Underscoring the Need for Enhanced Due Diligence Investigations
Cassie Chadwick the “Queen of Ohio” in 1897 started an audacious, highly lucrative, and extremely successful con. At a time when women could neither vote, nor take out a bank loan, she led banking institutions to believe she was the daughter and heir of steel-magnate Andrew Carnegie, obtaining fraudulent loans totaling 10 to 20 million dollars. In the 2000’s, Elizabeth Holmes, touted as the “next Steve Jobs,” convinced numerous venture capitalists, C-suite executives, government officials, and various other notables to invest millions into her company Theranos, which at one point was valued at over $9 billion dollars. Her board of directors was called “the most illustrious board in U.S. corporate history.” Holmes was going to revolutionize the medical industry with a bio-technology that could purportedly test blood with a single finger prick. The only problem was that the technology did not work. Holmes was faking it. It may seem incredible that a host of sophisticated industry experts could be taken in by Chadwick, but this scenario illustrates a simple truth: everyone is a potential victim.
One’s sense of surety that they can never fall for a con, is the very reason they do. Humans need to believe. This is why one of the basic ways companies can protect themselves from “bad actors” is by leveraging the expertise of external due diligence investigative firms with worldwide reach.
The “confidence game—the con—is an exercise in soft skills. Trust, sympathy, persuasion,” writes Maria Konnikova in her New York Times bestseller The Confidence Game, Why We Fall for It…Every Time. One of the Theranos board members was former Secretary of State, George Shultz. His grandson Tyler worked at the company. Tyler, who had a degree in biology from Stanford, was a research engineer there. He, along with co-worker Erika Cheung discovered that outliers were being removed from Theranos’ data, causing inaccurate results. They also discovered that blood samples were being run in a secret lab on commercially available machines instead of the Theranos Edison Machine as investors and patients had been told. When Tyer brought this to Holmes attention, it was not well met. In response, Tyler quit and spoke with his grandfather George Shultz, but he sided with Holmes rather than believe his grandson. John Carreyrou, in his book Bad Blood, quotes George saying to Tyler, “They’re trying to convince me that you’re stupid. They can’t convince me that you’re stupid. They can, however, convince me that you’re wrong and in this case, I do believe that you’re wrong.” Holmes’ relationship with Shultz was one she “carefully cultivate[d].” Schultz, was not the only one taken in by Holmes, but the example is clear.
People wanted to believe Holmes. She was going to make people’s lives better, save lives even. It was an appeal to people’s charitable instincts and of course, she tailored her behavior on a personal level to convince people of what they already wanted to believe. People want to trust. As Konnikova notes in her book: “The irony is inescapable. The same thing that can underlie success can also make you all the more vulnerable to the grifter’s wares…those who trust more do better. And those who trust more become…the perfect mark.”
“The easiest thing of all is to deceive one’s self. For what a man wishes, he generally believes to be true.” – Demosthenes
An over-reliance on technology adds to the dangerous waters which businesses and individuals tread. Frank Abagnale, the subject of the film “Catch Me if You Can,” famed for years of conning people with a variety of personas and careers, was asked if today’s technological advances and “ever-growing sophistication” would make it harder to accomplish what he had done. Konnikova reports his reply as, “What I did fifty years ago, as a teenage boy is four thousand times easier to do today because of the technology. Technology breeds crime. It always has and always will.”
Many companies depend on standard background checks when they hire executives. These are typically insufficient to protect a company from “bad actors.” The first line of defense is to conduct deeper screening than can be accomplished by a simple background check. The best way to mitigate risk is by partnering with an investigative firm with deep experience in enhanced due diligence that is able to conduct open source intelligence investigations and enhanced due diligence to capture a larger picture of the individual and their background. But not all investigative firms are equal. USIS, the contractor that at one time supplied around two-thirds of security clearances for the intelligence community was discovered in 2014 to have had a culture that allowed malfeasance to flourish. Konnikova notes that the according to the Department of Justice (DOJ), USIS had “faked well over half a million background checks between 2008 and 2012—or 40 percent.” Integrity starts from the top, and allowing individuals with a questionable moral compass, can lead to the company being riddled with problems. Following these issues, USIS was dissolved as a company.
Many individuals think they can spot a liar. They think certain facial clues or body language can reveal discomfort, but studies show something different. Paul Ekman, who studies the ability of people to discern a lie found that “the success rate at identifying honesty has been approximately 55 percent,” the nature of the lie notwithstanding. And con artists are craftsmen; their objective is to gain your complete trust so that you won’t bother to check them out.
Age also isn’t a factor in who can be conned. The only difference tends to be the type of con or the approach of the “bad actor.”
Because it is so easy for individuals to be deceived, because of our own psychology and the varying skill of bad-willed individuals, due diligence investigations are vital when implementing executive screening, or as part of a robust compliance program. A skilled investigation firm not only provides the research, but helps to interpret this research and make suggestions as how to apply it to your unique business and industry, and in accordance with your business risk tolerance. These firms will have highly trained investigators who can search both data and also are aware of what may be missing that should be found, plus they will have a global reach.
Cassie Chadwick was eventually arrested and tried for her crimes in a trial witnessed by Andrew Carnegie himself. In 1905, a Cleveland court sentenced Chadwick for conspiracy to bankrupt Citizen’s National Bank and conspiracy against the federal government with a $70,000 fine and a 14-year prison sentence. Elizabeth Holmes was found guilty on four counts of defrauding investors in January of this year. Holmes is now bidding for a new trial casting aspirations on one of the primary witnesses Dr. Adam Rosendorff, who was former lab director at Theranos. Rosendorff stands by his testimony and wellness during the trial. More than $144 million was lost by investors in Theranos. Had due diligence investigations been completed on both of these individuals, things could have turned out very differently for those taken in. The word con man comes from the term confidence man. It was coined in the 1849 in reference to William Thomas who would approach marks asking “Do you have the confidence to trust me with your watch until tomorrow?” Surprisingly, many people fell for it and off he departed, never returning the watch. The trust that made these individuals successful elsewhere, led them to trust the wrong people here. It underlines the need to determine trust based on facts found in thorough due diligence investigations; don’t leave it to your “gut feel”. After all, why take the risk?