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Corporate Counsel Connect collection

February 2013 Edition

The art of avoiding unpleasant surprises in proper due diligence

William Barth, Thomson Reuters

William BarthProper due diligence is more than a necessity; in today's business environment it's the first line of defense against potential disasters. The headlines are filled with examples of troublesome business relationships that have resulted in unpleasant surprises. How well do you know the people and entities with whom you're doing business?

Even a single bad deal or business relationship can lead to losses, expose the business to legal and regulatory action including lawsuits, and distract management from more important matters. And rising regulatory requirements are increasing the responsibilities facing businesses as well as the consequences for mistakes.

Fortunately, new due diligence tools are giving businesses and counsel improved capabilities for managing risk. We'll briefly explore some of the steps companies can take to help protect themselves.

The importance of due diligence

Every day, businesses encounter a wide range of new, unfamiliar parties: prospective customers, vendors, partners, investors, acquisition targets and more. Many of these will eventually lead to new productive and profitable relationships.

But each new relationship also exposes the business to potential losses, disruptions and other risks.

Effective due diligence involves a detailed investigation of business, financial, legal and other records to create a complete account of a person or organization's history. It identifies issues that could potentially impact their relationship with a business – such as whether they have ever been convicted of a crime or have other adverse filings, where they own property and more.

Leaving no stone unturned

Finding the right information is no easy task. In today's Information Society, information resides in countless locations and formats. Names and other identifying information may be captured differently across records. As a result, different search techniques may yield vastly differing results. Knowing where to look and what to look for are critical.

The first step is having the right tools that can find the right information in the right places. Starting points for searches often include court dockets as well as national databases, such as property records, foreclosure and default notices, and as well as phone, vehicle registration and consumer credit records.

While many search tools are available that can conduct basic searches for these documents, a new generation of due diligence tools brings a new level of technological sophistication. They can comb through millions of records in different databases at once, and combine results, organizing them and presenting them in a manner that's easy to understand. hey generate graphical views that show connections at a glance, helping identify key relationships, verify identities and more. This not only greatly speeds up searches, but it renders the results much more useful.

Automated alerting tools are also important to keep abreast of information that is constantly updating. Such tools can also provide immediate notification of lawsuit filings to keep a company abreast of potential litigation as well as industry trends.

The human factor

But sophisticated tools are only part of the solution. Effective investigation requires both rigorous automated search tools and personal interaction with information specialists skilled in the nuances of search and information retrieval. Experienced researchers know how specific jurisdictions record their information and how to find it.

With many jurisdictions still not fully digital, crossing "the last mile" for a critical piece of information can often be difficult in courts that still maintain primarily paper records. Document retrieval services can dispatch expert researchers to specific courthouses and agencies, using fast, personalized service for hard-to-obtain documents.

Based on a true story...

I'll briefly cite just one example of how all these factors can come together to protect companies. In 2009, federal investigators uncovered one of the largest Ponzi schemes in history. More than $3.5 billion had been bilked from thousands of investors, including some of America's largest and most sophisticated financial institutions and investment funds.

However, one large hedge fund avoided being ensnared in the scheme and losing their money. The hedge fund was considering putting in money to join one of the investor groups. But as part of their due diligence, the fund hired an investigator that employed a combination of multiple court docket and public record search tools as well as document retrieval services.

The investigator examined places where the leader of the proposed investment had lived. After methodically piecing together records, he discovered multiple cases of check forgery and civil judgments for nonpayment. The investigator alerted the hedge fund, which then decided not to put their money into the investment, potentially avoiding millions of dollars of losses in the scheme.

Manage risks, do business with confidence

Risks abound everywhere in today's business world. Every new business relationship is an opportunity to enhance the business, but also carries with it certain risks. Effective due diligence is an essential component of risk management to mitigate exposure to unwanted outcomes.

Exploring new business relationships, with business partners, investors and others, always raises new questions. Comprehensive due diligence tools and services can provide the answers that are needed.

Avoid unwelcome surprises. Know who you're doing business with, and be able to do business with them with confidence.

About the Author

William Barth is vice president, Fraud & Investigations, Corporate Segment, U.S. Legal, Thomson Reuters. He has over 27 years of experience in the information retrieval business working at or with the thousands of court systems in the country. He started his career as a document runner in Washington, DC and has moved to the top of the industry holding executive positions at Washington Document Service, Choicepoint and GSI. Currently, William is vice president of Fraud & Investigations within Thomson Reuters' Corporate Counsel business and has expanded his expertise into the areas of Due Diligence and Risk Management.

William is a frequent public speaker providing insights on solutions to due diligence and investigative challenges faced by law firm attorneys, general counsel, and other investigative professionals.

William is a graduate of Luther College, in Iowa, with degrees in Political Science and Communications.