Due Diligence – A case study in investment scams

Due Diligence can shine a light on the dark past people don’t want you to know about

In the last quarter of 2020, a new client requested we conduct due diligence enquiries and background checks on their behalf. The client was looking to invest in a new tech start up. At the outset our client was planning to invest between $200,000 to $500,000 depending on professional advice and our findings.

Our initial consult with the client sought to gather all the information provided to the client about the investment opportunity. We gained the details of the key members involved in the start up, what they wanted from the client and the parameters they had established for the investment and set to work trying to ascertain what information we could gather about the individuals and the company. We would then compare whether the information we found corroborated the version the client had been supplied by the business principals.

During our investigation we raised with the client a number of issues we identified that painted a picture of impropriety. The client had been told there were three companies associated with the product. These were allegedly in place to safe guard the product from any legal issues in the future. Our checks located four companies associated with the product. The client had been told the key founding members had been running their own successful companies but were winding these down to work full time on the new technology start up. Our checks showed whilst they had been in business, they had turned over less than $75,000 per annum in their business and had been before the courts for unpaid debts several times. Additionally they had only recently opened another company in the same industry, thus directly contradicting their statement to the client.

We were also able to ascertain none of the directors owned their own homes. When they were asked, one in fact stated he was selling his house to invest in the business but it was revealed the house being sold was in fact a rental property and he as the tenant was being evicted. Perhaps the most telling of all was a key founding member who had been charged and convicted numerous times by the Police for offences. In company documents he had changed the order of letters in his name and used his middle name as his first so criminal record checks did not show any convictions. Checks revealed two other directors and staff in key positions also had criminal histories that had not been disclosed. This was of great interest to the client as they are associated with a regulated industry. As such the client could not be seen to be in business with people who had criminal histories.

When we divulged these facts and a number of others to the client we also noted a number of issues that were indicative of fraudulent behaviour, such as setting a deadline of when they had to invest but without any credible reason for the deadline. Offering the client a deal that would only be offered to the client but not to other investors. Using false pretences to lure the client to a meeting just so the founding members could make another sales pitch to our client. Using professionals from another city that were not accredited with the appropriate professional bodies and unable to be seen in person.

We believe as does the client , they would have lost any money they invested in this start up company. It is noted this same company has advertised this “investment” opportunity through respected well known media outlets. What can be learnt from this is always check the facts of the sales pitch you are given. Do not assume because a company advertises in mainstream media they are credible. Finally learn to distinguish facts from fiction and even faction and above all always enter any deal with a questioning mind.

If you’d like to learn more about our Due Diligence and background checks please click on the link below.

Due Diligence

Leave a Reply

Your email address will not be published. Required fields are marked *