American Greed

Greed Report: Trust, but verify: How to do a background check like a pro

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Could a little bit of homework have stopped a $100 million scam? And what lessons does it hold for you when you are thinking about making an investment?

As dastardly as Deepal Wannakuwatte's fraud was, it basically boiled down to a single lie.

The Sri Lankan immigrant — who came to California and built a business importing and selling surgical gloves — conned investors, attorneys, banks and even a whole town by claiming to have lucrative contracts with the U.S. Department of Veterans Affairs.

"He indicated to investors that because of his unique position of being a minority-type business, he had access to government contracts upwards to $150 million per year," FBI Special Agent Paul Artley told CNBC's "American Greed."

Wannakuwatte did have a contract with the VA; that much was true. But it was worth a tiny fraction of what he claimed: just $25,000 per year. When the truth finally came out, 150 investors and lenders were left holding the multimillion-dollar bag.

In the little Northern California town of Olivehurst, where Wannakuwatte had purchased a shuttered plant to turn into a $30 million manufacturing facility, hopes for 175 badly needed jobs he promised were dashed. Wannakuwatte, 65, is serving a 20-year federal prison sentence for fraud and conspiracy.

As tragic as the losses may be, they are made even more so by the fact that there is a slim possibility Wannakuwatte could have been stopped by some of the very people he eventually conned. The story, told on the latest episode of"American Greed," is a cautionary tale to consider any time you are asked to put down money now in hopes of a payoff down the road.

Deepal Wannakuwatte
Deepal Wannakuwatte

"It's imperative that people do background checks on any kind of person they are going to do business with," said David Schassler, a licensed private investigator in New York.

In some cases, that means hiring a professional like Schassler who knows how to do the legwork.

"I personally go into people's lives. I personally go by where they live. I personally look into them, I knock on doors, I talk to ex-business partners," he said.

But before that, there are some steps you can take on your own, with more online resources available than ever to do your own due diligence.

Deepal Wannakuwatte bolstered his claims by showing prospective investors his purported contract with the Department of Veterans Affairs. And when he started running into trouble paying investors back, he produced what turned out to be a fake letter from the VA saying it had changed its terms for paying contractors.

Both documents would certainly be useful to investors and lenders in vetting Wannakuwatte's claims, but it appears no one took the added step of verifying the contract — something anyone can do online.

The federal government maintains an online database of all its contracts — those up for bid and those awarded in the past year. The search engine can be cumbersome at times (this is the federal government after all), but you can learn things like the amount of the contract and the payment terms — both of which would have been useful for anyone trying to check out Wannakuwatte or anyone else claiming to have big government contracts.

If the company you are researching claims to have military contracts, the Department of Defense puts out a daily list of every contract worth $7 million or more. You can search the archive as far back as 1994.

A spokesperson for the Department of Veterans Affairs told "American Greed" that while the agency does not put out its own list of awarded contracts, it does issue press releases on large awards. Indeed, a search of the VA website shows press releases on contracts as small as $568,000, awarded to an Oklahoma firm in 2000 to design a military cemetery.

"There's more to it than just getting online and looking somebody up and saying, 'Oh, OK, this must be the right guy." -David Schassler, Private investigator

Obviously, a search for VA press releases on Wannakuwatte's International Manufacturing Group — which any prospective investor could have done — turns up no results, let alone the $100 million-plus in contracts he claimed.

Looking for other ways to check out a potential investment? The Securities and Exchange Commission offers a host of tools at a special website just for individual investors. The site will link you to the SEC's vast database of company filings, although not every company is required to submit information. Still, the site has valuable information on how to read a company's financial statements, and other tips for new and experienced investors.

If you are trying to check out a financial advisor, a good place to start is the Financial Industry Regulatory Authority. The organization's online Broker Check service has information including disciplinary records on thousands of investment professionals.

Of course, all of these are just starting points, especially if you are considering a large investment.

"There's more to it than just getting online and looking somebody up and saying, 'Oh, OK, this must be the right guy,'" said Schassler.

He said that's particularly true when it comes to a person's social media profile on sites like Facebook or LinkedIn, where the person is merely posting information about himself that may or may not be true.

"Oh here this guy is, he must be famous. He works for this company. He works for that company, … and all of sudden they've created their own profile on their own," Schassler said.

He advises getting — and contacting — real references. More important, look for independent sources including former business partners, customers and former employers. If you can't do it, hire a professional who can. And don't be shy.

"There's nothing wrong with doing your due diligence, and the person will probably not be insulted if you do your due diligence because he would respect the person he's doing business with," Schassler said. "Hey, this guy's on the ball here. He really wants to do business with someone proper, and I think that's a really smart idea."

It also might stop the next Deepal Wannakuwatte dead in his tracks.

Think you could have spotted the holes in Deepal Wannakuwatte's medical glove business? Find out on an ALL NEW American Greed, Thursday Aug. 18 at 10pm ET/PT on CNBC Prime.