“Soho Grifter” Case Demonstrates Importance of Due Diligence

Posted by Katherine M. Silverman on

Sometimes an exciting business opportunity really is too good to be true. In the past year, several news stories – Theranos, Fyre Festival, and Anna Delvey (affectionately known as the “Soho Grifter”) – have captured the public’s attention in what has come to be known as the “Summer of Scam.” When watching the Netflix or HBO documentaries, it’s hard to imagine how anyone could be convinced to invest money in these ventures. The common thread seems to be a lack of due diligence.

When considering investing in a business, it is important to do your due diligence. So, in practical terms, what does that mean?

First, it means asking questions, especially the uncomfortable questions. If someone is asking you for money, you have every right to ask questions that will help you understand how your money will be invested and used to grow the business. That means asking questions not only about the business itself, but about the individuals behind the business. A good place to start is to ask for a list of officers and directors and ask to speak with those individuals. You may also want to ask questions about the business’s current ownership structure, its assets and liabilities, and any pending claims or litigation.  If a business owner is uncomfortable providing you with basic information about their business or their professional background, that’s a red flag. In the case of Anna Delvey, she often made vague references to her aristocratic family in Germany, but associates observed that her German language skills were sorely lacking.

Second, ask for documentation. While there may be some aspects of the business that constitute confidential information or trade secrets, other information should be readily made available to potential investors. These documents include organizational documents, financial information, employee lists, insurance policies, and real estate documents such as leases or deeds. If a business owner is uncomfortable sharing proprietary information, you may be able to enter into a nondisclosure agreement that would allow you to review the information in a confidential setting. If you still aren’t getting the information you need, you might want to ask yourself why the business owner seems reluctant to provide the information? Do their explanations make sense?

Anna Delvey was able to stay in hotels for weeks on end by presenting falsified wire transfer receipts evidencing “payment.” She obtained loans from banks based on altered bank statements and bad checks. In many cases, a simple phone call to the originating bank would have uncovered the fraud. Taking the time to follow up on information you receive to verify its accuracy is a key step in the due diligence process.

Delvey’s scam came to an end when her lies finally caught up with her. She is currently on trial in New York for grand larceny and theft of services. While most of us will never cross paths with someone like Delvey, her case demonstrates the risk you take when you don’t perform proper due diligence before making an investment.

This post only skims the surface of the due diligence process. If you are considering investing in a business and you want advice on thoroughly vetting the opportunity, an experienced attorney can help guide you through the process.