My career as a lawyer started out on teams for two major cases: representing TNK-BP in the never-ending wrangle over control of Russian oil fields, and representing Pablo Trujillo, the first defendant extradited from Colombia under a new treaty permitting extradition for financial crimes involving drug cases. In the case against Mr. Trujillo, the prosecutor alleged that he laundered funds on behalf of the Norte del Valle and Sinaloa cartels. I've represented victims, witnesses, and defendants on civil, criminal, and regulatory matters involving investor fraud, embezzlement, RICO claims, stock-options backdating and even, the infamous Enron litigation. I also happen to be an angel investor, and have represented a number of other investors throughout my career.

There’s a lot that investors can unpack from the recent Elizabeth Holmes verdict. As you well know, the new year did not bring the cheer, accolades, public praise, or career advancement that Elizabeth Holmes, Founder & CEO of Theranos, may have hoped for. Theranos, a startup that promised to revolutionize blood testing for patients, providers, and labs, came under fire for fraudulent claims. The jury in her fraud trial found Holmes guilty of one count of conspiracy to commit fraud, and three counts of wire fraud.

The verdict confirms, in part, the prosecution’s case that Elizabeth Holmes actively misled investors, regulators, distributors, and consumers about the efficacy of the blood testing technology. The charges in which she was convicted relate to more than $100 million dollars in lost investor funds. At sentencing, expected to occur in September 2022, the prosecution will have the chance to present evidence of additional wrongdoing related to at least another half billion in lost investor dollars. 

With my past experience, and this present day high profile case, I found myself asking what lessons does this case leave us with when it comes to avoiding fraud and deceit? A lot of people are going to talk about checking SEC filings and checking out finders and brokers. That helps, but there’s a HUGE difference between a smell test and rooting out fraud at this level. Here are the tips you can’t miss if you are going to actively protect yourself from fraud and deceit as an investor.  

  • Your Own Team. It doesn’t matter how many lawyers, financial advisors, and CPAs have looked at a deal. Trust those you know personally. Trust those who you know have your best interest at heart. Until YOUR lawyer, YOUR advisor, and YOUR accountant look at it and give you specific advice, you remain unrepresented. Your people represent your interests. The licensed professionals for other people represent THEIR interests. Plenty of potential investors in this scheme backed out, even when “their friends” had already staked large amounts. Whenever I saw my clients back out in a scenario like this, it’s because they relied upon the advice of their own professionals vs. the trend of what their peers were doing. It’s not easy going against the crowd, especially when it seems like the crowd might be getting a piece of a major payout. But sometimes the sheep that breaks away from the herd is the one to follow.  
  • Your Own Interests. The professionals on your team cannot account for your interests if you don’t specify to them exactly what your interests are. So, be sure you get some clarity before an investment opportunity crosses your table on what your criteria is for moving forward. Make sure your team of professionals understands those criteria and can effectively articulate it back to you, in writing, and in plain language. As an outside general counsel, I emphasize to clients that we need a strategic plan of action before fulfilling work so that we advise against the context of knowing your long and short-term goals, resources, and management styles.   
  • Your Own Strategy. Use your people as strategic gatekeepers. The biological reality of “logical decision-making" is that people often make decisions from an emotional standpoint, and then find the evidence that supports their inclination to invest (or not). Adopt a strategy that counteracts this natural, human approach. Use your team to remove emotion from the equation. Let deals first path through your team for a round of initial vetting.

I know that many times, investors fall into a potential fraud scenario because they want to be closer to the action, more involved, and have less oversight. I get that desire and I understand that appeal. As an angel investor, I’ve gone to bootcamps, served on due diligence teams for angel investor groups, and kept up with my angel investor connections over time. Being close to a deal is fun and exciting. It feels great to be in on the action. Getting to know the founders is personal and natural. Don’t feel like you HAVE to be rigid. Invest what you can afford to lose, comfortably. Understand and accept your true motivations for investing in a particular deal. And, be sure you are not working solely from the standpoint of following a trend.

____

Image credit: 

Elizabeth Holmes, Theranos founder and CEO

Panelists:Elizabeth Holmes Fortune Editor Alan Murray

Photograph by Stuart Isett/Fortune Global Forum