American Greed

The Greed Report: Doing Due Diligence - How to Check Out a Business and Not Get Taken

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If there was one thing Ingrid Robinson knew from six years of training to become a therapist, it was the value of channeling pain into something positive.

So when she suffered her own devastating loss—the death of her only daughter from a heroin overdose in 2006—she decided to build a residential and retail complex in Northern California, in memory of her daughter.

"I called it 'Michelle's Diamond,' as a legacy for Michelle," Robinson told "American Greed." "And I wanted people to know if they had asked, 'Who was Michelle?' She was the daughter of a mother who loved her very much," said Robinson in a 2014 interview with CNBC's "American Greed."

Robinson purchased land in Marin County for $500,000, but she would need help financing the development. She found that help in Remington Financial Group, a Philadelphia-based lender that offered her $5 million in financing in exchange for a $10,000 fee upfront. Robinson had no experience in the commercial development business, but she took comfort in the fact that Remington's credentials seemed impeccable. The company came highly recommended by the commercial real estate broker she was working with, and she had gone to what she thought were great lengths to check Remington out.

"I was doing everything I was supposed to do," she said.

Sure enough, there was a spread in Forbes magazine that looked glowingly positive. And Remington was accredited by the Better Business Bureau. What could possibly go wrong?

In fact, Remington turned out to be a costly lesson about due diligence—the process of checking out a property you are thinking of buying or a company you are considering doing business with. Robinson and hundreds of other investors who thought they had done proper due diligence on Remington wound up broke. It turned out that the fees that she and the other investors paid went largely toward the lavish lifestyles of Remington founders Andrew Bogdanoff and Matthew McManus, both of whom are now in prison.

How did so many people miss what turned out to be a garden-variety advance fee scam? How did all that due diligence fail? For one thing, Bogdanoff, McManus and their cronies were very good at what they did.

"Some of the people that were scammed by Remington were attorneys, experienced attorneys," said Robinson, who launched a crusade for justice for herself and other Remington victims. "Remington was slick. There was no question they were very slick."

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Oliver Nicolaas Ponder | EyeEm | Getty Images

That Forbes spread turned out to be a slickly disguised paid advertisement. And the Better Business Bureau accreditation represented a mere snapshot that the company continued to milk long after the BBB soured on the company and started issuing negative ratings.

Remington even found a way to trick internet search engines, according the federal grand jury indictment of the company's founders. In 2010, with fraud complaints already piling up, Remington announced a new anti-fraud policy on its website, and falsely claimed it had alerted federal and local authorities about a suspected e-mail scam. The result: if you Googled "Remington Financial" and "fraud" in 2010, the first thing you would see was Remington's supposed efforts to combat fraud, instead of all the fraud complaints against the company.

Is it possible for fraudsters to be that good—covering their tracks so expertly that you can't avoid being taken?

In a word, no. But due diligence is a complex undertaking, and there is no room for shortcuts.

A simple Google search is clearly not enough; Remington proved that even the most powerful search engines can be fooled.

"Some of the people that were scammed by Remington were attorneys, experienced attorneys," -Ingrid Robinson

And while the Better Business Bureau has been looking out for consumers for more than a century, it too has its limits. Remington's status with the organization was far more complicated than the company let on, according to BBB national spokeswoman Katherine Hutt.

She confirms the company applied for "Accredited" status in 2006, meaning the company agreed to uphold the BBB Code of Business Practices for sales, advertising and customer service. With relatively few customer complaints to that point, the accreditation was granted. But Hutt said it soon became clear Remington had lied on its application, failing to mention a government action against the company in California a few years earlier. By 2008 the accreditation was revoked.

"Remington Financial is actually a good example of how BBB's self-regulatory process works," Hutt told "American Greed." "The BBB investigated the company and discovered a number of falsehoods. The BBB Business Review for Remington reported an F rating from 2008 until the company closed."

But the move came too late for Robinson, who had applied for funding with Remington in 2007 while the company's BBB status was still in flux.

The Federal Deposit Insurance Corp. headquarters in Washington, D.C.
Andrew Harrer | Bloomberg | Getty Images
The Federal Deposit Insurance Corp. headquarters in Washington, D.C.

In part because of situations like that, the organization urges consumers not to rely solely on BBB reviews when conducting due diligence.

"BBB reports on information we know," Hutt said. "Consumers can help us out by filing complaints when they have a problem with a business."

But it can take time before a pattern of complaints translates to a negative rating.

"As much as possible, we try to work with businesses to get them to improve," Hutt said. "When they do not, we publish alerts so consumers are warned."

So where else should you be looking when you do your homework?

First, find the government agencies that regulate the business you are considering working with, and check for any complaints or regulatory actions. A good place to start is your state's attorney general, as well as the attorney general of the state where the business is based. You can find listings for all 56 state and territorial attorneys general through the National Association of Attorneys General (NAAG).

In the case of lending institutions, check with the state's banking regulator (you can find a list through the Conference of State Bank Supervisors (CSBS)), or the Federal Deposit Insurance Corp. (FDIC).

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Remington was able to evade those checks because it was a nontraditional lender. Borrowers without track records—like Robinson—figured it was their only choice.

"I knew that traditional banks would never lend," Robinson told "American Greed." "I didn't have the assets to support that kind of loan that I would need, and I didn't have the experience."

In fact, she may have been operating under a common misconception among entrepreneurs, according to the U.S. Small Business Administration, which offers a host of tips and programs to help small businesses get started and secure financing. The SBA specializes in linking start-up business owners with traditional financing they may not be able to get on their own.

Even after you have completed all those steps, you are not done yet.

Before you sign a loan commitment, experts say, have a qualified attorney look over the agreement. Don't sign on the dotted line until you and your attorney are satisfied.

Finally, and perhaps most important of all, beware of any lender—or any other business for that matter—demanding to be paid ahead of time. While there are instances where certain advance fees are proper, experts say in general they are a giant red flag—one that Remington investors missed again and again.

Doing due diligence can do wonders protecting you and your money. But you have to do your due diligence right.

Watch "American Greed," Thursdays at 10 p.m. ET/PT on CNBC Prime.