If you ever wondered where the new Sam Spade is lurking, look no further than Securities and Exchange Commission filings from activist investors.
Want to find out if director nominees have skeletons in their closets? Hire a private investigator. What about even the most tawdry allegations, such as extra-marital affairs. A private gumshoe may be needed to run down witnesses or hushed-up lawsuits. And it's not just the purview of investors — corporations also make use of investigators' services in the interest of shareholders (it's always in the interest of shareholders.)
The goal of the undercover investigations, activists and their advisers say, is to ferret out juicy, sometimes embarrassing, details that can help build support for their campaign from institutional investors and help prod companies into action. But it may also be used as a way to double-check an activist's theory about what is ailing a company. In addition, background checks, whether performed for activists or targeted companies, are a critical aspect of the vetting process for board director candidates.
Wachtell Lipton Rosen & Katz LLP put a spotlight on private investigators in a recent memo outlining tactics employed by activists. Activists hire PI firms to "establish dossiers on directors, management and key employees" and also conduct "aggressive diligence," the law firm said in its memo.
Though Sahm Adrangi, founder of activist fund Kerrisdale Capital Management LLC in New York, insists that hiring a private investigation firm is not his preferred strategy, he has resorted to their services when he wanted to short Chinese companies that he suspected of playing fast and loose with their financial avowals. Between 2010 and 2012 Adrangi hired a Shanghai-based firm to look into what he deemed to be suspicious acquisitions by ChinaCast Education Corp., an online operator of Chinese for-profit colleges.