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By Larry Burke
What follows is a frightening story; what makes it truly frightening is that it really happened.
On a recent due diligence background check, the investigating firm was asked to research a man and his company. The client who requested the background check intended to acquire the company and hire the individual. The man was an experienced inventor of automatic weapons technology; his company manufactured automatic weapons components for sale to other companies. These companies, in turn, would integrate the products into their own weapons.
The key assets of the company were the 13 patents that had been filed on the technology, both domestically and internationally, for the components made by the company. The other main asset of the company was the company owner himself, because although the patents described the science behind the technology, they couldn’t describe the art of making the technology work.
The due diligence process began with specially formatted questionnaires: a corporate questionnaire and a key individual questionnaire. Every officer, director and key person in the company received one of the questionnaires.
When the completed questionnaires were returned, a couple of serious problems were noted: the questionnaires were late; those that were completed weren’t done in accordance with instructions and many were incomplete. This is a red flag. Someone who is trying to sell a business for $750,000 but cannot take the time to complete a five-page questionnaire accurately and completely is usually trying to cover up something. Additionally, several claims were made by the selling individual related to the patents, capital equipment of the company and ability and skill of the individual.
An inquiry to the US Patent and Trademark Office revealed that the patents owned by the individual were null and void and were now in the public domain. None of the annual maintenance fees required to keep the patents in force had been paid for many years.
An investigation of the principal revealed that he was a convicted felon, charged with running a contracting/billing scheme in which he overbilled for products and services. (But wait, it gets better.) In fact, for the entire time he was operating the company he was attempting to sell, he had been on a prison work-release program — the result of his government contracting/billing scheme. He had been able to work at the company during the day but had to go back to prison at night and on weekends. Also, as a convicted felon, he could not be anywhere near a firearm — of any sort — whatsoever — let alone own a factory that produced components for firearms. (I told you it gets better).
Investigation revealed further that the man did not even own the company; it was set up in the name of relatives who were acting as his nominees. It seems the Federal Government wanted its money back, and the man had been ordered to pay restitution and damages of almost $400,000. Complying with the order would put a substantial Government dent into the money coming from the sale of his company.
Finally, it appears that he had sold or licensed the patents to several other companies. Two of these companies had recently filed civil racketeering suits against the individual and the owners of the company. When his relatives learned, as a result of this investigation, that they were being sued for civil racketeering because of their entrepreneurial relative, you could hear their screams from coast to coast without a telephone.
Suffice it to say that the client passed on the opportunity to purchase the company. The due diligence investigation occurred near the end of the transaction. The acquisition documents had been drawn up and the accountants had reviewed the books. The books were good. The company’s sales and client base were accurately stated. Everything else was messed up beyond belief.
Approximately $15,000 had been spent on attorney’s fees and accounting fees. The due diligence investigation cost less than $2,000. If the transaction had been completed, the liability incurred by the accountants and the attorneys could have been substantial. The loss to the client could have been fatal to his business.
For their own protection, the company owner’s relatives notified all the appropriate authorities and regulatory agencies upon discovering the real nature of his activities. Three months after the client decided to pass on the opportunity, the Bureau of Alcohol, Tobacco and Firearms closed down the plant and caused the parole granted to the individual to be revoked.
Larry Burke, a PI specializing in Financial Investigations, is the author of many articles on related subjects and a book on financial investigations. He can be reached at (602) 838-1728.
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