Attorney Craig Wolson specializes in derivatives, structured finance/securitization, complex finance, securities (especially securities fraud) and legal malpractice matters.
As a transactional attorney he has been an Associate, Special Counsel or Partner at several of the leading transactional law firms in the United States, including Shearman & Sterling; Mayer, Brown & Platt; and Cadwalader, Wickersham & Taft. As an expert witness and/or consultant, he has worked with many of the preeminent litigation firms, and litigation departments of full-service firms, including Berger Montague; Chapman and Cutler; Kirby McInerney; Labaton Sucharow; Patterson Belknap; Robbins Geller; Scott + Scott; and Williams & Connolly.
With these credentials in mind, we asked him what due diligence precautions consumers and investors can take before they commit themselves to deals that have substantial risks to fail.
Your case studies share a common thread: that a lack of due diligence by clients of banks and investment firms can result in lawsuits.
That’s not quite right. What leads to lawsuits in the securities area is investors losing money on securities they have bought. The actual common thread in cases I have worked on is that the relevant issuer of the securities involved and the principals of the issuer have failed to disclose everything that would be “material” to a reasonable investor and/or have set forth the information in the offering materials in an inaccurate or misleading manner. Often the situation could have been ameliorated had the underwriters or placement agents for the securities taken reasonable steps to make sure that the information in the offering materials was complete, accurate and not misleading.
It is true that, in some cases, investors could have avoided their losses by doing some “due diligence” of their own. However, this is often too time-consuming and expensive a process for an investor to undertake. Moreover, even if an investor had the time and money to do a thorough investigation of the issuer, there is no guarantee that the company would give the investor full access to its books and records and/or would not deliberately mislead the investor.
There is no requirement that an investor do his/her/its own investigation/due diligence of an issuer before buying securities of the company. The issuer and/or the principals of the company and/or the relevant underwriters or placement agents may try to use the fact that the investor did not do this as a defense to minimize their own potential liability. However, I am not aware that this defense has ever succeeded. Nevertheless, it would obviously be helpful for an investor to do his/her/its own investigation of the issuer to the extent that the investor has the time and money to do so.
What can investors do to protect themselves from risks in specialized investments like derivatives, which they often do not understand?
This one is easy. They should go to a professional–an investment banker, an investment advisor, or an attorney–who has a clear understanding of how derivatives and other specialized investments work and the potential risks that the investor may face, to have these things clearly explained to the investor. One should allow ample time to find such professionals inasmuch as only a small percentage of investment bankers, investment advisors and attorneys themselves understand these things.
Warren Buffett–the “Sage of Omaha”–has stated continually over the years that, if he does not understand what a company does, then he won’t invest in it. Similarly, my advice would be that, if an investor does not understand how derivatives and other specialized investments work, and the potential risks that they entail, even after speaking to a professional, the investor should not invest in these things.
How can investors check the reputations of advisors and firms to avoid the type of “Bernie Madoff”-like misrepresentations that each decade seems to feature?
This is difficult to answer. Madoff and people similar to him often have sterling reputations before their misdeeds are caught. Madoff, in particular, was a highly respected businessperson and securities regulator before (and for a long time after) he began engaging in criminal activities. Nevertheless, many of the people who invested money with Madoff realized that he was probably doing something illegal because his returns were just too high year after year to be possible. However, because they were getting such good returns, they decided to close their eyes and not check into what was really going on. My advice would be to keep in mind those old cliches “buyer beware” and “if something seems too good to be true, it probably is”.
In terms of checking reputations of people one doesn’t know, I would suggest the following:
1. “Google” the individual’s name. If he has a criminal record or previously engaged in fraudulent activities, this will probably show up.
2. Check with the securities commission of the state in which you reside and see if there have been any complaints or investigations relating to the individual.
3. Check with the U.S. Securities and Exchange Commission for the same types of things.
4. Check with other securities professionals and see if they are aware of or are willing to check if there have been any negative reports or investigations of the individual.
5. Trust your instincts. If you are suspicious of the individual or feel he can’t be trusted, then stay away from him.
Last, how can consumers check the reputations of law firms to avoid those that have been proven to commit malpractice and possibly been the focus of other credible lawsuits?
This question is relatively easy to answer. I would do any or all of the following:
1. Ask a lawyer you know and trust what he or she knows or can find out about the other law firm.
2. “Google” the name of the law firm and see if it has ever been accused of malpractice or if any actions, by clients or agencies, have ever been brought against it for violations of legal ethics and duties.
3. Check with the Ethics Committee (or committee with similar functions) of the State Bar Association of the state in which you live to find out if any complaints have been filed against the law firm or if any disciplinary actions have been taken against it.
4. Check with the Attorney General of your state to see if any complaints have been filed against the firm or if any legal actions have been taken against it.
5. Make similar investigations in the state where the firm is based (which may not be the state where you live).
6. In a big city like New York, you can also check these kinds of things with the local bar association.
7. If you have any reason to feel suspicious of or have reservations about trusting the firm, don’t use them.
This is part of our continuing series of interviews with experts whose work relates to online reputation management.