Trust, but Verify
I never dreamed of becoming a private detective like Sherlock Holmes or Nero Wolfe when I was growing up. Well, maybe you need to be one when you are living in a world of lies, tricks and deception.
For my entire professional career, I have conducted due diligence on hedge funds and have encountered so many fraudsters who tried to deceive me. I have so far escaped their traps because I have been able to detect them, whether by sixth sense or by thorough due diligence.
Hedge fund industry has not always been glamorous or glorious in the 60 years of its existence; it has had its dark moments. Most recently, Bernie Madoff’s $65 billion Ponzi scheme contributed yet another embarrassment, which the naysayers will surely use to pronounce that the whole industry is a scam run by crooks. But a majority of the hedge fund managers do understand the importance of being earnest because they are truly smart and good at what they do.
We know the importance of being diligent, but there usually no clear guidance as to how to be diligent. Even the professional lie-detectors – lawyers – can do no better than “just look for something unusual.” However, detecting something as “unusual” requires experience, which is more often than not subjective and not easily transportable. Therefore, these case studies are my attempt at systematizing my experience based on the following principles. As President Reagan said: Trust, but Verify.
- Start with doubt, and finish with comfort.
- The Devils are in the details: You go as deep as you need to go in due diligence.
- A small lie is just start of a big lie.
- Nobody can hide every trace of his wrong doing.
June 26, 2011