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Red Flags of Investment Fraud Checklist

Red Flags of Investment Fraud
Written by Andy

Unfortunately we’ve seen this story before: Adam Neumann – WeWork, Elizabeth Holmes – Theranos, and more recently Trevor Milton – Nikola. All charismatic people selling something that investors want to be true. All hucksters selling a vision and little more. All able to reap huge financial gains from so called “sophisticated” investors.

This “Nikola” thing stinks to high-heaven. And that’s a pity, for hydrogen has a real future, but not as a fuel for vehicles (economically unfeasible at present), but to store energy generated by wind and solar arrays for use when the wind’s not blowing and the sun isn’t shining. Remember: the biggest challenge in energy isn’t generation, but transport and storage.  Hydrogen isn’t free-you have to spend energy to split water to get it.   Like all “zero emission” vehicles, it isn’t; it only moves the energy and pollution from one place to another.  2. It takes a lot of hydrogen to power a vehicle. 3. Hydrogen is a gas at normal temps, which means either extremely high pressure to get enough in a tank, or liquification by cryogenics.  Either is very dangerous because of the explosive potential.   If you go the cryogenics route, you have to keep the tank very cold (-253 deg C, -423 deg F).  What supplies the power to do that when the vehicle is parked?  Hydrogen gas even when not compressed is dangerous–remember the Hindenberg?  So who has been asking Milton these questions?

All three – Adam Neumann, Elizabeth Holmes and Trevor Milton were able to tap into the credulity of an investor base that has become fanatical and emotional about certain ideas. For Neumann is was the dream of revolutionizing work into some millennial utopia. For Holmes it was the promise of a medical breakthrough and the “genius” of a female 19 year old college drop out. For Milton it was the fanaticism surrounding everything “green” and eco-friendly. All these concepts drive an emotional response for many investors that ultimately cloud their vision and objectivity.

Folks should remember, exaggeration is lying and lying is a slippery slope that leads to the pit of fraud.

In general here are some red flags of investment fraud checklist: 

  1. High turnover in senior and middle management.
  2. CEO complains repeatedly about short-sellers.
  3. Proxy risk factors mention short-sellers.
  4. A CEO who doesn’t live in the city where the company is located.
  5. Someone who treats his or her assistants and secretaries badly.
  6. A leader with a large corporate jet allowance disclosed in the proxy.
  7. Constant restructuring and layoffs, even in good times.
  8. Frequent press releases about winning business with unnamed customers..
  9. Small/unknown companies touting contracts or relationships with large household name companies. E.g., “We have signed a memorandum of understanding with Boeing”.
  10. Compensation that consistently appears egregious relative to the size of the company and the compensation of its peers.
  11. 2 pages’ worth of related party transactions in the proxy.
  12. New lavish headquarters.
  13. Big naming rights deals to stadiums.
  14. CEO gives interviews in hard-hats.
  15. Major executives are married to each other.
  16. High amount of travel expense.
  17. Spends a lot of $$$ on consultants.
  18. Excessive or nonsensical ESG disclosures.
  19. The use of ‘serial entrepreneur’ biographies by management.
  20. Tech companies with no patents granted or applications on file at the Patent Office.
  21. Located in region with weak criminal law penalties. Senior management who can make a run to their home country. Unknown accounting or law firms doing meaningful work.
  22. Unknown accounting or law firms doing meaningful work.
  23. Any company based in Ft. Lauderdale.
  24. Big Florida homes (homestead exemption from creditors’ claims). Abrupt trips to countries lacking extradition treaties. Dyed hair and veneers.
  25. Managers/shareholders with margin loans. Low levels of push back on corporate doc negotiation.
  26. Hiring a bunch of college buddies.
  27. Not showing organic growth ex M&A charging/re-arranging segments frequently.
  28. Frequent changes of accounting firm. ‘Strategic’ changes in fiscal reporting periods.
  29. Kissinger or similar luminaries on board of directors.
  30. “Philanthropy that tries too hard”.
  31. Executives who do not speak freely and candidly but resort to legal boilerplate or drivel.
  32. CEOs who wear wigs.
  33. The majority of equity compensation is time-vesting without any performance requirements.
  34. Responding. ‘Will follow up offline’ to detailed questions on conference call. And any reference to Street/consensus expectations.
  35. Long term guidance is non-GAAP/lots of adjustments in non-GAAP stuff.
  36. CEO is giving interviews promoting the stock.
  37. Number of senior executives that attend Davos every year.
  38. Marianne Jennings ‘Seven Signs of Ethical Collapse’ checklist: Pressure to maintain numbers, Fear and silence, Young ‘uns and a bigger-than-lif CEO, A weak board, Conflicts (of interest), Innovation like no other, and goodness in some areas atoning for evil in others.

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