Share |

Rudy Giuliani: taking due diligence to the next level

Rudy Giuliani admits he is growing tired of being asked whether he intends to run for governor or president. The former mayor of New York, feted as the man who led the Big Apple out of its darkest day in September 2001, is constantly being touted to return to the political big stage.

However, the 65-year-old says with midterm elections in the US a year away, he has a very different focus at present – helping ultra high net worth families to protect their wealth in the post-economic crisis world.

In September this year Giuliani Security & Safety, the security, investigative and crisis management consulting firm he founded in 2005, launched an exclusive joint venture with New York-based Nine Thirty Capital, an investment firm that manages assets for a select group of wealthy families, to protect the latter's clients from potential manager fraud.

In a nutshell, while Nine Thirty Capital will manage the investment portfolios, selecting bespoke funds and managers for each family, Giuliani and his team will provide investigative due diligence on those same funds and managers to ensure they are who they say they are and are able do what they promise to do. This combination of portfolio and investigative due diligence is unique to the market and will, its founders hope, engender a sea change in the wealth management industry.

While Giuliani Security & Safety has focused on due diligence as a core part of its offering to corporations, individuals and governments since its inception, the smoking gun for this new venture was the financial crisis and the scams, defined by Madoff, that were unearthed in all their gruesome detail.

"I was surprised that Madoff and the other scams occurred," Rudy Giuliani exclusively tells Campden FO. "They are dramatic illustrations of the fact that while people may have trusted that a certain kind of due diligence was being done, it actually wasn't. What my colleagues and I have looked at over the past 12 months are the lessons that can be learned from these scams so that people can have more confidence when investing their money."

Such discussions led Guiliani to Stuart J Rabin at Nine Thirty Capital. Originally co-founded by Rabin in 1997 as an investment platform for two prominent New York families, Nine Thirty Capital is today a fully independent investment management business that designs customised portfolios for a range of select clients, including family offices.

Within the framework of the joint venture, Nine Thirty Capital carries out "traditional" portfolio due diligence when it tailors the best type of investments for their clients. GSS will then focus on investigative due diligence of the selected funds, which is split into three distinct parts: background, operational and ongoing due diligence.

On the background side, GSS will look into the fund to determine who the people are who are running it, what their backgrounds are, what experience they have, whether they have any criminal background and whether they have any debt problems. Crucially, however, it is not simply what Giuliani calls "a computer check".

"We'll actually do the leg work – in essence using the same procedures you would use to investigate a crime," explains GSS's chairman and CEO Pasquale D'Amuro, who has plenty of experience in the field – as a 26-year veteran of the FBI, he was chosen to lead the Bureau's investigation into the 9/11 terrorist attacks.

"For example, we've designed a questionnaire (to be filled out by funds) similar to that used by the federal government's employment service and we will hold the information that's provided on a confidential basis," continues D'Amuro.

GSS is able to claim to be a world leader in the field of investigative due diligence thanks to the experience and enviable contacts that Giuliani and D'Amuro have built up. While the former mayor is best known for his handling of the 9/11 aftermath, it is easy to forget that in 1981, President Reagan appointed him to be US Associate Attorney General, the Department of Justice's third highest position. Two years later, he became US Attorney for the Southern District of New York where he earned a reputation for his efforts to eradicate organised and white-collar crime and government corruption.

A key component of the process is what is done with the background information GSS collects. Giuliani claims he sticks by Reagan's maxim of trust, but verify: "We don't just take people's word for it. We go out and conduct investigative action to make sure what we are being told is true. If someone says they have a degree from Wharton, we'll go and make sure they do."

Operational due diligence is the assessment of the controls and procedures of a fund as well as counter-party and other relationships, to ensure that all relevant items are well understood. Again, using the trust but verify maxim, GSS will utilise stringent on-site compliance visits, testing, and independent verification.

"If you had performed the background/reputational test on Madoff, it is likely that the results would have been pretty positive," says Giuliani, quoting the report on the US Securities and Exchange Commission investigation. "What the SEC didn't do was to verify and validate what they were told. I'm sure the operational due diligence that we are putting forward would have uncovered his flaws."

Principally, the operational side will employ criminal investigators to look at whether stock is actually being traded, whether the accounting firm being used is legitimate, whether the results make sense and whether there are any anomalies.

However, for those thinking that this sounds rather similar to your average audit, Giuliani has a clear message: "We're going to ask to see an audit for sure, but then we're going to interview the auditor, we're going to ask who the prime brokers and custodians are and we're going to get direct access to the counterparties involved in the funds."

The third and final strand of the joint venture is ongoing due diligence, which is self explanatory but critically important according to D'Amuro: "You have to go back and check on the funds periodically to ensure that things are the same as they were when you first visited. Perhaps they have hired and fired some managers or they have not stuck to the procedures you originally agreed upon."

While Rabin will work closely with families to provide access to investment managers and a customised portfolio, D'Amuro will run the day-to-day operations of GSS's investigative teams and Giuliani will oversee the whole process, reviewing the direction and strategy of his firm's participation.

The number of people detailed to undertake the due diligence process will depend on the size of the fund, where it's located and how complicated it is, but Rabin says they have the process and capability to accommodate both the smallest and the largest funds.

From a philosophical standpoint, D'Amuro says they want to see a separation of functions where there is a prime broker, a custodian and an administrator. What they do not want to see is funds where everything is done in-house with one person making all the important decisions.

Due diligence is clearly one of the hot topics in the wealth management industry, but as families and family offices work their way through improving their chances of mitigating their exposure to fraud, can they replicate what Nine Thirty Capital and GSS are doing themselves?

"Given the world-class people we have involved in this joint venture – both on the portfolio management side and on the investigative due diligence side – I think it would be incredibly difficult for any family office to replicate what we are proposing," says Rabin.

Giuliani is in agreement as he says it's not simply a question of resources, it's the expertise, contacts, experience and repeated focus on this niche sector that he and his colleagues can bring. It's also about having a nose for crime.

"The people we have doing this have investigated some of the biggest financial fraud cases in history. They have long histories with the FBI's white collar crime and financial fraud divisions and so we're looking at this through the eyes of experienced criminal investigators," confirms D'Amuro. "Unless you are very unusual, you are not going to have access to these types of people."

Just as pertinent, according to Rabin, is what family offices have done historically in this field: "It's really been below par as many families are not well suited to investing their own portfolios. It is not their core competency and the reason why the money management industry exists in the first place. It is also why we have decided to bring GSS into the wealth management sphere as I think they will add enormous value."

Clearly, this partnership believes that families need to be doing more to protect their wealth as, fundamentally, there is an acknowledgment that criminals are not going to disappear now that Madoff is behind bars. "I don't think anyone really knows how at risk family wealth really is," says Giuliani. "However, there is a certainty in my view that, as the current crisis recedes and all the family money that is sitting on the sidelines begins to flow back into the financial sector, new scams and people will emerge to defraud wealthy investors."

This is a scary if perhaps inevitable consequence of the human psyche and its relationship with money. But if people won't change, are there not measures that the much maligned regulators and national governments can do to help?

"Government is not the answer," says Giuliani emphatically. "And a lot of regulation misses the point - remember that the banks and funds that got into trouble were heavily regulated. Simply increasing regulation won't change things – the real art of regulation is making it relevant and disciplined."

Ever the politician, Giuliani describes himself as a free market capitalist who believes government should only step in when it has to and only then in a "very disciplined way". As such, what this joint venture proposes is a private solution that will potentially assist governments in figuring out what the correct level of regulation should actually be.

"It would be foolish to rely solely on government as they do not have the resources to check on the thousands of funds that exist," he explains. "You create a false reliance if you believe government can resolve the problems investors face by regulating more."

This philosophy also applies to the way GSS and Nine Thirty Capital want to interact with families. "The results of our multiphase due diligence process will be totally transparent. Ultimately, it will be up to the families to decide if they want to proceed with an investment – we're not going to decide for you, that's not our goal. Our job is simply to provide you with the information," says Rabin.

The information can be presented to families in the form of a detailed report, the results of which will be discussed and explained to families at a meeting. As the joint venture will only apply in the first instance to Nine Thirty Capital's client base, those families will have access to Giuliani, D'Amuro and Rabin in person. "They'll get as much information and contact as they want," confirms the former mayor. "If they want to get in touch with me, they can have contact with me. And if there's something more that they want then we will do our best to accommodate them."

D'Amuro says the biggest challenge they face is getting full cooperation, but if they don't then a red flag is immediately raised: "If you can't get the basic information you're looking for then that tells you something about that fund straight away."

So far, the team has been getting the kind of access they have wanted because, according to D'Amuro, people in the industry realise just how important transparency is becoming: "Coming from the FBI I was initially a little sceptical about what the reaction to us would be, but I've been pleasantly surprised at the level of cooperation and access to information that we're getting."

Looking to the future, the joint venture partners expect that their approach will become the industry standard as families become more cautious about investing until they have a complete portfolio and investigatory review at their disposal.

Giuliani also expects a lot of people will try to copy what they are proposing, but is relishing the competition. "I have no doubt that others will compete but I love that because it shows that the industry is changing and people expect better answers about who they are entrusting their money with. Investors accept that you're going to have good and bad years, but what people don't accept is losing significant amounts of wealth through fraud."

Click here >>