How to make sure you don’t invest in yet another Enron

8 September 2007

IT'S déjà vu all over again: this week, another hedge fund manager pleaded guilty to fraud. The activities of Keith Gilabert, the founder of a fund called GLT Venture Fund, cost investors about $14m (£7.8bn, E11.3bn). This was just a skirmish, however, compared to the spectacular collapse last August of Bayou Capital Management, which took with it $350m in investors' funds. In both cases, the losses were not due to anything like high-risk derivative investment structures: the cause was old-fashioned, outright fraud.

Increasingly, a ?disclosed? investment intelligence modality is coming into use, and is even being required by investors as a condition of investment. This means that the subject of investigation knows he or she is being investigated and has signed and completed a disclosure/release form, providing legal access certain restricted data (such as credit reporting data), and also provides assertions that can be verified or falsified (education, work history, etc.).

Beyond this, monitoring through repeated investigations on a regular or continuing basis, called ?indications and warnings?, represents a way to extend risk management.

One of the newest applications of these techniques, driven by anti-money laundering concerns and regulations, is intelligence on investors prior to accepting an investment.

Legality is a critical concern: for the client's protection, all investigations should operate fully within the law and be conducted by a firm licensed in its home jurisdiction to undertake such operations. The difficulty of conducting investment intelligence varies widely, based on how ?friendly? the information environment within a particular country is. The US is easiest, followed generally by western Europe. In other areas, difficulty increases as access to data becomes more problematic. Cost will naturally rise with difficulty. However, because the global data array is now so rich, investment intelligence can be revealing even in the most difficult environments.
The applicability of the military intelligence maxim ?trust but verify? to the investment world cannot be overstated.

Dee Smith is chief executive of Strategic Insight Group, a global, US-based private intelligence agency serving the investment, legal, and corporate communities.

deesmith@sigintelligence.com