1. Due Diligence: Beyond the Data Room
Lisa Silverman, Managing Director
June, 2014

2. Due Diligence Drivers
Independent verification – ensuring business partners/investees are who and what they claim to be and are not hiding problems, history of disputes etc.
FCPA – adhering to U.S. law. It is unlawful for a U.S. person (includes companies and individuals), and certain foreign issuers of U.S. securities to make a payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. New DOJ guidance, November 2012.
UK Bribery Act and other international regulations – anti-corruption issues extend beyond the US Government. Corporations need to make sure they have stringent risk assessments in place, including on all subsidiaries, joint ventures, and members of their supply chains.
Incident responses – post closing events.
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3. Due Diligence Types Pre-transaction Post
Less expensive, less intrusive and less time-consuming—HIGHLY preferred method and serves as a way to independently verify information in the data room
Post
Investment investigation, audit, litigation consulting, asset searching and public relations assistance—VERY expensive, distraction and impediment to operations
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4. Different Methodologies of Due Diligence
Screening—searching the name against a select set of public records and databases; little to no independent verification, little if any analysis; appropriate for volume projects
Investigative—comprehensive review of all available public records and databases; iterative research process; in-depth analysis of findings; source inquiries; appropriate for pre-transaction investment, reputational risks, high value transactions, etc.
Risk-reward ratio to consider
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5. Effective Open Source Research: Google is Not Enough…
Public record analysis comes from searching press archives, the internet, proprietary databases, field visits and physical retrieval of records from relevant industry, government and regulatory bodies.
Examples of open source information that should be collected AND verified wherever possible:
Criminal records (federal, county, municipal)
US Litigation (federal, county, municipal)
Bankruptcy/judgments/liens
US and international regulatory repositories
Trade and industry specific data
Directorships
Corporate records
Credentials—education, employment, professional licensing & disciplinary actions
English and local language media review
Property and other asset searches (optional)
Social media sources
How wide and how deep should one go?
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6. Public Records Be appropriate and thorough
10-year checks great for year old; not for 65-year old director
Search where the subject has lived AND worked—may be different states
Think creatively when scoping the project
In many jurisdictions, U.S. & international, discrepancies can occur between what is disclosed in the data room, found online and what is found at the courts
Internationally, availability of public records drops off dramatically—requires human source inquiries
Ensure outside providers adhere to the highest standards of compliance and never risk reputation or that of its clients by obtaining information illegally
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7. Reputational Inquiries
Rumor v. Fact
Need to gather intelligence from multiple sources
Seeking balanced, holistic understanding of subject(s)
Requires balanced set of human sources
Former employees, litigants, local business people, trade/industry association membership, government authorities, journalists, law enforcement, former spouses, etc.
Track down source of adverse rumor rather than just repeat it
Context of findings
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8. The Paths We Take
Case Studies – How Far Do You Go?* * All identifying details have been changed
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9. The Paths We Take – Example 1
Collect database Information
- Lloyd H. Smith III
Addresses in GA, NY, NC
Wife Christie Smith
Conduct Federal Litigation Search. Pacer index contains a 1994 federal lawsuit in GA naming a Lloyd H. Smith with no designation. It appears to be the subject’s father.
Stop here or
Continue Investigation
Do more research. Review the docket from the GA lawsuit. It’s an insurance dispute involving Lloyd H. Smith III, the subject. The court ruled in Smith’s favor, the case was dismissed with prejudice and Smith received $324,947 in insurance proceeds.
Get case copies, analyze, do more public records research - GA litigation references Ohio litigation filed by Jane Smith’s parents. Filings from that lawsuit state that Jane died by drowning in a bathtub at home after blunt force trauma to the head. Lloyd Smith was the only other person at home at the time.
Review docket / do more research. Barbara and Bill Jones are cross-defendants in GA lawsuit; The Jones’ are parents of Jane Jones, Lloyd Smith’s first wife (Jane Smith).
Smith was deposed in the Ohio lawsuit, get deposition. Smith stated that Jane called the police about six weeks before her death because of an argument they had. During a court proceeding in the Ohio case, the Jones’ attorney alleged that Smith refused to take a polygraph test regarding his wife’s death.
The Cobb County medical examiner ruled the death accidental, and the Cobb County police cleared the case February 21, Smith was never arrested or charged in the matter; the Jones’ lost the Ohio lawsuit seeking to exhume Jane’s body. 9
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10. The Paths We Take – Example 2
Conduct litigation and public records searches on Allan Williams and Saunders Williams and Potter (SWP = PE firm)
Stop here or
Continue Investigation
Searches show Williams served on the boards of 4 privately held companies. Compare search results to Williams’ self disclosed bio in the proxy filing. Williams fails to mention that he served on the boards of privately held companies: Star Concepts, Topper Salads, Party Planning and Shopping.
Get case copies, analyze. Williams was charged with one count of misdemeanor petty theft and one count of misdemeanor battery, alleging he stole a Scattergories board game from a store in Pinole California and used - force and violence against an individual (possibly a store employee). Williams pled guilty to petty theft. Note the record includes the subject’s DOB.
Public records research reveals a criminal record naming an Allan Williams filed in Contra Costa County, California in 1992.
Conduct further research to identify other criminal records naming Allan Williams in California. Two cases - both involving thefts - were filed in San Diego County in 1988 and Review of the 1988 case file, determines that the defendant in question had provided the name - Allan Williams as an alias and that his real name was Charles Williams. Charles Williams is Allan Williams’ brother. Charles Williams has a lengthy criminal record involving robberies in California in the late 1980s and 1990s. He provided officers with the alias - Allan Warren Williams.
Additional research on the new companies showed they performed poorly while Williams was on the board and they were under SWP’s management. Issues included launching unsuccessful expansions and declaring bankruptcy. Two of SWP‘s portfolio companies breached their loan covenants. This is at odds with SWP‘s past claims that it achieved superior returns through growth and that it was a value-added partner. 10
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11. The Paths We Take – Example 3
Pre-employ screening co. did check on Catherine Smith
Stop here or
Continue Investigation
Additional research found more lies.
Litigation support matter after subject’s termination: standard investigative due diligence.
Identified only one discrepancy: MA degree issued in May, not August of 1975
PhD claim false; criminally charged for falsely claiming PhD
$100m company she co-founded/worked 12 years does not exist
Phone number for employment verification was mother’s
address for company was an AOL address
Company address in strip mall with “Parcel Plus”
Website for company registered after her termination
NO other employees (current or previous) identified for company
Previous company (13 year tenure) never existed
Not a member of board of Fortune 200 company
FL fictitious business name with no further information
CEO of foundation assisting those with HIV/AIDS—namesake of foundation allegedly died—no deceased person with that name
Foundation president a doctor sanctioned twice
Registered website using name of former roommate who had been dead 2 years
Earlier company alleged Malcolm Baldridge Award—false
Georgetown Univ education--false 11
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12. Lisa Silverman Managing Director Kroll Phone: 312. 345
Lisa Silverman Managing Director Kroll Phone: |