The tech world has been rocked in recent weeks by allegations that Nikola, the once-high-flying electric automaker, and its founder, Trevor Milton, engaged in deceptive practices, exaggerated technological capabilities, and even faked a video of a truck driving down a deserted road.
But all those damning claims weren’t uncovered by government prosecutors or investigative journalists. Rather, the story was broken by a small investment research firm that few people outside the investing world had ever heard of: Hindenburg Research. Using techniques mastered by private investigators, the firm was able to spot red flags and potential fraudulent activity missed by Nikola’s giant investors and partners, including GM and Bosch. As a result, its stock has plummeted, Milton stepped down, and the company is now struggling to find partners to build a network of hydrogen fueling stations.
Hindenburg’s work demonstrates the power of in-depth investigation and research in the business world, an approach that uncovers fraudulent activity much more effectively than standard due diligence. In his new book, The Modern Detective: How Corporate Intelligence Is Reshaping the World, author Tyler Maroney describes his journey from Fortune magazine reporter to international private eye, showing how private investigative work has grown in the last decade to become an essential tool for corporations around the world.
Though P.I.s are still viewed by the public as wisecracking gumshoes in fedoras and trench coats who lurk in back alleys and sometimes have to knock some heads, most modern detectives these days help companies get a leg up on the competition. They expose fraud, prevent the theft of trade secrets, unmask hackers, prepare investors for acrimonious negotiations, and expose weaknesses in global supply chains, among other things.
In his book, Maroney, whose firm, Quest Research & Investigations, gained fame from its work uncovering evidence that overturned the conviction of rapper Meek Mill in 2019, takes the reader through a series of cases, from the managing director of an investment firm forging documents to try to cover up embezzlement to the CEO of a body armor manufacturer who orchestrated a $200 million fraud. In fascinating detail—and with a mystery writer’s sense of intrigue—Maroney shows how each of these crimes was uncovered by investigators wielding an array of techniques.
To detail the embezzlement case, for instance, Maroney lists the exact contents of the crush-proof briefcase used by his forensics guy on his late-night visit to the suspect’s office—including white chocolate macadamia nut Clif Bars—along with his complete procedure for imaging the suspect’s hard drive. In a case involving money laundering and bankruptcy fraud, a colleague of Maroney’s was able to track down an elderly couple on the lam in France by interviewing their veterinarian and trading tips with French gendarmes.
Fast Company recently spoke with Maroney about his work, some lessons he’s learned, and why you shouldn’t use your mother to help you steal money from your company.
Fast Company: Why does the Nikola case demonstrate the need for more private investigators in the investing world?
Tyler Maroney: Although we don’t know the full story yet, the Nikola case exemplifies the value of uncovering corporate malfeasance. Whether carried out by short sellers—who routinely hire private investigators to help them expose wrongdoing—journalists, or regulators, fraud detection keeps the flow of capital smooth and enhances transparency.
FC: In general, how is corporate intelligence reshaping the world?
TM: Every chapter [in The Modern Detective] is about how an investigation unmasked some kind of bad behavior, some kind of wrongdoing, some kind of malfeasance. And it’s not always in the service of exposing public corruption, but in some cases, it’s simply part of a pretty routine business transaction—like the due diligence in chapter three really focuses in on kicking the tires of a portfolio company that a private equity firm wants to buy.
FC: In some examples, like the Nikola case or the arms manufacturer, they were exposed by researchers, not traditional private investigators. It sheds light on how so many investors and companies should be doing more intensive due diligence on their executives, who they’re hiring, as well as their investments. You’d think a hedge fund or private equity firm or large public company would be doing this kind of scrutiny, but we keep seeing headlines that prove they’re not. What can private investigators teach us about what investors and companies should be doing to flush out problems before they explode in their faces? I always think of Theranos, where no one was asking basic questions like “Does this really work?”
You’d think a hedge fund or private equity firm or large public company would be doing this kind of scrutiny, but we keep seeing headlines that prove they’re not.”
TM: One of the lessons that we often discuss that came out of the [Bernie] Madoff case and Theranos is that there are a lot of people involved who, to be honest, didn’t necessarily have it in their interest for it to be a fraud. Especially investors who had already committed capital to a promising startup. [Essentially because investors have a lot of money to lose, they don’t always have a motive in the short term to expose fraud at a high-flying company]. Not to say that they were intentionally burying any evidence of wrongdoing. And one of the systemic flaws we see is that due diligence is often done too late in the game, when the flames are leaping out of the windows as opposed to when they smell smoke.
Nikola and the DHB [arms manufacturer] case are both cases where investigative work was done not by private investigators but by stakeholders to uncover information about publicly traded companies. And those are particularly interesting to look at because you have not only investors whose interests are benefited by doing due diligence and investigations to uncover fraud, but you have so many others—you have the media, you have employees, you have labor unions, so many stakeholders who could ultimately benefit from knowing if there is fraudulent behavior within. In the DHB case, what UNITE [the union whose investigator exposed its CEO’s fraud] did was to uncover the kind of fraud that one would hope regulators would uncover. Because a regulator is designed, or should be designed, for that very purpose.
FC: What are the two or three key things that businesses and investors should do when they’re dealing with a big risky investment or a big corporate decision like a potential merger before they even take that first step?
TM: I think basic intelligence is important, and basic due diligence takes many forms—because you are, in some cases, acquiring a company and, in other cases, investing money and sometimes borrowing money. So your relationship to the people on the other side of the table varies. But I think it’s crucial for us all to know who we’re going to be doing business with, and even though it involves the commitment of some capital to hire private detectives, that investment of capital could save you tens of millions of dollars if not more down the line because it might persuade you to not invest in a company that seems so appealing on its face.
And I think it should be tailored to not be due diligence that is off the shelf, because that’s where many companies get in trouble—like simply looking to find out if the chief financial officer has gone bankrupt before or if the chairman of the board is a felon.
But there are many other things that would be more valuable to know. For instance, [Theranos founder] Elizabeth Holmes was not a felon, she didn’t have DWIs, she didn’t have debt, she didn’t have the kind of conflict of interests that established executives have. So all the things that normally go into a check-the-box exercise were absent from a case like that, which is why the investigation took on a whole different level, because it involved unmasking her as somebody who is orchestrating this massive fraud over the course of years and years and years by essentially compiling lies to the point of persuading even her own employees and luring away the most powerful people in the tech industry.
Due diligence is often done too late in the game, when the flames are leaping out of the windows as opposed to when they smell smoke.”
Tyler Maroney, author, ‘The Modern Detective’
The other problem is that the compliance programs are often designed to help investors, particularly big investment banks, avoid getting in bed with shady characters. But those compliance programs are often a check-the-box exercise as opposed to more comprehensive organic investigations along the lines of those that uncover substantial frauds.
FC: In a way, it reminds me of how politicians often do oppo research on themselves, that it makes sense to hire someone to take a skeptical approach and do in-depth research and see what turns up.
TM: There actually is a product in my industry called “self due diligence,” which is essentially you’re turning the spotlight on yourself and hiring a third party like a private detective to do exactly this kind of digging because they want to anticipate what kind of information might be discovered, not just in the course of a routine due diligence but in advance of being involved in some kind of legal action.
FC: Without giving away your secrets, are there any things to look out for in earnings reports and 10-Ks that are sort of red flags?
TM: Yes, one particular section of SEC filings that we love to look at is the related-party transactions section, in which companies are required to disclose when they have links to relatives of officers that might be considered inappropriate and improper. Companies that have a lot of those are often worth looking at because it might suggest a willingness to push the envelope a little bit when it comes to what would otherwise be considered inappropriate relationships. And what’s fascinating about that is that whether you’re a private detective or an investigative journalist or a labor researcher or an NGO, when you’re looking at a public company’s related-party transactions, the disclosures of those are fascinating because if you can find others that were not disclosed, then you have a serious angle in terms of investigating further.
FC: How would you find those if they’re not disclosed?
TM: The typical way of approaching that is to build a comprehensive profile of the subject. Let’s say you’re looking at the CEO of a publicly traded company and you find out that she has five other companies that are linked to her somehow, and all five of them are in the business of marketing and public relations. And one of those companies has been disclosed as having a relationship with her publicly traded company but there are two others where the relationship has not been disclosed. Creating that dossier on somebody else . . . is crucial at the beginning. In that case, you’re not necessarily looking for wrongdoing, but you’re looking for a pressure point. You’re looking for angles, you’re looking for crumbs that you can follow that might lead to some kind of inappropriate behavior.
At DHB, the founder David Brooks had basically set up companies that were run by family members—his mother and his brother were named in companies that had relationships with DHB. And that’s pretty sloppy, right?