The saga of Scott Rothstein and the collapse of an apparent fraud scheme points again to the failure of traditional due diligence in ferreting out fraud. From what little has been published regarding this unfortunate incident, someone checking up on Rothstein and his integrity would receive glowing reports. He lead a prominent law firm and had many friends in the bar. In addition, Rothstein was prominent in political circles in Florida, and I am sure that recipients of his fundraising largesse would gladly attest to his honesty. It is not known now what type of due diligence, if any, investors performed. Were there fake books and records? Was a bogus accountant involved, as in the case of Bayou and Madoff?
The one thing for sure is that Rothstein must have revealed his dishonest intentions when enticing others to participate in the fraud. Questions about returns and the security of invested funds certainly elicited verbal and non-verbal clues to his deception. Had one of the fleeced investors been able to detect the signs of his deception in advance, they could have avoided the loss. This is why I am so excited about our H Factor integrity practice, in which we deploy a behavioral scientist to assess people as they are speaking and determine if they are lying. It promises to be a huge step forward in avoiding future fraud.