Investment Fraud: Top 5 Reasons Why It Happens

Theranos attracted almost $1bn in funding from investors such as Larry Ellison and Rupert Murdoch.

On July 7, 2022, Theranos president Ramesh “Sunny” Balwani was convicted on all 12 counts of fraud and conspiracy related to what prosecutors said was a grand plan to hide from investors, partners and customers the fact that the company’s blood-testing technology did not work. Its tests were in fact covertly conducted on commercially available machines.

Top 5 Reasons Why Investors Are Defrauded

The smartest investors can fall victim of well engineered fraud schemes. We used the Theranos fraud case to draw 5 key lessons for investors.

1. Gut Instinct decisions are bad decisions

Investors should make fact-based decisions. Rigorous investment due diligence does make a difference.

2. FOMO decisions are bad decisions

Fear Of Missing Out. Rushing for an opportunity without conducting the necessary checks. 

3. A prestigious board is not enough to make a decision

Investors must thoroughly check the qualifications of the management of the target company. Unqualified management is the first sign that something is likely to be wrong.

4. Extreme secrecy is a red flag

Investors should fully satisfy their most thorough due diligence requirements on all aspects of the target company's business. Refusing to let investor access information on the basis of confidentiality or security is likely to be a red flag.

5. Confirmation bias leads to bad decisions

When investors favour information that conforms to their existing beliefs and discount evidence that does not conform. Typically, in-depth research and analysis on the target's industry and market can uncover obvious discrepancies and properly informs the investment decision. Letting a confirmation bias win over in-depth due diligence research is a recipe for disaster.

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To be able to properly and seriously challenge an investment opportunity - regardless of the prestige of the founders and backers - investors should always gather strategic investment intelligence from all possible sources (competition, current and former employees, experts in the field, analysts, other investors, academics, administrations, and more) to develop their own informed judgement of an investment opportunity.

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Picture: Madeleine Albright, Elizabeth Holmes, Jack Ma, President Clinton. 
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