due diligence recipes
The Contagion of Fraud: Best Nipped in the Bud
Only a few months ago, mention of the name Bernard Madoff brought to mind America’s biggest-ever Ponzi scheme. The sheer scale of the financial fraud involved and the audacity with which it was carried out dazzled most people. Fast forward to now and Madoff as an individual has largely faded from sight. Instead, it’s the ramifications of what he did that keep throwing up his name. The latest is the revelation that the former head of Optimal, the Geneva-based hedge fund investment wing of Satander, the Spanish bank, has been charged with criminal mismanagement of client funds placed with Madoff’s operation. The charge carries a maximum sentence of five years jail under the Swiss penal code.
The Spaniard concerned is one of the most senior wealth managers known to be confronting criminal charges as a result of the Madoff scandal. Central to the case against him, as well as to accusations against Satander, is that investors were misled by false claims that adequate due diligence had been conducted on Madoff’s activities. As one legal observer notes, the court investigation will have to establish why people were closing their eyes and not asking enough questions.
The problem is, that’s what people do when things seem to be going smoothly and everyone’s happy with their return. The only solution is to have systems in place that set bells ringing that simply can’t be ignored. It’s dangerous to wait until suspicions are aroused, or intensify to the degree that action is imperative. Rather, it pays to bring in a team of professionals that can apply sophisticated methods of computer forensics and financial analysis to give you the early-warning system you can’t afford to be without. The technology involved and its reach will surprise you.
India’s Vanishing Companies – Is Your Forensic Search On?
For such a computer literate country as India, on which many businesses around the world rely for skilled services, it comes as a shock to read in a Financial Times front-page story (July 15) that 121 companies have vanished there after violating filing rules. With the state of financial crime in India – let alone everywhere else – this is a salutary warning to business to link up without delay with forensic professionals who can help you avoid losing all your assets when such a company disappears into thin air.
Investigations by the Ministry of Corporate Affairs in New Delhi have revealed the identity of the 121 companies involved, which listed on the country’s stock exchanges during the 1990s. But there could be more. Those already uncovered will be prosecuted. The Ministry has also announced that India’s stock market regulator – the Securities and Exchange Board – has banned 100 companies and 378 directors from using the capital markets for five years.
Business people around the world were shocked in early January this year to learn of the Satyam scandal in India. A leading IT outsourcing company, with clients like General Electric and General Motors, the $US823 million fraud was the biggest in the country’s corporate history, causing the company’s share price to drop by 78 per cent and sending India’s benchmark Sensex Index down by 7 per cent. It was quickly nicknamed India’s Enron scandal.
Forensic Investigation: Avoiding “Boiler Room Fraud”
Six Sky Capital executives surrendered to law enforcement officials in New York on July 8 2009 and were charged with a $140 million stock manipulation fraud. And all this in the shadow of the mind-boggling Bernard Madoff debacle. This shows yet again how careful you need to be. Clearly, none of the investors hoodwinked by the scheme availed themselves of the sophisticated skills in forensic accounting and computer forensics that can now protect you from such calamities. The Financial Times report on the case on July 9 provides a chilling account of just how happy-go-lucky some investors are. In this day and age, there’s simply no excuse for not taking appropriate precautions.
The manipulation strategy involved was allegedly devised in a way that led investors to buy shares in the belief that those shares were in demand. In reality, there was no such demand. The aim was simply to control the market and boost the price of the stock. Sky Capital’s boiler-room tactics and those of its brokers undercut the level of honesty and fair play that the US Securities and Exchange Commission was seeking to maintain.
According to the criminal indictment, the six executives, including Sky’s founder and chief executive, allegedly persuaded investors to buy shares through private placements in two related companies – Sky Capital Holdings and Sky Capital Enterprises, which traded on the Alternative Investment Market of the London Stock Exchange. As The Financial Times points out, not only were US investors drawn into this web, but British investors were too. The funds thus procured were supposedly used for private purposes as well as for commissions paid to brokers that were camouflaged as special bonuses or loans.
Healthy Scepticism - Due Diligence Went Unheeded in Madoff Case
Now that Bernie Madoff is behind bars, and likely to remain there for a considerable time, recriminations have begun to ricochet amongst the various parties responsible for creating and sustaining the largest single fraud in history; investors, advisors, feeder funds, bankers, lawyers, hedge fund managers, regulators and government officials.
One oft repeated line is “How could Madoff continue to get away with this for so long?’ Indeed, had the recent economic meltdown been less severe, Madoff would probably still be operating his massive Ponzi scheme with investors and regulators oblivious to his shenanigans. The benefit of hindsight is usually always good as is the fact that so many are now reflecting on the extent of systems failure but why were those critics decrying Madoff’s financial system long before his collapse ignored.
One of the best known whistleblower’s was Harry Markopolos who spotted Madoff’s Ponzi scheme after an investment firm he worked for tried to emulate Madoff’s methods but failed to reproduce the same steady high earning results. Markopolos warned the Securities and Exchange Commission (SEC) about Madoff’s activities but his cries failed to ignite a serious investigation of Madoff’s affairs.
A number of major investors, including Deutsche Bank and Fund of Fund asset manager Ermitage Group were highly skeptical of Madoff’s operation and declined to invest any funds with him. A healthy suspicion that something too good to be true probably is, resulted in these investors being spared financial Armageddon.
