tomorrow night, Oct. 27th – NextGen Leaders Dinner at McCormick & Schmick’s in Fanueil Hall – http://nextgenleaders3.eventbrite.com

10 REASONS TO START A COMPANY IN AN ECONOMIC DOWNTOWN – http://jonahlupton.me/rGFtQQ #innovation #startups #entrepreneurs

Apple’s market cap equals $8.2 million per employee – anyone think of a company with a better ratio (Google = $6.3 million per employee)

Reports that Qaddafi was worth over $200 billion (I wonder who did his estate planning) – http://jonahlupton.me/q8m7CE

I wrote one of my best evergreen articles on using LinkedIn eight months ago–when I shared 10 tips to use the networking site professionally.

Recollecting last night’s social media workshop led by Tyson Goodridge when more time was spent talking about Facebook and Twitter than LinkedIn, I think it’s worthwhile to expand upon the 10 tips and offer 12 ways how you should use LinkedIn today.

• If you have a LinkedIn profile, please keep it updated. If you want to know why, ask your friend to open his or her web browser and search your name. Chances are, unless you are omnipresent everywhere online or your name is very common like John Smith (not that I’ve ever met anyone with that name), your LinkedIn profile will appear in the top 5 search engine results. That’s why it should be updated.
• Fill your profile with colorful language, not drab resume-speak. There is a reason why the site is called LinkedIn, not ResumePlace. Verify the headline either is a mirror of your job title or a description of what you do. Change your headline as often as you’d like; mine currently states, Online media strategist and community manager for business and government, and Newburyport City Council candidate. Flesh out the summary and don’t be afraid it’s too long. Most summaries I see are too short. Which leads me to…
• Write in first person, not third. Unless you introduce yourself in third person at job interviews, cocktail hours, and networking mixers, keep your page about you in your words. Be transparent to who you are, not a third-person essay of what you’d like people to think you are.
• Upload the same photo you use elsewhere online. Ensure the picture is what you look like today, or within the past few months. Don’t use a picture that’s more than a year old. Again, think of the cocktail hour; unless you wear a mask to the event, show me who you are and what you look like.
• Join a group. Prove to me that you can connect to random people who share your beliefs. The more groups you join, the better. But don’t overdo it. You can also choose, when joining groups, whether they appear on your public page or not. If you look at my page, I am displaying a fraction of the groups in which I belong. Don’t display irrelevant groups to the rest of your profile.
• Ask and answer questions. Social media is about a dialogue; and the more questions you ask, the more frequently your connections will see the questions you ask in their streams. The more questions you answer, the more likely your answer will be marked “the best” and appear next to your name for future questions and answers. There are dozens of topics you can participate in, so go crazy. I was selected for having the best answers in selected questions on blogging, organizational development, and using LinkedIn.

A recent answer of mine on LinkedIn

• Don’t accept every connection request. This is a controversial topic, as some people prefer to use LinkedIn like a typical job recruiter and be connected to anyone and everyone; I am in the other camp. If we’ve met in person or communicated enough times online–if you’re someone I trust and respect and wouldn’t hesitate to recommend to someone who asks for a referral, then I’ll connect with you. But if I don’t know who you are, I’ll archive your request, nicely reply no thanks, and ask you to connect with me elsewhere as a precursor. The caveat is if you’re seeking to hire me and indicate that in your introductory message, I’ll say yes.
• Don’t mirror your LinkedIn network with other social networks. Just because we’re friends on Facebook or mutually connected on Twitter doesn’t necessarily imply I will connect with you on LinkedIn. Point is, you can always decline. (Try not to click the “I Don’t Know” button which has negative consequences; just archive the request.)
• Recommend your connections. Whether someone is a friend, a colleague, a co-worker, a teacher or student, or any other connection to you, recommend the person. Some suggest you should recommend a new person every day, a strategy I sometimes commit for a few days and then forget to continue. You don’t have to work with someone to recommend him or her. I’ve recommended (and been recommended by) people whose blogs I respect, for instance. Just don’t add two sentences; make your recommendation prolific.
• Ask your connections to recommend you. Sometimes, people will recommend you if you recommend them first. Other times, they won’t. Either way, if you don’t ask, you’ll never know.
• Add applications to your profile. If you have a blog, there are applications to add recent posts. If you travel a lot and like to share where you go, or attend networking events, there are applications you may want to add to your profile. If like me, you have a Slideshare account for your presentations, link that.

Most importantly, be a person, not a robot. If you’re not connected to someone on LinkedIn and would like to be connected, don’t accept the default invitation text that would arrive in my inbox like this:

Dear Ari,

I’d like to add you to my professional network on LinkedIn.

-John

Tell me why you want to connect with me, for your assumption may be different than mine. Again, think of the cocktail party. If you give the same business card to every person with the same line, “Call me,” then please send the default invitation. But if you give the business card to people and personalize the action, why not echo that on LinkedIn?

Bernard Madoff scammed an estimated $50 billion from his investors over a 20-year period. Why was nobody watching? There are countless ways to perform due diligence, but many methods miss the mark. While it’s easy to blame the Securities and Exchange Commission (SEC) for missing the signs and accusations, there is a long line of interested parties who also failed to clue in to Madoff’s scam.

One lesson to be learned by this event is that due diligence means more than just dropping by for a visit or relying on the opinions of others. It’s a methodology that encompasses all aspects of an investment management organization, including investment policy, trading patterns and verification of investment returns. While there is no official handbook or checklist, a skilled due diligence team has the experience and know-how to complete the process. (For more, read the Investment Scams Tutorial.)

Hedge Funds and Fraud
While its easy for the hedge fund community to defend itself by pointing the finger back at corporate America’s debacles like Enron and WorldCom, the temptation and accessibility to perpetrate fraud from a hedge fund requires much less coordination. Enron and WorldCom required collaboration from multiple areas in the company and implicated the accounting firms and banks that participated in the success of the company.

The passage of the Sarbanes-Oxley Act of 2002 was designed in part to eliminate that risk of collusion within large organizations and force management to take personal responsibility for the financial statements and opinions. While there is no guarantee this large cases of corporate fraud won’t happen again, there are now stronger laws in place to prevent it.

Proper due diligence works well when all of the information is readily available with regulated investment companies. In the case of hedge funds, the rules are quite different. The private offering status of hedge funds excludes them from both SEC registration and frequent reporting. While their reporting requirements are loosely defined, their obligations as a fiduciaries are the same as for everyone else in the investment management business.

Hedge funds’ lack of reporting requirements has left many opportunities for abuse and scams like Madoff’s. With no formal requirement for hedge funds to file audited financials, investors have to perform their own research or rely on third parties like feeder funds to perform the duties. In the Madoff case, it appears that everyone was looking the other way. Madoff had used a small accounting firm, which may have assisted Madoff in cooking the books; Madoff was able to fake the rest himself. (To learn more, see Taking A Look Behind Hedge Funds.)

The SEC’s Fumble in the Madoff Case
It’s obvious now why investors missed the signs of the Madoff scam: they were relying on third-party opinions about the investment in the Madoff funds. The third parties participated in the profits with commissions and finders fees. Madoff himself was well-respected in the community and his returns, while seemingly impossible to duplicate, were better than most funds and offered diversification against major asset classes. The opinions and support of the third parties provided a level of security for investors, because these third parties claimed to be conducting frequent due diligence.

As for the SEC, it made a number of visits to the Madoff offices, conducted some forms of their profiled evaluations and even investigated reports or misconduct. Unfortunately, they just did not dig deep enough. Instead, they made assumptions and took Madoff’s word on many occasions. They failed to evaluate even the most basic custodial statements which would have easily exposed the fund’s actual value. Even a random sampling of trading history would have at minimum raised some red flags. Unfortunately, the only upside of a major scam is to draw attention to lax standards and hopefully force investors to be more proactive in the future. While it’s easy to blame the SEC, you can only imagine the arduous task of reviewing and tracking such a large volume of companies with such limited resources. (For more, see our slideshow on Biggest Stock Scams.)

The Origins of Due Diligence
The term “due diligence” is used in many ways and has vague interpretations for many. Due diligence in its basic form is based on a certain standard of care or level of prudence. It can involve the evaluation of a person, a group or a specific act or set of events. It is considered an open format for the party or parties under evaluation, meaning that any segment of the business is open season for review and unfettered access must be granted. Businesses themselves conduct frequent internal evaluations as part of the normal operating procedure usually called internal audit or internal operating business review.

The origins of due diligence in the investment field can be found in the Securities Act of 1933, which used the term due diligence in its description of how a broker dealer would evaluate a security offered to an investor. This early groundwork provides a standard against which the modern business practice of review in the investment and investment banking industry has evolved.

Levels of Investment Research
Whether they realize it or not, individual investors perform their own version of due diligence when they read a prospectus before investing in a mutual fund. While this form is quite after the fact, it relies heavily on the many hands that participated in the process along the way. That’s one of the reasons a broker-dealer is required to provide a prospectus to investors before selling an investment to a client. (For more insight, see Don’t Forget To Read The Prospectus!)

Broker-dealers themselves perform a form of due diligence on the individual investors who buy in to their funds by evaluating their tolerance for risk and investment time horizon. This process shows that there are a number of due diligence processes occurring at the same time. With its various potential outcomes, it’s easy to assume that due diligence is a somewhat casual engagement, but in fact it its not. While there are various formats for due diligence, the evaluation of investment management firms, including hedge funds, follow a commonly accepted general plan and are much more formal.

4 Madoff-Proofing Portfolio Requirements
A robust due diligence plan includes a very comprehensive evaluation of the complete operation of a hedge fund, from the stated investment policy to the audited financial statements. These items would be considered a minimum requirement:

1. A Strategy
   A defined, written investment strategy must be determined. This is usually termed an “investment policy statement” or “investment management agreement” when written for specific clients

2. Historical Returns
   Your portfolio’s historical returns, preferably in the format accepted by the Global Investment Performance Standards (GIPS), should be determined. GIPS is very comprehensive as it includes an accurate representation of a client’s historical performance in both relative and absolute returns. The fact that a firm has adopted the standard also suggests its commitment to honest reporting and accountability because doing otherwise would put its credentials are on the line. While there is no guarantee that the performance is 100% accurate, at least there is some transparency for the evaluation party to locate potential gaps.

3. Audited Financial Statements
   Audited financial statements are required if the fund is registered and regulated by the SEC. Federal laws require companies that register and are regulated by the SEC to submit complete, accurate and truthful statements, which are prepared according to Generally Accepted Accounting Principles (GAAP). It is also important to know who the independent auditor is and to do some research on it as they as well, as its opinions will provide a significant weight in the overall evaluation of the due diligence.

4. Current Prospectus
   A current prospectus - or the equivalent of one in the form of an ADV – and a complete outline of the assets under management, risks taken, investment professionals’ biographies and actual copies of investment statements, preferably from a reputable custodian, are must-haves in the due diligence process. These documents should containing details regarding the valuations of investments, particularly those investment that are not actively traded with current market values. (For more on due diligence, see Due Diligence In 10 Easy Steps.)

The Bottom Line
In its purest form, due diligence does work. A methodical, complex review of all aspects of an investment management firm can provide a clear and concise summary of its merits. Hedge funds, on the other hand, require a more robust process of due diligence because they are not subject to the same reporting requirements as registered firms. The SEC has proved to be very effective in its pursuit of investigations, but missed opportunities to close in on the scam taking place right under their noses in the Madoff case. You can be assured that the SEC will be on the lookout for more Bernie Madoffs and will most likely be more proactive in the future. (For more on this topic, see our related article Hedge Fund Due Diligence.)

by Michael Schmidt (Contact Author | Biography)

Michael Schmidt, CFA earned an MBA from Loyola University of Chicago and is a Chartered Financial Analyst. Mr. Schmidt contributes to the CFA Institute as part of the Educational Advisory Board helping shape future CFA exams and has been part of the annual grading team since 2001. He has spent 20 years working for management and consulting fields, such as William M. Mercer, INDATA and Coastal Asset Management. His roles there included asset allocation and integration of pension investment assets. As an analyst at Mellon Bank, Northern Trust and Evergreen, he provided buy side research while publishing reports on various buy side sites like Dutton, Investrend and InvestSource. He has also managed investment portfolios for the institutional and the ultra high-net-worth arena with specialties in value and quantitative equity styles and multiple fixed income strategies. Mr. Schmidt is currently working for the NASD (now FINRA) Dispute Resolution Board as an arbitrator, chairperson and professional mediator. He has also testified as an expert witness for claimants/plaintiffs and respondents/defendants. Mr. Schmidt also consults to the website Invest Safe as an expert witness. You can contact Mr. Schmidt through this page or locate his consulting services on www.liveperson.com