Alleged ponzi schemer Earl Jones is awaiting trial in Montreal on eight charges that he stole from and defrauded investors in Canada of some $50 million. A Canadian accounting firm that examined the books of Jones’s now bankrupt company said that Jones withdrew more than $12 million of client money out for personal use.
While we cannot claim that we would have pegged Jones as a probable Ponzi schemer, the way we investigate any individual or business would have brought to the surface almost immediately a major concern about Jones and his business: he was carrying heavy mortgages on his personal real estate. This fact may now have emerged in newspaper reports following the arrest of Jones, but does little good for investors who have lost their life savings.
Most investigations into Earl Jones prior to his arrest would have revealed little was wrong with his business or personal affairs. As the Montreal Gazette reported this year, before Earl Jones became a household name, if you googled him, the only hit that came up was a business listing for Earl Jones Consultant and Administrative Corporation on Google Maps.
The newspaper also reported that the financial regulator in the province of Quebec, the Autorité des Marchés Financiers had never heard of Jones on the day the regulator became involved in investigating him in July 2009. The next day, they had shut his business down. Jones’s business was declared bankrupt later that month.
The lesson from both the Jones and Madoff scandals: do not count on financial regulators to do your due diligence for you. And, when you perform due diligence, do not cut corners.
For investors in the pre-Jones, pre-Madoff world, a quick Google check and perhaps an online criminal records check was what constituted “due diligence.” By contrast, we have always believed due diligence means a deep background check on both the personal and professional levels.
Given nothing more than the name of Earl Jones’ company, here is how we would have proceeded to flag his personal indebtedness:
Step 1: The registration for Jones’ company with the province of Quebec contains his home address, 870, Pr. Lakeshore, Apt 3X, Dorval, Quebec.
Step 2: Public records for the property in Lachine Parish and then in the Quebec Land Registry showed that Jones and his wife bought the condominium in 1999 for $370,000, with a $230,000 mortgage from the Bank of Montreal. Nothing unusual here.
Step 3: In December 2006, Jones and his wife got another mortgage on the property for $558,750, when the condominium’s value had risen to $665,300, according to the Montreal Property Roll. Even assuming that the second mortgage paid off the first, why would someone as successful as Jones need to remain so heavily mortgaged?
Step 4: A database check of Jones in the U.S. revealed his ownership of another condominium in Boca Raton, Florida. According to Palm Beach County records, Jones and his wife bought the property in December 1992 for $140,000. They got a mortgage of $125,000 for this purchase. Nothing unusual with this so far.
Step 5: The press to date has reported only that Jones is delinquent in his condominium fees. But we found that Jones and his wife got a $125,000 line of credit on the same condominium in May 2005, according to the agreement filed in Palm Beach County.
Combined with the new mortgage the next year on the Dorval property, an intelligent investigator would ask: Why is Earl Jones in need of so much borrowed money, all around the same time?
Step 6: We would have recommended further inquiries into Jones at this point. Through interviews with former colleagues, employees and clients, these would probably have turned up yet another new mortgage, on a condominium in Mont Tremlant, Quebec.
Our kind of due diligence takes longer than a three-hour computer check. We look at the public record both for what investors would expect us to find – convictions for fraud, civil fines, and regulatory sanctions – as well as for what we should find (a man at a time of life who should be getting out of debt, not further into it) but do not. Most importantly, we talk to people who get us information about lifestyle, habits and associates that will never make it into a government filing.
Our brand of due diligence is the kind investors who trusted Earl Jones and Bernard Madoff may wish they had ordered. Now, it’s too late.
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