18. The Secret Sauce
We have discussed instances of varying degrees of fraud that we have uncovered during our many years of conducting business investigations and also touched on some recent well known business scams. We have told you what happened, how it happened, and what could have been avoided from our professional perspective. But how do we do it? What do we look for? What is the recipe for our secret investigative sauce, and how can you apply our methods to your own due diligence initiatives?
No matter the nature of our inquiry, we always rely on two unique approaches to gathering intelligence and determining what needs to be done to give a client their required comfort level: our creative research strategies and our analysis of information. There are thousands of public record sources available to anyone at any time. Google is an easy and popular resource where you can throw an individual’s name or a company name into the search bar and probably find out something you did not already know. For those of you who have access to commercial databases such as LexisNexis or Bloomberg terminals, you know that these resources provide an enormous amount of information. But what you have access to is just as significant as how you use it.
Take the story of Howard Deepart (from Chapter 3, “We Call That a Clue”), the CFO who defrauded a company of millions of dollars by siphoning funds from his legitimate employer to another company with a similar name that he had formed. The corporate record for this other company, the vehicle Deepart used to perpetrate his fraud, did not list Deepart’s name on the document. Instead, the corporate record just listed Deepart’s home address. Had we just used Deepart’s name as our search strategy, we never would have uncovered the key to the fraud. As in all of our searches, we use the individual’s name as a starting point. Once we establish where a person has lived and worked for the past ten years or so, we also use those addresses as search terms. Deepart needed to form a company in order to open a bank account for his stolen funds. Corporate records are filed by the state and are available for public review. In most states, the Secretary of State oversees the formation of companies. Many states have websites that allow you to access and search their databases of corporate documents. LexisNexis also has a comprehensive collection of Secretary of State records filed in 48 states.
However, as previously stated, there are two states that do not have corporate records accessible through LexisNexis and must be accessed through the respective state websites: New Jersey and Delaware. Delaware is a very common place for companies to be formed (more than half of the Fortune 500 companies are incorporated in Delaware). The state of Delaware has certain tax rules and other laws that are favorable for companies (some people refer to Delaware as a “tax haven” for corporations). Further, Delaware does not require a company to list officers or directors on corporate records. Because these records are not available through LexisNexis, they must be accessed separately via the website at http://corp.delaware.gov. It provides you the opportunity to purchase status and tax reports and historical information on the company. Also, given that most New Jersey corporate records are not included in LexisNexis, if we find an individual has lived or worked in New Jersey, we conduct a separate search with the New Jersey Secretary of State to identify any entities filed in New Jersey that list the individual as an officer, director, or registered agent. These records are accessed through the New Jersey website at https://accessnet.state.nj.us/home.asp.
Because of our intimate familiarity with corporate wrongdoing, we know what to look for: Avoiding using personal names on legal documents, such as corporate records, is just one way that scammers try to succeed. To thoroughly protect our clients and give them the necessary information, we apply our sophisticated search strategies to all available public records, such as searching corporate records by addresses and not just names.
To quote The Sound of Music: “Let’s start at the very beginning, a very good place to start.” For us, the beginning of any investigation starts with running what we call “identifiers” (we have mentioned identifiers in previous chapters). These are databases that identify and confirm a person’s name, date of birth, recent addresses, and a fragment of the person’s Social Security number. Not only do these identifiers assist us when specifically tasked with locating people, but also they play an indispensable role in setting the stage of the investigation. Arrowgant, Speed, Freenclear, Sneaks, Deepart, Leader, Omit, Front, Grudge, Guile, Legitt, Axtagrinde, Surprise, Bucks, Wicked, Hoax, Chance, Abind, Fikshun, Shady, and Imbroke: In every one of these stories, our investigative performance relied on the first step we took. Had we mistakenly begun our investigations on someone else who had the same name as any of these characters, our clients would have deemed us inadequate, not to mention we could have wrongfully accused many people of misconduct.
So what are these “identifiers,” and how do they work? The sources we use compile legally available information from credit-reporting and other sources and provide a profile of a person. If you put Penelope Bucks in the search, you will find every person with the name “Penelope Bucks” across the country. Once you choose which Penelope Bucks is the person you are investigating (based on known address history and age), you can look at more information on that Penelope Bucks. The profile for Bucks will show you all of the addresses Bucks has used in the last ten or so years, and a few other tidbits of available information. As licensed private investigators, we have access to certain information that is not available to most companies. And as responsible investigators, we are sensitive to the constant threats of identity theft and use the information we find cautiously. (For those of you concerned with privacy, do not worry, the information is not mainstream and is always and only used when we are conducting professional investigations.)
We use multiple identifier databases and always make sure the information we have from one source mirrors information from other sources. This guarantees the accuracy of our reports. When we have a signed release from a subject (which allows us to review consumer credit reports), we ask the individual to provide his or her Social Security number, date of birth, and current address. Then when we review our identifier sources, we can make sure the information matches. Sometimes, believe it or not, people have lied about their dates of birth or Social Security numbers. When this happens, it is an immediate red flag. If John Jokers tells us his Social Security number is 123-45-6789 and we find it is really 123-45-6788 (one digit off), we will run both numbers in all of our searches to see what comes up for the other number. In other instances, we have found the name a person supplied does not match the Social Security number. We once did an investigation on John, only to find out when we were confirming education that John did not receive a degree from the school, but Jill did. Because the school kept their records by Social Security number and not just by names, we found out that John was once Jill. How funny is this one?
The information we get from identifiers gives us a jumping point: The address history tells us where to search courts and criminal records, as each address is used to find property ownership, corporate interests, and so on. This information is only useful when it is cross-referenced and properly interpreted. Consistent with all of our search strategies, identifying information on a subject must be analyzed and not merely read.
Another way our search strategies and analysis come into play is when we conduct media searches. We access four different major news databases (LexisNexis, Bloomberg, Factiva, and Westlaw), which allows us to review articles published in thousands of local, national, and international newspapers, magazines, journals, trade publications, transcripts from television news programs, and Congressional testimonies. We often find news reports that quote the individual as an employee of companies where he or she has worked over the years. This complements the employment verification process. Media articles also discuss charitable and social events in local communities, rosters of participants in sports events, and frequently mention people who have attended or hosted these events. These reports can also provide key information on a person. If Jim Smith ran a marathon or hosted a charity for impoverished children, this helps you paint a more complete picture of Jim Smith.
When we run our media searches, we look to not only identify articles that mention the subject, but also articles that mention individuals who have worked with the subject over the years. As mentioned in previous chapters, talking to former colleagues over and above a person’s friendly references often provides significant information regarding the subject. If we know that Jim Smith worked in a specific department of Merrill Lynch from 1999 to 2001, then we will look to find articles that mention other people who worked in that same department at the same time as Jim Smith. Then, if the client wants to contact references for Jim Smith above and beyond the names Jim Smith provided, the co-workers we identified can be great sources of information. Also, news sources often mention an individual’s corporate interests, which complements what we find through our review of corporate records and business databases. For instance, an article will mention Jim Smith is an investor in a company, or served on the board, or that many years ago Jim Smith worked as an intern at a commercial bank. If Jim Smith was an investor in a private company, then his name may not show up on that company’s corporate record. Similarly, interns and other employees who are not management-level at a company will not be listed on that company’s corporate records. Wedding announcements, property transfers, and other local listings also contribute to understanding a person’s background. Media searches help connect a person to other companies, properties, and personal and professional relationships over the years.
As with Nicholas Cosmo (from Chapter 7, “Digging for Disclosure”), media articles also identify controversial issues that a person has been involved in. Even when the topic is not as mainstream as Cosmo’s connections, articles from small local newspapers play a crucial role in identifying an individual’s involvement in disreputable activity. These local papers and other regional media databases have police blotters that often highlight when someone has been arrested or charged with criminal behavior, as we saw with Clark Chance (Chapter 17, “You, the Referee”). These cases may not come up when we run our court record searches because the charges may have been dropped and the case never went to court, or may have been filed more than 15 years ago (when court records often are put into archives and/or are not readily available in our classic 10-year court record reviews). We have found people who are now in their mid-40s who were arrested for DUI or assault when they were in college. And this information was uncovered through local media sources, not initially through the court or criminal system. Also as discussed in Chapter 15, “Show Me the Money: Asset Investigations,” when conducting asset searches, trade publications can play an integral role, especially when we are looking at real estate developers.
If we have not already made our point about the omnipotent media sources, consider the genealogy of these publications. If you rely on Google searches or other Internet sources, you are probably only going to get select media articles published within the last ten years or so. But when you use commercial databases like the ones described here, you find articles published from the early 1900s to the present. These publications have transferred their microfiche archives and sold them to companies such as LexisNexis, and thus provide us with a trove of media sources. We learned about Clark Chance’s criminal background because of the older media articles we uncovered. When looking into someone’s background, you do not want a time limit on the information. An individual’s background does not expire, and neither should your sources of information.
As discussed in Chapter 3, confirming an individual’s accomplishments, such as education and professional licenses, is critical. As enumerated in that chapter, people will fudge their credentials more often than you think. There is one main clearinghouse used by colleges and universities for education verification: National Student Clearinghouse. This company has an easy-to-use website, www.studentclearinghouse.org, that allows you to confirm most degrees received by an individual and gives you enrollment information. Some schools still require signed releases from the individual in order to confirm a degree, but the National Student Clearinghouse gives you clear instructions on which schools require what type of information. Some schools still perform verifications in-house, in which case we independently contact the registrar for enrollment and degree information. When we find inconsistencies with information presented on a resume and information provided by a school, we always request authorized documentation from the school to confirm what was relayed to us to avoid any errors or false accusations of resume fraud.
To confirm someone is a licensed Certified Public Accountant (CPA), Chartered Financial Analyst (CFA), or other designation, there are specific state or institutional websites that provide contact information to confirm these licenses. For instance, if someone claims he or she is a licensed CPA in New York, we would call or search the website of the New York State Education Department, Office of the Professions.
In Chapter 7, we also discussed the case of Thomas Fikshun and how he lied about serving in the United States Navy. Unfortunately, this happens quite often. We have seen many instances where individuals have falsely claimed service in the U.S. military. To avoid being fooled, you should always confirm a person has in fact served and was honorably discharged. To do so, you can submit a request with the National Archives and Records Administration.
In Chapter 16, “Investigating the Inc.,” we talk about the availability of information through state and federal regulatory agencies. Specifically, we mention regulatory information available with the Financial Industry Regulatory Authority (FINRA) and the investment adviser forms on file with the Securities Exchange Commission (SEC). This information can be accessed through the respective websites for FINRA and the SEC: www.finra.org and ww.sec.gov. Many other regulatory agencies have websites that provide information on individuals in the financial community, such as the National Futures Association (NFA). This website, www.nfa.futures.org, offers a check for registrations of firms or individuals conducting futures-related business. The check includes disciplinary history from both the NFA and the Commodities Futures Trading Commission (CFTC). The Chicago Board Options Exchange (CBOE) also maintains a history of disciplinary actions taken by the CBOE against registered member firms and brokers. Similarly, when we are conducting inquiries in the United Kingdom, we rely on the Financial Services Authority (FSA) to obtain information on individuals in the financial industry.
We have also discussed the importance of searching court and criminal records on the state and federal levels in jurisdictions where a person has lived and worked over a ten-year period. We detailed how to access court records on the federal level through PACER in Chapter 7. On the state level, some states, such as Florida, Connecticut, Colorado, and Virginia, provide easy access to records through online databases available to the public. Other states, such as New York and Pennsylvania, offer a statewide criminal search that can be searched online.
We never rely on websites that offer “nationwide searches” of court or criminal records; these sites are not comprehensive. In certain states, the records available online only include matters that have been closed (and thus do not include any active cases); in other states, often the online court and criminal record database does not include matters filed more than three years ago. No matter where we are conducting our court and criminal record searches, we always complement our online searching with dispatching local court record retrievers to physically walk into the respective courthouse or civil record repository and search the indices to ensure efficacy and accuracy of the information.
As in the case of Sam and Mike Surprise, we found that Mike Surprise had served time in a federal prison. We did this by searching criminal records not only where he currently lived but also where he lived and worked years ago. And to determine if and when Surprise had been in a federal prison, like Andrew Shady, we accessed the inmate locator system that allowed us to search for an individual and find out the details of the sentence and the release date. As mentioned in Chapter 5, “Sometimes You Just Gotta Ask,” this is a great complement to PACER when you think someone served time in prison a long time ago. We have also discussed the sex offender registries. These registries are easily searchable in most states and alert you to any known sex offenders in a specific area.
When talking about criminal records, you cannot ignore the myth of an “expunged” record. On November 11, 2009, The Wall Street Journal reported that more states are receiving requests by individuals and/or their attorneys to expunge their criminal records. But when a record is expunged, that does not necessarily mean the record does not exist in the public domain. When we conduct criminal record searches, whether we do them online or in person, we often uncover the arrest report or the original criminal record, and the indices may or may not have the notation that the record has been expunged. In these cases, while we might not be able to retrieve the court documents to learn more about what happened in an expunged criminal case, we do know the record exists.
In fact, and quite comically, sometimes even potential employees of our firm have not realized this. We once hired a young man, let’s call him Rod Iculous, who had just graduated college. After two rounds of interviews, a writing test, and a research aptitude test, we decided to hire him on the condition that the background check came back clear. We explained this to Rod Iculous.
“Is there anything in your background that we should know about? If so, now is the time to tell us,” we said.
“No,” he said.
“You have never been convicted of a crime?” we asked.
“Nope,” said the candidate.
So Rod Iculous signed a release form, and we told him to come back the next day to start his training and that we would simultaneously run a background check on him. At the end of the next day, the results of the criminal record search came back, showing that Rod Iculous had been arrested and convicted of drunk driving and smoking marijuana.
When we confronted him, he said, “I was told the record was expunged!” We then explained to him that Corporate Resolutions was clearly not the right spot for him, and when he said, with umbrage, “You cannot fire me because of my criminal record!”
We replied, “No, but we can fire you because you lied.”
It was pretty entertaining that someone looking for a job at an investigative firm would lie about his background, knowing we would run a criminal record search. That was not the kind of employee that would fit in with the other bright analysts, and he was not the kind of employee that would properly and professionally represent us to our clients.
In Chapter 11, “Now That Is Criminal,” we told the story of Penelope Bucks, who confessed she stole $100,000 from her employer, yet by the end of our investigation, we determined she in fact stole one million dollars. In that story, our review of Penelope Bucks’ credit report was decisive in our analysis of Ms. Bucks’ current financial situation. If you recall, Penelope Bucks said she could not pay the money back to her employer because she had gambled away the money she embezzled. When we reviewed her credit report, we saw three inquiries by casinos in Atlantic City. This confirmed, in part, Penelope Bucks’ explanation of how she spent some of the money. (We have also conducted more in-depth inquiries with casinos to learn about a person’s cash advances, lines of credit, and so on when an individual allows us access to this information via a signed release that authorizes us to contact casinos to retrieve this information.)
To look at someone’s consumer credit report, the Fair Credit Reporting Act (FCRA) requires that the individual sign a release form allowing a third party to access his or her credit report. The FCRA is enforced by the Federal Trade Commission and is designed to ensure an individual’s privacy and to protect him from identity theft. There are a few major credit reporting agencies that compile credit reports: TransUnion, ChoicePoint (now a division of LexisNexis), Experian, and Equifax. The credit reports basically look the same.
When we examine an individual’s credit report, we look to see what installment and revolving accounts they maintain, what the balances are, and if they were any late payments or profit/loss write-offs. Basically, these items tell you a person’s ability to pay bills and pay them on time. We examine mortgages, refinancing, and home equity loans as well as credit card accounts. If someone has had a state or federal tax lien filed against him/her, then that lien will often show up on the credit report. There have been times when we have found a lien on someone’s credit report but not in our court record research (and vice versa). This has been when we have looked for court records in only one jurisdiction (at the request of a client) and the lien was filed in a different jurisdiction.
Last, as recounted earlier, we look to see who else has been looking at the person’s credit report. Anytime a company looks at someone’s credit report, the report shows the date of that “inquiry” (as it is called) and the company that reviewed the report. So, if you are going to lease a BMW and BMW runs a credit report on you on March 6, 2003, then we will see that on your credit report. These inquiries are important to assess because you can see if someone has a gambling line of credit (as in the case of Penelope Bucks), if there have been problems with collection companies, or if someone has applied for financing for vehicles or homes. We have also seen instances where other background check companies have made inquiries into a person’s credit report.
When we are looking at multiple individuals at once, say three C-suite executives of a company, we take a look at the dates of the inquiries of each person’s consumer credit report to determine if any inquiries were made on the same date for all three people. If Bank of America made an inquiry into the credit report of Kyle Hope, Matthew Gain, and Sandy Goal on November 17, 2007, we know that perhaps these three were looking to get a loan from Bank of America. And what if Bank of America decided not to give them a loan? Wouldn’t you, as an investor or potential employer of Hope, Gain, and Goal, want to know why the bank denied their requests? In all of our reports, we bring these issues to clients’ attention.
The FCRA also has strict rules when conducting background checks for pre-employment purposes. In these pre-employment background checks, information that was filed or occurred more than seven years ago is not permissible in the background check. So, if you are about to hire Kathryn Hype, a reputable accountant, and hire us to do a background check on her, we would first require Ms. Hype to sign a release form allowing us to review her consumer credit report. Then if we found in our research that Ms. Hype filed for personal bankruptcy protection 15 years ago, we would not be legally allowed to include that information in our report. But as with all legislation, there is fine print, and there are qualifiers to these rules. The requirements are detailed and complicated, but you can access the FCRA rules to ensure you are in compliance on the Federal Trade Commission website.
In Chapter 15 we talk about asset investigations. We use Harry Home to illustrate the ways to search property records and to identify private planes, vehicles, boats, and political contributions. Information available on property records varies by state. Some states provide details on the seller and buyer of a property, as well as the different mortgages taken on a property. These property records are available through LexisNexis and Westlaw (as well as other sources that vary by state), but in most instances, we call the local tax assessor to get the most accurate information on a home.
If Harry Home lives on 567 Front Street and the property record says he bought his house for $400,000 six years ago, we call the local tax assessor to confirm the information available online is still accurate. Also, if there are multiple parcels of land that appear related to the same property owned by Harry Home, we call the tax assessor to gain clarity on the size of the property and how the parcels are divided. Like anything else online, there may be a lag time between when the records have been updated and when the transaction occurs. This is a very common method used in mortgage fraud: Individuals will buy and sell the same property many times on the same day so as to avoid being monitored by the local tax assessor and authorities.
We have often seen that Harry Home no longer owns 567 Front Street, but The Harry Home Living Trust owns it. Property records also detail parcel numbers of properties owned. If Harry Home lives in a rural area, he probably owns his home, in addition to several acres of land that do not have a street address but are only identified through parcel numbers.
It can be overwhelmingly tiring to keep track of numerous parcel numbers and the owners of these properties, but it is always important to try and get as much information as you can from either the record itself or the tax assessor. And as we have mentioned repeatedly throughout the book, these searches cannot be performed in a vacuum. If we find Harry Home owns his residence at 567 Front Street in Los Angeles, California, and then we find The Harry Home Living Trust owns property in Las Vegas, Nevada, we then go back to our court and criminal record research and make sure we cover courts in Las Vegas. Our search strategies are constantly being amended based on what we find in each of our investigative endeavors.
These are just some of the resources and methodology we use when conducting our investigative research. But thorough research is just one piece of the puzzle. Connecting the dots and conducting analysis of information is what truly separates an investigation from a raw data dump. All of the cases mentioned in this book relied on analyses to reach the appropriate conclusions. If it were not for the rigorous dissection of data, Deepart, Sneaks, Arrowgant, and Omit would have each been just another Tom, Dick, Harry, or John.