Uncovering dishonesty

There’s something about stories of fraud allegations that gets people clicking: two recent articles on PEM, one related to Playboy’s private equity partners and another to an alleged ponzi scheme, have quickly become among the site’s most read items in the past week.

Part of their popularity may indeed be down to the fact that such stories remain relatively rare in the private equity world. Insiders say that while cases of fraud and illegal activity pop up from time to time, a much more common form of dishonesty that industry professionals might run across is resume padding. Educational qualifications, certifications such as CPA, CFA and various memberships are among the items that may be embellished.

The prevalence of resume padding is not limited to one specific industry. According to a recent CareerBuilder.com survey, 38 percent of the 5,000 respondents indicated that they had exaggerated their job responsibilities as noted on their resumes. Approximately 18 percent admitted to lying about their skill set, 10 percent about their academic degree and 5 percent said they had been untruthful about their job title.

Private equity managers’ due diligence processes should uncover such dishonesty as they typically include background checks on executives at prospective acquisition targets and on professionals they plan to install at portfolio companies. The process should not only involve speaking to a chief executive, but the individual’s former employees, co-workers and others beyond references provided, says Ken Springer, a former special agent of the US Federal Bureau of Investigation and head of Corporate Resolutions, a consulting firm.

About one in 10 investigations result in a private equity firm restructuring a contract or even abandoning a deal altogether, according to Springer.

As fund managers continue to expand their reach and strategies, the need for such due diligence increases; entering unfamiliar geographies and markets exacerbates the need for background checks, says Robert Strang, head of Investigative Management Group, a corporate security and intelligence gathering firm.

An increasing need for such checks may contribute to the cost of doing business, but it could save private equity managers a lot of trouble down the road.