communicate or manage a team.
Identifying former employees of a company is also useful when investors are seeking to know more about a company or when distressed investors are buying a company out of bankruptcy. Through a similar process as the one we use for finding former associates (idendifying opposing parties to lawsuits, targeted media searches, reviews of blogs and chat rooms, business reports, and other sources), we identify former employees of a specific company and contact them to learn more about the reasons why they left the company and any information about its management team. As discussed in a later chapter, former employees can give critical information when a deal has gone wrong.
When acquiring a company, we always recommend contacting the Equal Employment Opportunity Commission (EEOC) to see if any complaints had been filed against the company or any of its principals. The EEOC is a regulatory authority that enforces equality and monitors corporate discrimination (race, age, sex, and so on). Generally, third parties cannot obtain information from the EEOC, but if you are looking to invest in a company or acquire the company, this information can be obtained by you or your counsel. By learning more about the way a company is run and its internal culture, investors are given information that helps predict the success of the company.
The Situation: Case of Contagious Coercion
An investor hired us to conduct background checks and business intelligence on Rampant, Inc., a service-oriented company that has branches across the country. The investor had heard Rampant was on the verge of a major expansion and hoped to make a sizable investment and reap the benefits of the expansion.
As part of our research, we identified about 25 individuals who we determined had left the company within an eight-month timeframe. Our preliminary research on these former employees found that 20 of them had found work at competitor companies. Because this seemed more than mere coincidence, we approached the investor with the information, and the investor decided to heed our recommendation and told us to begin contacting these former employees to find out what happened.
Our first round of interviews consisted of six female former employees. None of these women were willing to elaborate on the reasons why they left Rampant; they all seemed oddly cagey about their former employer. Finally, one woman explained she could not speak with us “as per the agreement” she reached with the company but suggested we speak with Joan Leader, another former employee. When we contacted Leader, she was quite fired up. Leader told us that Rampant was run by a misogynist management team and that the women at Rampant were either harassed or deliberately not promoted. Leader said the other female employees who left Rampant were bullied into signing an agreement that said they would not discuss the specifics of their departure from Rampant, but Leader proudly told us that she refused to sign this agreement and left Rampant without the requisite financial departure package.
Leader’s comments had to be taken seriously. However, we also had to consider that Leader could have her own motives to smear the management of Rampart. So we plugged on with our calls to the rest of the former Rampant employees. The more former Rampant employees we spoke with, the more we heard about the widespread sexual harassment that occurred at the company. Both men and women told detailed stories of uncomfortable incidents they witnessed that triggered the departures of quality employees. One male former employee stated he could no longer sit in meetings and listen to the CEO overtly and repeatedly proposition a female employee in exchange for a promotion.
Although the former employees never filed any lawsuits against Rampant, several of the women stated they did file EEOC complaints and/or complaints with the human resources department, and other women stated they did not want to deal with the hassle, embarrassment, exposure, and cost of filing lawsuits against Rampant.
When we presented this information to our client, he was aghast. The investor knew he did not want to be around when a former employee finally did file a major sexual harassment lawsuit, so the investor walked away. To him, the potential returns were not worth the risk of embarrassment and exposure that came along with the investment.
The Tactic: Secrets of Former Employees
As you have seen in the cases described here, the benefit of talking to the subjects, former employees, and other relevant parties plays a critical role in gaining clarity on a complicated or sensitive issue. Sometimes our investigations have led to interviews that have challenged the statements made by the person being investigated. Like in the case of Freenclear, these interviews then serve to figure out who is telling the truth and what the real story is.
What we had in our pocket that truly allowed us to rescue our clients from an ugly situation was the most underestimated resource: people. Whether they are former employees or current and former business associates, these people are privy to information that is often not included in public record documents. Reaching out to these “sources” can enhance the research you conduct and will often serve to either substantiate what you already know or contradict your previous assumptions. Never underestimate the power of conversation; it often leads to resolving a dilemma.
The Situation: Unearthing the Ugly
A private equity firm hired us to conduct background checks on three principals of a paper manufacturing company in California. Two of the principals, we were told, were longtime friends, and the third, Andrew Shady, was new to the company but had come highly recommended. So we began our research and confirmed all of the necessary information on the two original executives: schools and professional licenses checked out, no court records (civil or criminal cases, bankruptcies, judgments, or liens) for either individual, and no controversial media articles or regulatory infractions were found.
The first step in all of our investigative research efforts is to run what we call “identifiers,” or the resources that provide us with an individual’s full name (and any possible aliases), abbreviated Social Security number, date of birth, and any current and previous residential addresses. After we ran our identifiers and confirmed Shady’s Social Security number and date of birth, we examined his history of residential addresses and noticed there was a gap: For a few years in the early 2000s, Shady had no residence. When we find a person is “missing” a residence for a period of time, it is often an indicator that either the person was sharing a residence with someone else and had not used any credit of any kind during that time (unlikely), had been in the U.S. Armed Services (possibly), or that the person had served time in prison (also possible). We contacted the Federal Bureau of Prisons and used their inmate locator system to determine if Shady had ever been incarcerated in a federal prison. We plugged in Shady’s Social Security number, and the records that came back showed Shady had spent several years in prison for child abuse. We then checked the California Sex Offender Registry. According to what is known as “Megan’s Law,” a person who has been convicted of a sex crime must register as a “sex offender” with the state in which they live. Each state then maintains records of these sex offenders, and anyone can search their respective state sex offender registry to identify and locate known sex offenders. When we searched in California, Shady’s name popped up. Yikes.
We talked to the client and told him what was going on. At this point, we had found the original criminal case that charged Shady with child abuse and ordered copies of all documents on file in the case. We advised the client that there may be two sides to the story, and it would be best for us to interview Shady and hear what he had to say about it. The client agreed.
At first, in our interview of Shady, we asked him if he had ever been involved in any criminal cases. “Not that I recall,” he said. Then we specifically asked him about the child abuse case. “Oh that?” Shady said. “I was wrongly accused. That whole thing was blown out of proportion.” OK, we said, then explain to us what happened. And Shady embarked on a convoluted story that was difficult to follow and difficult to listen to because of the vile nature of it, but the key statements included: “She climbed into bed with me, not the other way around, OK?” “That lawyer had it out for me; I am convinced the bitch messed with the evidence.” “See, the whole thing was just an exaggeration.”
Now what?
We documented Shady’s responses and sent them over to the client. The client was disgusted. We then suggested we get another professional perspective of the situation and recommended talking to the Assistant United States Attorney (AUSA) involved in the case to hear what she had to say. The client agreed. We found out the AUSA who handled Shady’s case was no longer in the U.S. Attorney’s office, and we could not find her working in any professional capacity. We were able to locate her at her home and explained we were looking for public record information regarding Shady.
“That case horrified me,” the AUSA said. “After Shady, I quit my job. The details of what this poor little girl suffered through and how sick Shady was...the case haunted me.” So he was not wrongfully accused? “ABSOLUTELY NOT!” she shouted. When we hung up with her, the court documents had arrived. We read about all of the details that the AUSA referenced. It was difficult to read. In the end, the client told the two founders of the company that if they wanted investor money of any kind at any point, they would need to get rid of Shady. And they did. And the deal went through.
The Tactic: Corralling the Criminals
In the case of Andrew Shady, we used the Federal Bureau of Prisons’ inmate locator system to confirm Shady had served time. The Federal Bureau of Prisons website allows you to search by a person’s name to determine if he or she has served time in a federal penitentiary. The system will give you details about the person’s sentence, such as the length of time served and the release date. The website is located at http://www.bop.gov/iloc2/LocateInmate.jsp. There are similar systems in most states when accessing criminal records.
Another great resource is the sex offender registry. As discussed, most states throughout the country keep a sex offender registry that is available for public review. Some states, such as California, have the information on a website (California’s is http://www.meganslaw.ca.gov/), while other states require you to call the appropriate department for information. Every state has varying levels of information available.