Business Week is featuring a brief article suggesting that investors would be well served by doing their own due diligence before trusting their finances to an investment advisor.

This uncontroversal advice goes without saying, I think - that one should seek both anecdotal opinions and conduct a personal review of potential regulatory and legal issues that might be an early warning sign of porential recklessness or illegalities is hardly earth shattering news. However, is should be noted that in no way does this sort of preliminary review replace a proper due diligence investigation.

The savvy or sophisiticated investor certainly does not consider "googling" adequate DD in making an investment decision. Google (or your search engine of choice) is an imprecise tool and, while it might produce some quick hits that may warn one away from a bad egg or risky deal the volume of responses can also hide crucial tidbits amid a sea of search returns. Moreover, there is no guarantee that any relevant details may show up in Google.

As the article rightly points out, one should supplement Google with other resources - litigation databases, indices of regulatory filings and the like. But this is only where a proper investigation begins. For those opportunities that pass this "whiff test" having professionals review the matter for other potential liabilities is essential. A thorough background review of the entities involved comprised informed by database info as well as on-site court searches and first person interviews / references checks is the surest way to avoid horror stories such as the recent HMC debacle.

The article:

Hedge Funds: Do-It-Yourself Due Diligence - A little sleuthing online can turn up information that may signal trouble ahead

January 16, 2006
By Anne Tergesen
BusinessWeek

Hedge funds generally don't make it easy for investors to get information about their inner workings. But the 80-odd investors in the most recent hedge fund to collapse, tiny HMC International Fund of Montvale, N.J., could have saved themselves trouble and money simply by using the Internet to do some due diligence on HMC's managers.

One, Bret Grebow, left a trail of legal problems that include a property lien, an arrest on charges of possessing drug paraphernalia, and failure to repay much of a loan to a former employer.

Grebow and co-manager Robert Massimi now face Securities & Exchange Commission charges of securities fraud and the misappropriation of more than $5.2 million of the $12.9 million invested in HMC. The managers "sent investors false monthly account statements that portrayed their investments as profitable when, in reality, Grebow was systematically looting the Fund's trading account," the SEC alleges in a Dec. 21 complaint filed in the Southern District of New York. Among the items the duo is alleged to have paid for with investor funds are rent and furniture for a Manhattan apartment.

What warning signs were detectable? A search of public databases -- including those maintained by Google (), LexisNexis, and various federal, state, and county courts -- dredged up enough dirt on Grebow to cause alarm. The record includes arrests in 1994 and 1995 in Arizona -- where Grebow attended college, according to HMC's Web site -- on charges of possessing marijuana and drug paraphernalia and damaging property worth less than $100. According to the Pima County Justice Court in Tucson, the drug-related charges were dismissed in July, 1996. Grebow pleaded guilty to a lesser charge -- unlawful acts regarding alcohol -- and was fined $284. According to the court, there is an outstanding warrant for Grebow's arrest on the damage charge because of his failure to complete a drug education course. "It was staggeringly easy to get this information," says Michael Allison, CEO of International Business Research of Princeton, N.J., a company that performs background checks on hedge funds and managers (Personal Business, Nov. 21, 2005).

That's not all. In 2002, Grebow's former employer, defunct New York brokerage Bluestone Capital, won a judgment against him for not repaying a loan of more than $118,000, says Eric Streich, an attorney who represented Bluestone. Grebow has since repaid $3,212, he says. Court records also show an October, 2004 judgment against Grebow for failing to pay his former wife, Jamie Grebow, some $127,000 in support. An attorney who represented Jamie Grebow didn't return calls. Bret Grebow's attorney declined to comment on the SEC charges or his client's past. With hedge fund blowups becoming common, do some sleuthing before you write a check.

The original article appears here.

-- MDT

Labels: background checks, Bret Grebow, database, HMC International, Robert Massimi