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Special Report
The Lost Art of Due Diligence
The recent arrests of several major investment managers such as R. Allen Stanford, Arthur Nadel, partners Paul Greenwood and Stephen Walsh, and the conviction and sentencing of Bernard Madoff have proved unsettling. In the Bernie Madoff scandal, even presumably astute and wealthy investors can be victims of fraud on a massive scale. One is left with the impression that shady and unscrupulous characters are lurking around nearly every business plan, retirement investment or contest opportunity.
The act of being taken in by con artists is as old as civilized man. In today's world, the techniques have become more sophisticated in several ways. Still, there are often red flags that could easily alert the public that something is amiss and proper due diligence could unearth questionable practices and ties suggesting there are potential problems beneath the surface.
In the Madoff case, there were countless warnings that should have cautioned potential investors and prompted further scrutiny. These red flags included too-good-to-be-true rates of return on investments during both buoyant and down economic times. A small, 3-person audit firm that included only one actual certified public accountant that audited Bernard L. Madoff Investment Securities should have been a show-stopper. Another cause for concern was that Madoff performed all three major investment roles. He was the broker-dealer, investment advisor and asset custodian. Lastly, Madoff did arouse the suspicions of some in the industry. For nearly a decade, another fund manager tried unsuccessfully to convince the Securities and Exchange Commission to investigate Madoff.
"Unfortunately, investors sometimes have to dig really deep to find those connections that might cause them to reconsider writing a check," cautions Frank Bragg of Centurion Intelligence Partners. Bragg runs a due diligence firm that scours the one-off partnerships and the less-than-arms-length relationships that had been overlooked in years past. "Today, it's an absolute necessity to turn over every single rock," he warns.
Bragg's warning has merit. Another firm that has fallen under a cloud of suspicion is one whose owners have both impeccable family pedigree and the best of political connections. A federal judge recently froze the assets of hedge fund Ponta Negra Fund I, LLC after hearing claims from the SEC that the firm committed a multi-million dollar fraud by forging documents, falsifying returns and misrepresenting assets under management.
The SEC's action against Ponta Negra is not the newsworthy event. It is the fund's curious relationship with Paradigm Global Advisors, LLC. A fund of hedge funds, Paradigm is owned and managed by James and Hunter Biden, brother and son of Vice President Joe Biden.
The SEC has not alleged any wrongdoing by Paradigm, but as a fund of hedge funds, the firm's forte is purportedly to be the wizards of due diligence. On this task, they have seemingly come up short. Ponta Negra and Paradigm occupied the same floor in a Manhattan office building, used the same marketing agent, and shared the same telephone number. Paradigm officials have explained that this curious set of coincidences was a result of Ponta Negra having leased office space and facilities from Paradigm.
Fair enough. But the shared marketing agent, Jeffry Schneider, had a sketchy past and was previously the subject of numerous complaints and litigation. The SEC's action against Ponta Negra was filed in U.S. District Court in Austin, Texas, where Schneider was previously employed suggesting the SEC investigation likely began with him. Questions have been raised regarding Schneider's past employment and the circumstances regarding his departures from previous investment firms.
Ponta Negra wasn't the Bidens' only brush with dodgy characters during their nearly three-year ownership of the fund. In mid-2007, Paradigm formed the Paradigm Stanford Capital Management Core Alternative Fund with Stanford Financial Group. Stanford Financial was led by the same R. Allen Stanford who stands accused of running a multi-billion dollar Ponzi scheme. The Paradigm-Stanford relationship was ended after the SEC filed civil charges against Allen Stanford earlier this year.
There is more unpleasant history at Paradigm for the Vice President's family. In early 2007, a lawsuit and a counter-suit were filed between the Bidens and one-time partner Anthony Lotito, Jr., over business arrangements, professional credentials, and fees regarding the Bidens' 2006 purchase of Paradigm. According to a court filing, a goal of Paradigm under the ownership of Lotito and the Bidens was to "expand its network of investors, particularly among public employee pension funds." The trio settled the case out-of-court late last year.
As part of the proceedings, James Biden filed an interesting affidavit in which he alleged Paradigm "had only between two and three hundred million dollars under management" and not the more than $1.5 billion he and his nephew previously believed. He also claimed Paradigm's returns "were not as represented to us." The Bidens eventually purchased a controlling interest in Paradigm without original partner Lotito.
One might expect the investing public would tread a bit more cautiously in the post-Madoff era after it became known Ponzi schemes can be run out of a Manhattan office building just as easily as from an industrial park storage facility. Yet, this does not appear to be the case. The sloppiness and inattention to detail exhibited by some of those in the investment business suggest proper due diligence lessons may not have been well-learned.
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drudge ette obama| 10.19.09 @ 6:49AM
Does anyone else smell a big, fat rat?
Eric Cartman| 10.19.09 @ 10:16AM
You can believe the Republican Party doesn't! They will walk right by this pile of fetid garbage and not even blink! As a matter of fact, some Republican somewhere (maybe Arizona) will come out and say something like "My friends, the Bidens are good people. I have known Joe since we discovered girls together back in 1922. They are lovely people and a great family. I'm sure there is nothing illegal here." Then turn right around and kick a person like Dick Chaney in the groin. Anyone wanna bet?
Steve in Fla| 10.19.09 @ 3:03PM
WTF? Are you an idiot? Don't you mean the Dems?
Eric Cartman| 10.19.09 @ 3:49PM
No, pinhead, I mean the Republicans! Show me a time in the past 10 years they have successfully implemented a plan of attack on the Democrats! Any plan. I'll wait. I thought so.
How do you think we got where we are at? Because the Republicans have been a powerhouse of ideas and leadership? They haven't put anything together since 1994 - and they wasted that by spending us into oblivion! They are stupid. Period.
JimE| 10.19.09 @ 6:20PM
Cartman, MORON ALERT!
Eric Cartman| 10.19.09 @ 9:12PM
Thanks, JimE!
I'll keep a lookout for them. You can always tell the morons: they're the ones who think the Republicans are going to do anything good with this golden opportunity to retake the house and senate in 2010. Wait! There's one now! Oh, sorry. It's you. Phew! Thought you were one of "them" for a second.
Melvin| 10.19.09 @ 7:22AM
A letter to Joe and the rest of the weasels.
It is high time for this Country to put an end to your sitting in this place, which you have dishonored by your contempt of all virtue, and defiled by your practice of every vice; you are a factious crew, and enemies to all good government; you are a pack of mercenary wretches, and would like Madoff sell your country for a Ponzi scheme, and like Judas betray your fellow Americans for a few pieces of gold.
Is there a single virtue now remaining amongst you? Is there one vice you do not possess? You have no more honor than a common thief; power, and corruption is your God; which of you have not bartered you conscience for bribes? Is there a man or woman amongst you that has the least care for the good of the Country?
You sordid prostitutes have you not defiled this sacred place and turned our nation's Capitol into a den of thieves, by your immoral principles and wicked practices? You grown intolerably odious to the whole nation; you were elected here by the people to get grievance redressed, are yourselves gone! So! Take away that shining city on a hill and lock the doors. In the name of God, go!
WRTolkas| 10.19.09 @ 8:01AM
Ladies and Gentlemen,
WE (and that included me) would continually vote these tainted rascals back to Washington. Why? I have made a vow that I will never again vote for an incumbent who has spent more than two terms in office. Why don't we take a pledge here and now to refuse (unless the alternative is to vote in a card-carrying ding-bat ala: Al Franken) to vote back into office anyone who has had more than two terms?
Let us spread the word of our pledge and remove these professional politicians.
Rmm| 10.19.09 @ 10:41AM
Sounds good to me. The over-riding force here is that the system itself corrupts the weak - kneed, softies who can't resist temptations. We need an amendment to the constitution forbidding career politicians! Period.
Pingback| 10.19.09 @ 8:37AM
The Lost Art of Due Diligence…. « Jacksonian Lawyer's Blog links to this page. Here’s an excerpt:
Patrick | 10.19.09 @ 10:05AM
It appears that the Biden family is surrounded by an impenetrable force field that is able to deflect all sorts of prosecution despite its associates and allies falling all around them. The Piper has obviously been paid!
And just how stupid are these Bidens if they think they're buying a firm with $1.5 billion in assets and the correct figure is less than half of that?
Pingback| 10.19.09 @ 10:27AM
Monday, Ocotber 19th, 2009 « links to this page. Here’s an excerpt:
Indiana Alex| 10.19.09 @ 12:31PM
There would be enough here to convict and hang a conservative, however, the burden of proof for liberal democrats is much higher.
victor| 10.19.09 @ 8:08PM
Standards? Standards? Dems don't need no stinkin' standards!
Hangin's too good fer 'em.
Boil 'em, beet 'em and them berryum!
Straight down and only leave the feet stickin' outen the ground!
Pingback| 10.19.09 @ 3:44PM
Twitter Trackbacks for The American Spectator : The Lost Art of Due Diligence [spect links to this page. Here’s an excerpt:
whyyeseyec| 10.19.09 @ 11:33PM
You are right Eric C. The pubs are lost in the wind. Stupid as all getout. I believe they actually enjoy being in 2nd place. I despise the marxist dems but the pubs are not the answer. It`s a tossup between Newt, Trent (well I just don`t know) Lott or John McCain as to who`s the worst.
Expect the pubs to let 2010 pass them by. Too bad for Sarah because the diaper pants republicans will shun her in 2012....
小语种翻译| 10.19.09 @ 11:33PM
i think As a matter of fact, some Republican somewhere (maybe Arizona) will come out and say something like "My friends".so that ...
Doubtless| 10.20.09 @ 11:14AM
Hmm, Hunter Biden had no experience in running a Hedge Fund and yet...don't suppose it had something to do with his father sitting on the Senate Banking Committee do you? Hunter was a paid lobbyist up until about a week before his father decided to run for President, when he got out, Hunter went back to that position oh up until about a day before his father was announced as VP candidate. His sister, a Delaware state employee was caught doing coke on camera at a party this year but the story became about how wrong it was for her to be tricked like that. Has Delaware state attorney general's office looked into it? No, Beau Biden was in Iraq, but he did look into the charges against Larry Sinclair, Obama critic even though it was a county issue. Not to worry, when he runs for Daddy's Senate seat, I'm sure all will be taken care of.
ArnePaul| 10.20.09 @ 8:02PM
Free Bernie Madoff! Free Bernie Madoff! Free Bernie Madoff!
Okay, maybe not, but isn't what he did just another version of business as usual? Forget Enron, that's too easy. Also, let's not talk about the banks, who have such a small fraction of their depositors assets on hand or even on loan but "invested" in such recent brilliant ideas as the vastly over-inflated real estate market, up to 65% in some cases, whereas when banks were run cautiously and rationally not too many years ago they had a saner 5% in real estate investments. And before we start talking about their "predatory lending practices", let's remember that you can't cheat an honest man-or woman. The average home owner/buyer thought that flipping houses was the never ending get rich quick scheme and the bulk of them were refinancing with every increased assessed value to pay off their previous, soon to fall apart, bad debts and buy more things they didn't need with money they didn't have. But then again that's how a good many used credit cards, leveraging one against the other to cover their behinds before the bankruptcy monster came a knocking. Most of them were so brilliant they were Ponzi scaming themselves! Let's not forget, however, the biggest bankrupt, robbing Peter to pay Paul (well maybe not Paul but those who are in bed with them one way or another, essentially lining their own pockets in some fashion), the US government. Only with Bernie Madoff you had the delusion you'd get a return for your investment, with that dead beat Uncle Sammy you know he's screwing you with every buck he takes whether you like it or not.
Nigel Nickelsby| 10.23.09 @ 4:58PM
Frank Bragg and Centurion Intelligence Partners are quite an extraordinary intelligence firm. I've seen their work and it's very impressive. If you need good intelligence then you need to call on them. Excellent article, Mr Hyman.
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