7 Due Diligence Websites

In the wake of yet another finance industry disaster, I thought I’d share some good online due diligence resources for Kiwis.

In 2012, it’s crazy to not take advantage of the resources available that enable you to run basic background checks, investigate different types of investment models and learn more about personal finance.

Your Favourite Search Engine

The first place to start is by searching for:

  • the name of the investment professional you’re working with
  • the name of their company
  • the name of their investment product
  • the name of their company with “+ scam” added
  • their name with “+ judgment” added

Through spending time with your favourite search engine and a potential investment opportunity you can size up who you’re dealing with. In this day and age, not having a web presence is suspicious in and of itself.

While I’d hesitate to say investment professionals using social media is essential, it’s definitely weird if you can’t find something resembling a secure client login area.

If you can’t log in and see where your money is going, something is wrong. Either the company is stuck with paper records (terrible) or they’re not willing to provide real-time updates on where your money is (really dodgy).

The Companies Office

The New Zealand Companies Office enables you to search for the company name. That will enable you to look at corporate documents like deeds and prospectuses (if they’re registered).

It will also enable you to look at other companies the directors and shareholders are involved with. This can be helpful in identifying potential conflicts of interest. For example, if you are contemplating a property syndicate investment and the current title owner has one of the syndicate arrangers as a director, you’d be well advised to ask whether you’re really entering into an arms-length transaction on a commercial basis.

Another thing to look for is how the shareholdings are structured. If you see arrangements where the same people have 98 shares and 2 shares, it’s likely to be a trust arrangement.

If you’re going to be a counterparty to a transaction where there is a trust involved, it’s going to be difficult to get your money back if it ends up in the trust. Just look at the difficulty BNZ are going to in order to get money from the trusts of convicted fraudsters Skinner and Rowley.

Shark Patrol

This website enables you to search for insolvency events or judgments against companies. Most investment professionals won’t appear anywhere here. But if you’re about to pay an advance fee for a loan that will never be settled I wouldn’t be surprised if your new friend’s name showed up here.

NZ Legal Information Institute

NZLII is a free repository of court judgments – High Court, Court of Appeal and Supreme Court. If you search for the names of the person you’re dealing with and the names of the companies they’ve been involved with you can find some good stuff.

It can require creative search terms and trawling newspaper archives to figure out which case is which, but sometimes you read judgments from 10-15 years ago and wonder – who the hell would do business with this person after that?


This free website is a good basic overview of things you really should have down pat before you go anywhere near investing in complicated products.

There are lots of good calculators including a household budget that’s really simple to use. If you’re not budgeting, again, you have no business investing.

Khan Academy 

If you didn’t take a finance paper at university, you’d do well to work through the core finance lecture series on Khan Academy. They’re ~10 minutes each and well worth your time.

If you don’t know how to calculate present value, net present value or how to do a discounted cash flow analysis this is really simple stuff that no investor should be ignorant of.


It’s a US orientated website, but the amount of good information here is undeniable. You can learn about how bond prices work or plain English explanations of how margin investing works.

If you’re being sold something complicated, look it up here. Then ask yourself – who’s really benefiting from this transaction?


These 7 sites are just the starting point for performing due diligence on prospective investment opportunities. They overlap with financial education because they’re the same thing – the more you learn about the mechanics of different investment opportunities the better equipped you are to avoid making silly mistakes like having all of your wealth tied up with one advisor.

Red Flags And Ross Asset Management

The report by High Court appointed receivers PWC regarding Ross Asset Management makes for sober reading. In the wake of several ponzi schemes being uncovered as the global financial crisis led to more withdrawals than contributions, we have to think carefully about the enormous red flags that presented themselves when it came to Ross Asset Management.

Brian Gaynor wrote in the Herald:

Investors deposited funds with RAM, assets were purchased and sold on their behalf and held by RAM. The investment performance of these funds was reported by RAM without any independent verification or audit. RAM clients had their own individual portfolio and, as a consequence, could have widely differing investment returns.

As he notes, this was exactly the same structure employed by Bernie Madoff. The cash flowed into a single account and back out again when withdrawals were requested. The PWC receivers have identified just $10.2 million out of a supposed $449.6 million in assets under management. The cash flow analysis in the PWC report makes for sobering reading.

When you think about due diligence on potential investments, the Ross Asset Management proposition sets off multiple sirens. The lack of independent verification of returns, the use of an accountant who shared the same address as the firm, the absence of an independent custodian and maintenance of client records in a single Access database are just the tip of the iceberg.

There was quite a disturbing interview on Radio New Zealand where the poor lady involved had all of her savings with David Ross. It is clear that Ross Asset Management was operating on the down low, relying on referrals and word of mouth.

With the high average account balance of around $500,000 many investors would have been wholesale investors / accredited investors. That means lower disclosure is required and filing prospectuses with the FMA isn’t necessary.

It’s clear that having $500,000 to invest is not sufficient evidence of an ability to manage your own wealth. An enormous amount of reading and careful thinking needs to be done before writing a cheque to anyone – let alone to an asset management firm that operated completely outside standard practice.

Since the collapse of MF Global it has been clear that you are an unsecured creditor to any investment firm you have an account with. Every single dollar of your wealth is at risk – your term deposit, your bonds, your shares, your derivatives trades – they all require ongoing monitoring and tough questions being asked of the people you’re dealing with.

When the most clued up fund managers in the world regularly clear different types of trades through different prime brokers to reduce the counter-party risk involved, that’s a clear signal to ordinary investors that breaking up where you put your money is the bare minimum of risk reduction you can do.

I am surprised that accountants performing the foreign investment fund tax calculations for investors in Ross Asset Management didn’t double check shareholdings via the registry. How could you file accurate tax returns reporting foreign capital gains and dividends without double checking the relevant share registries?

I will follow the development of this case with interest. Because Mr Ross was an “Authorised Financial Advisor”, it will be interesting to see whether more background investigation will be conducted to see if other AFAs are running investment funds of this magnitude on the side and outside the regulatory framework the FMA oversees.


Book Review : Too Good To Be True By Erin Arvedlund

“What do you mean he’s been arrested?” she screamed. “But that’s where all our money is!” – Ellen Jaffe, wife of Madoff agent Robert Jaffe.

The central theme of the Bernard Madoff affair is that you can only trust yourself with your money. You cannot rely on personal relationships, cultural ties, regulation, due diligence, the historical relationship of your family with the asset manager or any other reason. You simply must conduct ongoing due diligence of every asset class you are exposed to and the “professionals” that you deal with.

A track record of solid performance doesn’t mean that your investments are safe or even being managed properly. There is always a risk of fraud or misappropriation if the correct procedures aren’t being followed with your money. Arvedlund describes in detail how all of the investments in Mr Madoff’s fund went to one JP Morgan Chase checking account. Billions of dollars flowed in and out, with nothing ever being done about it.

In Too Good To Be True Erin Arvedlund presents a detailed story of how Bernard Madoff exploited cultural ties and the need to feel special in order to run a ponzi scheme that could have started as early as the 1987 stockmarket crash. A successful market maker on Wall Street and well known in regulatory circles, Madoff cynically leveraged his ties to regulators and several failed SEC investigations as “proof positive” that his “split-strike options strategy” was legitimate.

The fraud also played on Jewish ties – country clubs with predominantly Jewish members, Jewish social circles, Jewish foundations and university endowments. Working class Jews were also targeted through lower level agents and referrals from Madoff employees themselves. Holocaust survivors like Elie Wiesel lost money. Absolutely sociopathic abuse of cultural ties on the part of Madoff.

 “Recessions catch what the auditors miss” – John Kenneth Galbraith

In 2008 the global financial crisis begun. Because of Madoff’s reputation for quickly returning customer money, he was flooded with almost $7 billion in redemptions towards the end of 2008. He didn’t have enough cash on hand and couldn’t raise any more money from the feeder funds who raised money for him.

Through telling his sons and pleading guilty, he avoided a trial. He also avoided a lot of the arcane but interesting details being brought to light. Arvedlund expounds on the network of feeder funds and how they worked. In exchange for a management fee and performance fee, these funds trawled the charity ball circuit and wealthy social circles for new investors. They then wired their money to Bernard Madoff. The people who earned commissions from Madoff lived lavish lives of luxury and didn’t ask too many questions – they simply couldn’t go back to the way they lived before the Madoff kickbacks.

Investors received regular but not excessive returns. It is clear that some investors had “returns to order” produced where they could invent losses in their Madoff accounts to offset their tax bills. When people asked questions Madoff always had an answer at hand. When Madoff investors were confronted by other people in the financial industry about the impossibility of Madoff’s consistent returns they ignored the suggestion that they remove money from their Madoff investments. It simply was “too good to be true”.

There is a sort of schadenfreude about the Madoff affair. The trustee Irving Picard is analogous to Breeden in the Conrad Black case. He is making millions of dollars managing the recovery of assets for investors. Some investors stand to receive more back than they initially invested in Madoff because their other investments have performed dismally during the global financial crisis. Ignoring opportunity costs and taxes paid on fictitious returns, it is estimated that at least half of Madoff’s investors will lose no capital.

Bernard Madoff played on our need to feel special, like we are one of the elite. By making it hard to invest in his fund he created an air of exclusivity that made otherwise sophisticated investors act like teenagers not invited to a house party. The need to perform extreme levels of due diligence before investing in anything is another central theme running through the book.

We will never know the true story of the Bernard Madoff affair. We will never know with certainty that all of the assets have been recovered and investors made whole. But some extremely arrogant people had their wings clipped by the collapse of Madoff. This is a good thing in the long-run and why arguments about taxing inherited wealth don’t make sense.

If investors in Madoff had stuck to the rules and not thought that they were better than the great unwashed with their special investment relationship with “Bernie” they wouldn’t have needed to sell their apartments and Palm Beach winter homes. They could have kept their NetJets fractional shares and American Express bills in the six figures.

The investors I feel slightly sorry for are the usual dupes – the “mum and dad” types who invested on the recommendation of friends and family. They never win in the financial markets because they are like people going to the sales without being able to tell a horses rear from its ears. As I’ve written before, they shouldn’t try and invest at all because it always ends in tears.

Relying purely on regulators as a risk reduction strategy as a success rate approaching 0% as evidenced by:

  • finance companies and the Securities Commission
  • the NZX, auditors and the Feltex IPO
  • Bernard Madoff and the SEC
  • Ratings agencies and mortgage backed securities being rated AAA

The book doesn’t touch on the reality that any investment fund can experience a run at any point in time. If all the investors want to withdraw their money, the fund won’t necessarily have liquid assets to cover the redemptions. It’s like a run on a bank, only investment fund’s will quickly sell off their assets to meet redemption requests. This will depress the value of the investor’s accounts even further.

I have followed the Bernard Madoff story closely. So far, billions of dollars has been recovered and due to the “net winners and net losers” calculation, many investors will actually get all of their money back. For sure, this is without interest and with considerable stress. But I’d wager it’s a better return than they would have got investing in some other asset classes since 2008.

If you like reading about the human side of how these schemes work, I’d definitely recommend checking this book out. It’s yet another cautionary tale about taking everything you read or hear with a grain of salt and pursuing a skeptical line of inquiry into the reality of the situation.

Due Diligence Questions For Investors

If you are thinking about investing in something, you have to do your due diligence. The finance company collapses, ponzi scheme failures and property investment scams that have been revealed following the global financial crisis ram home the fact that most investors don’t do their due diligence.

How can an average investor perform due diligence on a prospective investment? The truth is they probably can’t. If you don’t have above average knowledge of the relationship between risk and return, how probability actually works, what the law is surrounding investments and standard procedure for legitimate investment firms you should stick to investing in index funds.

The inability of the average investor to perform due diligence is why we have to make silly statements like “taking my investment advice without consulting a financial advisor or 3rd party solicitor first is really stupid”. The development of “plain English” product disclosure statements prepared in the format preferred by the Financial Markets Authority can’t account for how stupid some people are.

If you can’t explain to a reasonably clever teenager concepts like diversification, correlation of returns, the risks and rewards of Kiwisaver accounts, performance relative to benchmarks, impact of performance and management fees on long-term returns and answer questions that dullards send into Mary Holm every week you have no business going anywhere near the financial markets.

Armed with your above average knowledge of basic financial topics, you should be able to pigeon hole investment products you’re looking at. When you know the category of investment you are dealing with you can then ask the best questions for that category of investment. The Financial Markets Authority actually has some great information on its website. As does the Retirement Commission’s “Sorted”.

For example the Moa Brewery IPO can be filed under “new listing backed by guys with a track record of selling NZ brands for a premium to large corporates and non-trivial likelihood of success”. Examples of questions you’d want to answer before investing here would be:

  • How are the founders and IPO participants incentives aligned?
  • Who is managing the listing and what fees are they getting? Do they have to support the initial listing price?
  • What do the back-of-the-envelope calculations look like for the premium beer market?
  • What is the worst-case scenario if I put my money in the IPO?
  • What are the risks I am exposed to here? Currency risk? Distributor solvency risk? Consumer tastes and preferences risk?
  • Can I build a basic model in Excel that resembles what the Moa guys have put in the prospectus and test their assumptions?

If you are performing due diligence on a specific asset manager, there are lots of things you can do to lower the risk of getting “Madoffed”. Reading the disclosure documents very carefully is the first step. Then, conducting a detailed Google search on the asset manager, entities they are associated with, similar investment products, credit checks, background checks if you are investing a lot of money with one manager and testing whoever is trying to sell you the investment product with aggressive lines of questioning are all part of investigating whether an asset manager’s track record is plausible or someone is taking the mickey.

A clear understanding of probability and investment returns is also essential. Past performance does not predict future performance. Just because a hot-shot asset manager has beaten the NZX50 for the past decade doesn’t mean they possess some amazing ability. Never discount the possibility that someone has had really good luck and is rationalising their success by pointing to their “track record” and “investing acumen”.

If you’ve been reading this article and don’t understand every single concept I’m referring to, you have no business actively investing. The Financial Markets Authority should restrict investment products to people who are capable of performing due diligence independently.

Why is this? Well, it’s because in New Zealand we privatise profits and socialise the losses. If someone makes a bad investment and loses their retirement savings they will become a burden on every other Kiwi by accessing superannuation when they previously would have been able to decline it. They’ll also become eligible for nursing home subsidies if they haven’t stashed the rest of their assets in trusts.

Behavioural finance studies have proven that very few people are capable of making rational investment decisions. They are subject to enormous biases, under-estimate the likelihood that they are making a poor decision and over-estimate the likely returns from investment products they are considering. We think we know more about investing than we actually do and cry to the media when we make really dumb decisions.

I am not currently in a position to make substantial investments in hedge funds or pick individual stocks. My strategy at present is pure capital preservation and hedging against inflation. An index tracking product like the NZX SmartShares is the most reasonable level of risk I’d be comfortable with at this stage. Taking long-term bets with out-of-the-money options is too risky at present.

Handing over your entire investment strategy to a person whose incentives are not aligned with yours (think : commissions, kickbacks, golfing trips, liquid lunches at restaurants you’ve never heard of) and then losing it all is proof positive that financial darwinism exists.

If you are not prepared to do enormous groundwork in analysing potential investment products, doing the due diligence, clarifying things you don’t understand with your solicitor, asking your accountant whether claimed tax benefits are likely to result in an IRD audit or even performing a Google search on the potential investment provider and associated entities, you shouldn’t even consider index funds.

You could choose the conservative option on your Kiwisaver and keep all of your money in term deposits. But even then you’re an unsecured creditor to the Big Four banks and will get clipped if Open Bank Resolution is ever implemented. Do you even know how Open Bank Resolution will work? If not, you should take five minutes from your busy day to read about it.

I think you should read dozens of books before you go anywhere near the shark-infested waters of investing. If you don’t have a broad understanding of investing, risk and probability you are a mark for shysters who will take advantage of your naivety. Just because you have achieved success in one area of your life, namely having enough money to invest, doesn’t mean that success will transfer to your investing efforts.

I am reasonably smart. I read extremely widely in economics and finance. I have extremely low levels of confidence in the financial markets and the “professionals” who work there. Commingling of client funds and business funds, expenses being charged to investors and exceptionally poor after tax and after inflation returns make me wonder what excess return can be earned from assets even marginally more sophisticated than index funds like ETFs.

NB: For the illiterate I’m not an Authorised Financial Advisor and this shouldn’t be taken as financial advice tailored to your specific situation. If you actually don’t do your own research you are a dunce who deserves to lose everything. Search for an independent financial advisor who won’t charge commissions on investment products or read a few basic investing books before even visiting a sharebroker’s website or requesting information on something you’re unlikely to understand.