Copyright 2009 John A. Franczyk, Esq. All Rights Reserved.
Any mention of “financial fraud” will likely conjure images of Bernard Madoff or any number of other big-ticket fraudulent schemes that have been exposed over the past several years. Financial fraud is more rampant and insidious on a much smaller scale, however, and frequently, closely-held businesses are the targets and victims of that fraud. Not too long ago, one of our clients came very close to losing several million dollars in a transaction which, initially, looked perfectly legitimate. The client’s instincts, however, caused it to dig deeper into the bona fides of the transaction, which subsequently exposed a broad but ultimately superficial scheme that had been created to defraud the client of its funds. This article describes the nature of that fraud and the client’s and our joint efforts which exposed it.
The client is a lending institution which originates loans that are collateralized by publicly-traded securities. During the term of these loans, the client holds the securities in its own name with an account that it has established with its own brokerage firm. Once the terms and conditions of the loan are agreed upon, the loan transaction typically closes on a “delivery versus payment” (“DVP”) basis, in which the securities are transferred into our client’s account at the same time as the loan funds are transferred into the borrower’s account.
A prospective borrower came to the client seeking a multi-million dollar loan that was to be secured by a basket of blue-chip stocks, which were then held in an eTrade account. The borrower presented several months’ worth of eTrade account statements showing the existence and value of that stock and gave our client personal references and the name of his eTrade account representative. His only unusual request was that the transaction be closed through an escrow account that would be managed by his attorney at a prominent, nationally-known law firm. The borrower gave our client the attorney’s name and contact information, as well as a copy of correspondence from the attorney on the law firm’s letterhead and a copy of the escrow agreement that the attorney had purportedly drafted.
The escrow arrangement conflicted with our client’s internal underwriting requirements, which ratcheted the transaction into a more rigorous underwriting environment. The transaction would clear this rigorous environment only if the escrow agreement could be modified to meet certain standards. Our client asked us to assist with the negotiation of those modifications while the client completed the remainder of its underwriting. We first contacted the borrower’s attorney through the contact information which the borrower had provided. We later researched the nationally-known firm of which this attorney was a member and attempted to contact him through the law firm’s switchboard. The attorney that we then contacted, however, had no knowledge of this transaction nor of the borrower. The transaction and the underlying scheme began to unravel shortly after this latter contact was made.
Upon closer examination, we discovered that the law firm stationery we had seen included a correct building address, but a different suite number for the borrower’s attorney. Further, the attorney’s email address that we had been given included a slightly different domain name extension than the extension used by all of the other email addresses listed on the law firm’s website. Simultaneously, our client compared the borrower’s eTrade account statements with other eTrade statements in its possession and determined that the account number listed on the borrower’s statements was one digit longer than other eTrade statement numbers. We ultimately conducted a “WHOIS” domain name search on the domain extensions for both the borrower and his attorney, and discovered that the domain names for all of the email accounts we had been given were registered and owned by the same party.
It quickly became apparent that this prospective borrower had prepared forged eTrade statements and law firm stationery, had enlisted one or two accomplices to play the role of attorneys and account representatives, and had concocted a thatch of websites, all of which had a gloss of legitimacy yet none of which withstood a closer inspection. The client then referred the matter to the US Attorney’s Office, and the prospective borrower has since been indicted.
Our client in this transaction was fortunate to have enacted strict internal procedures which precluded it from being a victim. Statistics in this area are hard to come by, as many firms which have been victims of fraud either do not report the fraud or are not able to grab the attention of a prosecutor who is then willing to pursue the perpetrator. The individuals who enact these schemes will generally be long gone before the fraud is uncovered, and the victims will have little recourse as a result.
The best course of action for any company is therefore to impose internal procedures that are designed to catch the fraud before it affects the company. The second part of this article, which will be published shortly, includes a series of suggestions for internal controls that are designed to prevent fraud. Fraudulent schemes remain rampant throughout the world of closely-held businesses. Time- and cash-strapped business owners may well groan over the prospect of the additional work required to implement these procedures, but in light of the alternative, that additional work may well be the best investment of time and cash that the business owner has ever spent.
Showing posts with label Business Plans. Show all posts
Showing posts with label Business Plans. Show all posts
Tuesday, July 28, 2009
Monday, June 1, 2009
The Perfect Pitch: A Strategy for Investment Seekers
Perfect Pitch™ ©2009 David M. Adler, All Rights Reserved
A Strategy For Concise And Effective Communication Of The Idea Behind Your Business And Why You Merit Investment
I have spent the last 11 years of my law practice advising entrepreneurs and businesses in varying stages of development. At some point, all growing businesses will need an infusion of capital. Sometimes this comes from “friends, family and fools.” Just as often it comes from professional investors such as Angels or Venture Capitalists. If you or your business needs additional capital to get to the “next level” whether that be development of a “proof of concept,” execution of the go-to-market strategy or strategic investment in new people or technology, you will need to convince the investor that your idea or business is relevant to the target market, achievable by the people and intellectual capital behind it, and likely to result in a substantial increase in value.
It has been my experience that many entrepreneurs or CEO pitch-men lose sight of the forest for the tress. All too often, the “pitch” or presentation only focuses on one thing. Usually, it focuses too heavily on the idea or the market and not enough on the people and strategy. On the other hand successful presentations seem to incorporate three basic, yet distinct concepts, what I call the tri-partite “Perfect Pitch.” In a nutshell the Perfect Pitch answers three questions: Who Am I? What Am I? Why Am I?
Who Am I?
Answering this question tells investors about the people behind the idea. Every presentation should begin with a short, pithy and relevant description of the people and company, their history together and their qualifications for successfully commercializing this idea. For example: “John Doe, Jane Smith and Mary Jones each graduated in 2006 with a MBA from the Whoopity School Of Business. John has 5 years experience managing operations for a national retail chain. Jane has a 4 years experience as an assistant human resources manager for a Fortune 500 Company. Mary operated a small consulting business for 3 years before shutting down operations to pursue her MBA. Last year, they formed National Widget Sales Consultants (NWSC) as a Delaware LLC to capitalize on the emerging/growing/widening need for retailers to leverage the growing list of retail sales technologies.”
What Am I?
Answering this question tells the investor about the specific product or service offered and the revenue model. Put another way, answering this question tells investors what you do, how you do it and how you plan to make money. It never ceases to amaze me how many entrepreneurs forget the making-money part. They simply assume that advisors, investors and strategic partners will intuitively “get it.”
We won’t unless you tell us in plain and simple terms. If it is a product, does it stand alone or will it be incorporated into an end-product? Will it be sold wholesale, at retail, through VARs, through an inside sales team, or through an outside sales team, e.g. commissioned sales reps? How will the product be distributed? Will you have your own distribution? Will you piggy-back on another’s? Will you use a traditional courier, e.g., UPS or FedEx?
If it is a service, how will you market it? How will customers acquire it? Will it be licensed? How do you plan to keep customers coming back?
Continuing our previous example, “NWSC has created a proprietary and highly-customizable system that will be marketed and sold by an inside sales force. We will place consultants within our clients’ businesses to dissect their retail operations, identify operational and sales goals and evaluate which of the many technologies in the marketplace are the best fit for achieving those goals. NWSC generates revenue through consulting fees, commissions on technology sales and licensing the system to third-party business consultants.”
This is also the part of the presentation where you want to highlight the existence and commercial viability of any Intellectual Property including, Patents, Trademarks, Copyrighted content and Trade Secrets as well as proprietary technology or systems and methods.
Why Am I?
Now that you have convinced us that you are qualified to run this business and that you know how it will make money, you need to convince us how or why your idea meets existing or potential needs in the marketplace. Another common mistake I see is a focus on market size, penetration and growth. Yes, it’s true that VCs want to see Billion Dollar markets. But, more importantly, they want to know why your idea is going to penetrate that market and capture sales.
For example, is the market fragmented with no dominant provider? Are there segments of the market that are underserved by existing products/services? Put another way, what is your value proposition? Why will customers choose your product or service over their existing, entrenched ways of doing business? Again, don’t assume your audience will instinctively understand this. The more sophisticated the product or service, the more you will have to flesh out this value proposition.
The Bottom Line.
While following the method outlined above is not guaranteed to land you that round of financing that you are after, it will no doubt help. Paying attention to answering these three simple questions will help keep you focused, keep you on message and provide a framework for answering the types of questions that your advisors, investors and strategic partners will be asking themselves. Good Luck!
A Strategy For Concise And Effective Communication Of The Idea Behind Your Business And Why You Merit Investment
I have spent the last 11 years of my law practice advising entrepreneurs and businesses in varying stages of development. At some point, all growing businesses will need an infusion of capital. Sometimes this comes from “friends, family and fools.” Just as often it comes from professional investors such as Angels or Venture Capitalists. If you or your business needs additional capital to get to the “next level” whether that be development of a “proof of concept,” execution of the go-to-market strategy or strategic investment in new people or technology, you will need to convince the investor that your idea or business is relevant to the target market, achievable by the people and intellectual capital behind it, and likely to result in a substantial increase in value.
It has been my experience that many entrepreneurs or CEO pitch-men lose sight of the forest for the tress. All too often, the “pitch” or presentation only focuses on one thing. Usually, it focuses too heavily on the idea or the market and not enough on the people and strategy. On the other hand successful presentations seem to incorporate three basic, yet distinct concepts, what I call the tri-partite “Perfect Pitch.” In a nutshell the Perfect Pitch answers three questions: Who Am I? What Am I? Why Am I?
Who Am I?
Answering this question tells investors about the people behind the idea. Every presentation should begin with a short, pithy and relevant description of the people and company, their history together and their qualifications for successfully commercializing this idea. For example: “John Doe, Jane Smith and Mary Jones each graduated in 2006 with a MBA from the Whoopity School Of Business. John has 5 years experience managing operations for a national retail chain. Jane has a 4 years experience as an assistant human resources manager for a Fortune 500 Company. Mary operated a small consulting business for 3 years before shutting down operations to pursue her MBA. Last year, they formed National Widget Sales Consultants (NWSC) as a Delaware LLC to capitalize on the emerging/growing/widening need for retailers to leverage the growing list of retail sales technologies.”
What Am I?
Answering this question tells the investor about the specific product or service offered and the revenue model. Put another way, answering this question tells investors what you do, how you do it and how you plan to make money. It never ceases to amaze me how many entrepreneurs forget the making-money part. They simply assume that advisors, investors and strategic partners will intuitively “get it.”
We won’t unless you tell us in plain and simple terms. If it is a product, does it stand alone or will it be incorporated into an end-product? Will it be sold wholesale, at retail, through VARs, through an inside sales team, or through an outside sales team, e.g. commissioned sales reps? How will the product be distributed? Will you have your own distribution? Will you piggy-back on another’s? Will you use a traditional courier, e.g., UPS or FedEx?
If it is a service, how will you market it? How will customers acquire it? Will it be licensed? How do you plan to keep customers coming back?
Continuing our previous example, “NWSC has created a proprietary and highly-customizable system that will be marketed and sold by an inside sales force. We will place consultants within our clients’ businesses to dissect their retail operations, identify operational and sales goals and evaluate which of the many technologies in the marketplace are the best fit for achieving those goals. NWSC generates revenue through consulting fees, commissions on technology sales and licensing the system to third-party business consultants.”
This is also the part of the presentation where you want to highlight the existence and commercial viability of any Intellectual Property including, Patents, Trademarks, Copyrighted content and Trade Secrets as well as proprietary technology or systems and methods.
Why Am I?
Now that you have convinced us that you are qualified to run this business and that you know how it will make money, you need to convince us how or why your idea meets existing or potential needs in the marketplace. Another common mistake I see is a focus on market size, penetration and growth. Yes, it’s true that VCs want to see Billion Dollar markets. But, more importantly, they want to know why your idea is going to penetrate that market and capture sales.
For example, is the market fragmented with no dominant provider? Are there segments of the market that are underserved by existing products/services? Put another way, what is your value proposition? Why will customers choose your product or service over their existing, entrenched ways of doing business? Again, don’t assume your audience will instinctively understand this. The more sophisticated the product or service, the more you will have to flesh out this value proposition.
The Bottom Line.
While following the method outlined above is not guaranteed to land you that round of financing that you are after, it will no doubt help. Paying attention to answering these three simple questions will help keep you focused, keep you on message and provide a framework for answering the types of questions that your advisors, investors and strategic partners will be asking themselves. Good Luck!
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