While watching the excellent new film The Big Short with my son recently; I was by the struck by the fact that the same due diligence and verification failures that contribute to a substantial portion of  fraud/investment/transactional losses suffered by my small and medium size business clients, were the same lapses carried out by the world’s largest financial institutions and sophisticated institutional investors, ultimately resulting in the most serious financial crisis faced by this country in the past 75 years.

The Big Short is a film about the financial crisis of 2007-2008 brought on by the build-up of the housing market and credit bubble. The movie chronicles the roles of several characters in relation to the financial crisis and their early prediction of, and subsequent profiteering based upon the collapse of the U.S. housing market. One is unable to watch this film and not take notice of all of the missed opportunities for the antagonist financial institutions, investors, regulators and credit raters to have discovered that the subject mortgage backed securities and their derivatives were actually worthless, thus possibly preventing what was to come:

The fallout from the crisis was devastating, causing 5 trillion dollars in lost real estate value, and retirement and pension value to disappear almost overnight. In addition, 8 million Americans lost their jobs and 6 million lost their homes. These figures do not include the cost to tax payers in bailing out some of the most reckless and negligent financial institutions.

While certainly far less in dollar amount, my client’s losses are no less devastating to the security of their own businesses or their personal financial health. In my work as an attorney litigating investment and financial fraud cases and enforcing the resulting judgments, I too often discover that if my clients would have only used sound due diligence and fact verification protocols in assessing the underlying business opportunity, transaction or investment, they would have completely avoided their subsequent losses, and the incurrence of my attorney fees in seeking recovery, sometimes unsuccessfully, on their behalf.

In direct contrast, I am almost never retained by clients who have used proper diligence and verification procedures to detect potential fraud and transactional risk: Just one real-life success story involved an individual client of mine who commissioned a comprehensive assessment report to determine whether or not a new Nevada real estate partnership in which he was considering an investment was likely to succeed or fail. The assessment report revealed that the individuals behind the partnership had been previously enjoined by the State of Texas from selling similar partnership opportunities; were defendants in no less than six different civil fraud actions; and had filed numerous individual and business bankruptcies. My client, of course, decided not to invest in the partnership. Almost two years later, he sent me an online article detailing that the real estate partnership had failed and that several investors were suing the principals in a (likely fruitless) attempt to recover their losses. One of the principals was ultimately sent to prison for his participation in an unrelated fraud scheme. In short, the assessment report at a cost of less than two thousand dollars helped my client avoid a loss of at least 1.5 million dollars. Moreover, my client was saved from the uncertainty, worry, inconvenience and expense of a long drawn-out civil action.

The “take-away” from the film, and from my personal dealings with my own clients is that preventive steps today will almost certainly be better than reactive steps tomorrow, and that, although, lawyers may try, not all damages can be properly measured in dollars and cents. Hopefully, this country has learned important lessons from the crisis depicted in The Big Short; it is also my hope that my clients and others learn analogous lessons and take advantage of the readily available resources that can be used to assess and prevent risk related to their business and investment dealings.

Paul P. Young
Attorney at Law
Certified Fraud Examiner (ACFE)