I often represent limited partners and/or investors in businesses who have been defrauded by management. Often these partners and investors are aware of warning signs but fail to do anything about it until after it is too late. I am providing below some signs of fraud or wrongdoing.
The important thing to remember if you suspect fraud is to act quickly. Ask to examine the corporate records. Ask for an accounting. If there is nothing suspicious going on then management should not be offended. If they are offended and make any excuse as to why you cannot have an accounting, get a lawyer. If you don’t feel comfortable asking for an accounting, hire a lawyer to ask on your behalf.
Most management defrauders have the same characteristics including:
- highly personal material values
- emphasis on personal success over team success;
- overt displays of material wealth;
- a recklessness or carelessness with facts;
- often late to appointments or unable to be located;
- hostile and dismissive of those who disagree with their views;
- having high turnover among staff;
- managing by crisis rather than by objectives;
- having few friends among peers in their industry;
- engaging in related party transactions;
- having relationships with a large number of banks;
- having few long term relationships with financial partners including banks;
- keeping poor records or having a lack of internal control.
There are other red flags as well. The real barometer is if you have a “feeling” there is something peculiar going on, look into it right away. You are probably right.