Due Diligence For Asset Recovery

Due diligence investigations into the assets of a fraud feasor is delicate work. Even proposing to do some research into a potential fraud feasor to see what can be done to recover assets, that is if there are any, has many risks. In the due diligence process you risk tipping off the fraud feasor, possibly compromising your claim during the investigation, and even altering law enforcement or the media who can damage the quality of the claim either through criminal proceedings, blocking your recovery work, or media coverage, driving the fraud feasor to additional depths of secrecy. But, to understand the risks and there are many, you must make an intelligent assessment of the viability of the claim and the target before proceeding.

Assessing the claim qualitatively and quantitatively requires some very basic questions to be asked and answered;

• What is the nature of the claim?

• What were the misrepresentations to induce the investor to part with money?

• Where were those representations made; in person, online, over the phone, via email, via s-mail?

• In what countries did these representations occur?

• What are the dates of the first representation, the investment, and the last contact / communication about the investment that may or may not have contained additional mis-representations?

• Were there “introducers” to the claims, such as middlemen or commissioned sales agents, or other investors?

• Are there 3^rd parties to the claim that possess an inchoate liability for assisting or failing to stop the fraud feasor?

• How much was invested, directly or indirectly and how much was paid out in ponzi payments?

Asking these questions, one often come upon some fatal flaws. A fatal flaw is a flaw, but for its existence, the claim could move forward through the additional due diligence steps of assessing the claim. Some fatal flaws that are all too common are claims that bump up against or are past the statutes of limitation to file a claim, a stale judgment that has not been renewed, law enforcement involvement and even conflicting statues of limitation on the commencement of a claim. Depending upon the jurisdiction and the nature of the claim statutes can run out in from one to seven years tolling dating from the date of investment or the date of the last material misrepresentation.

Problems arise when the victim is not so much of a victim. We, in the last few months, interviewed a potential client who had a professed claim of some £200,000 against a fraud feasor. Upon a closer investigation we found that the “man who would not be a client” (emphasis added) had invested £150,000, received £250,000 back, but based upon the promises of the fraudster, he should have received an additional £200,000.   This man was an earlier investor in a ponzi scheme. His success is more likely to make him a defendant as opposed to a plaintiff.   At best, if litigation begins a receiver would demand to claw back every payment made to this man.

So what might be the total value of the claim? What can realistically be recovered from the fraud feasor without 3^rd party liability and minus the estimate costs of collection?

What is the size of the claim looking at all of the investors in the scheme, minus payouts. US$50 Million invested, minus US$30 Million in payouts is not a US$50 Million case for recovery but a US$20 Million. Subtracting an estimate of the cost and duration of the fraud feasor’s life style and the recovery may lose another US$7 million – leaving an estimated recovery from the fraud feasor of US$13 million.

Is the case to be litigated in a court of a competent jurisdiction where the costs of litigation are low or high, slow or fast? The costs of a thorough initial investigation and litigation to freeze assets must be estimated. Does the fact pattern support asset freezing exercises that be undertaken quickly in multiple jurisdictions to freeze those known assets? What is the size of this asset pool? Overlook substantial pockets of the fraud feasor’s assets and they will mount a well funded defense and the recovery litigation costs will soar.

Can the victims afford, or are they willing to afford, the estimated costs of a proper recovery? If unable or unwilling will the victims entertain and bear the costs of third party litigation funding? While many litigation teams can and do participate on a percentage of recovery, not all of their fees will be contingent or wait the one to three years it takes recover and distribute assets.

The team must understand how information has been sought, harvested and intended to be used. One must be able to parse the difference between, information, intelligence, and evidence. All may be valuable but only some can be used in court. The defining cull, intelligence versus evidence, has much to do with how that information was discovered and harvested. One may possess fruit from a poisoned tree, and if one does it is best not to deliver your poisoned fruit into the hands of the opposition in front of a judge.

Here you go My Lord, the fruit might look a bit dodgy, but I assure you it is easy to swallow.

It might be surprising to many that the fraud feasor may not play by the rules, no Marquess of Queensberry rules in this fight. When given an opening they will not only punch below the belt, but accuse you of standing too tall and manipulating the position of the belt. Any error in your facts, any error in your investigation and evidence gathering, and of the most microscopic of your case’s short comings and the opposition will hit at the blemish until it is an opening and festering wound.

Have other efforts of recovery been initiated? Sincere but incompetent recovery efforts can burden a subsequent competent recovery team with legacy issues that often add additional layers of complexity that would not have otherwise existed.

If a judgment has been obtained, what was the nature of the litigation? Will the nature of the litigation allow the judgment to be domesticated in other jurisdictions? Dealing on the surface of the requirements of Common Law, Civil Code, Sharia Law and the many blends of law and local customs one can see where procedure in one jurisdiction is sufficient to obtain a judgment becomes insufficient in another for domestication of that judgment. For example, even between common law jurisdictions – if the defendant was served but chose not to mount a defence and the plaintiff obtained a default judgment – the fact that the defendant chose not to litigate may bar the domestication of the judgment in other jurisdictions.

They are so many variables and so many imponderables in asset recovery. Even after a careful and thoughtful assessment much, may arise that is new.   In one case, a news story on the fraudster, obviously a criminal, triggered the state’s forfeiture department into action. The state determined that the funds she had amassed were the result of a fraud and the state moved in and has seized the assets we had identified and recovered as the proceeds of a crime, and denied the pool of victims a recovery. They were twice victimised.

The due diligence research required in asset recovery is real, significant, and short cuts and assumptive leaps will lead to error and the wasting of time and money. Authentic asset recovery is not easy, it is very hard, it is not for every attorney or receiver, as the profession becomes ever more specialised.

L. Burke Files DDP CACM
Mr. Files is an international financial investigator and due diligence expert who has run cases in over 130 countries and has visited over 100 countries. Mr. Files has tackled investigations running from a few hundred thousand dollars to over 20 billion. Along the way, he became familiar with the knowledge of what people need to do, for due diligence, preventing corruption, and to avoid helping criminals launder money. He brings this experience of hands-on investigating and problem-solving experience to his lectures on Due Diligence, AML, and Anti-Corruption. Prior to founding FE&E, Inc., he served as the Director of Corporate Finance for American National an investment bank focused on development stage venture capital. He was also employed by Oppenheimer/Rouse as a commodities specialist trading customer accounts in Agri-Business, 24-hour gold and silver, and foreign currencies. Mr. Files has authored six books, and many white papers and articles. He has been quoted in major publications including The Guardian, The Financial Times, Forbes, US Newsweek, and more. He is the author of the award-winning book Due Diligence For The Financial Professional 2nd Edition. Mr. Files serves on the board of directors for several private companies, funds, and non-profits. The companies include Unicus Research a specialty advisory service for fund managers and family offices, SGS Glazing a specialty glazing design and estimating firm, and NSI a premium spirits company.