Stanford, Kroll and “reputational self-due diligence”

(updates at the bottom of the post)

In the new Vanity Fair article about Allen Stanford, there is a reference to Kroll, an investigative/professional services firm. If you are not familiar with Stanford, he was recently charged for a several billion-dollar ponzi scheme.  Both the Vanity Fair article and one in the New Yorker (which focuses more on Stanford’s cricket connections) are worth a read. Yes, he did sponsor a cricket team called the Stanford Superstars.  He also, oddly enough, invested some of his clients’ money with Bernie Madoff.

Kroll makes an appearance in the Vanity Fair article for being hired to interview/ vet a one-time Stanford employee, Lawrence DeMaria, who was hired to write speeches for Stanford and “supervise internal publications.” But they are also named in the “VF Notes” on the Vanity Fair website, which alleges that they were hired by Stanford to “fight back against anyone who questioned his integrity.”  Stanford apparently spent millions with Kroll to figure out “who was looking at him” and to conduct a defensive “propaganda campaign.”

I am hesitant to make any real judgments about Kroll’s dealings with Stanford.  Clearly there was nothing wrong with vetting employees for the company, but the allegations made in the “VF Notes” are a little troubling.  I’m sure if I thought law enforcement and civil regulators were unfairly targeting me, I’d want someone like Kroll to argue my case. But using lobbying, public relations and investigation in concert is a strange—and possibly toxic—blend.

I’d argue that a publicly traded investigative firm is more likely to lose perspective and find itself in a gray area, because it faces the pressures and the misaligned incentives inherent in all publicly traded companies. What is good for an employee may not always be good for a stockholder, and what is good for a short-term stockholder may not be good for the future of the company or society as a whole—as we have seen recently with publicly traded investment banks.  (There are a couple of good comments in the financial world that explain this issue much better than I ever could. Look here and here.)

A publicly traded investigative firm requires major cash flow to operate. I am sure the managers face constant pressure to grow net income for the shareholders. When a company’s business is to gather facts and analyze information, it puts it in a position to manipulate the regulatory system. The less pressure to do so, the better for society.

With a private company, and specifically an owner-operated firm, management is not beholden to shareholders and they don’t have to constantly show profit growth.  This is not to say that private companies don’t do bad things, they just have different, and possibly lower, incentives to offer questionable services.

A couple of other things relating to the Vanity Fair article:

I first learned of the Kroll connections by reading Felix Salmon’s blog. Salmon quotes additional information from the “VF Notes” page that appears to have been removed from the Vanity Fair website or is in some place I can’t find. Salmon quotes additional information from what I assume to be the “VF Notes” section. His post says he learned of this from a post from his colleague Matthew Goldstein.  To make this more confusing, it is Goldstein’s post that links to “VF Notes” section. I can’t find what Salmon appears to have quoted in “VF Notes.” If this info was removed, I wonder why? (see an update/ correction below)

Also, I noticed one of the comments at the bottom of Felix Salmon’s posts about Kroll and Stanford lists the website for “Stanford Group Information.” The website was registered on June 4th by Margaret Fang of public relations firm Qorvis Communications.  The subject header for the website lists: “This website will provide information and updates regarding the Stanford Group.” The media contacts for Stanford Group Information list Qorvis partner Don Goldberg and Qorvis managing director Karen Hanretty.  The website appears to be posting legal filings for the Stanford case. I wonder who is paying for this site and why?

—————————————————-

Update 1:

All the references to Kroll, including the bits about “reputational self-due diligence” quoted by Salmon, all appear in the physical version of the Vanity Fair article.  It just looks like a couple pages of the physical article were skipped in the online version–possibly accidentally.

Update 2:

The first two Stanford related lawsuits have been filed against Kroll.  See here and here.

Update 3:

I noticed this article when I was searching the FT to find the reference to the two cases filed against Kroll. Obviously, Kroll is a large organization but still . . .

I’m amazed by the way people were taken in by Sir Allen,” says William Brittain-Catlin from Kroll, the risk consultancy, and author of Offshore: The Dark Side of the Global Economy. “There’s so much stuff out there that any one who wanted to do a cursory check would have seen. Various allegations have been flying around for years.

Update 4:

Apparently  Kroll went in for a helping of conflict of interest too according to Business Week via the Daily Caveat.

Update 5:

The FT got it wrong, it was two complaints and not two lawsuits against Kroll (see here).

Also, I started reading William Brittain-Catlin’s book and its good. Check out this article by him here.

Finally, Vanity Fair fixed the online version of the article so everything including the “reputational self–due diligence” is there.

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