This excellent November 17 article (shortened for brevity) from Financial Times once again demonstrates the value of business due diligence. In this case, the article suggests that the warning information from the FBI was not considered as an impediment to closing the deal.
While it is unrealistic to hope that the FBI will be in a position to warn all business parties to buyout, merger, and acquisition irregularities, corporate investors and small businesses have resources in the private sectors through reputable law firms, and risk management and private investigation practices. In the South Carolina Low Country, including Hilton Head Island, Bluffton, and Beaufort County, Private Investigation Services Group LLC, has the background, expertise, and resources to help provide confidential confirmation of claims made by all parties, and bona fides of all principals involved in the transaction. No matter who you use to protect you business or transaction, the cost is insignificant when compared to the risk involved.
The FBI tried to warn Bank of America against an ill-fated leveraged buyout led by former Blackstone deal maker Chinh Chu, telling an executive that “the entire transaction was setting alarms off, and there was a concern that someone was attempting to defraud” the bank. BofA faces steep potential losses after ignoring the warnings about now-bankrupt Constellation Healthcare Technologies, which are detailed in FBI files made public by a federal court last week. Mr Chu struck a deal to buy Constellation, and was the first acquisition for his investment vehicle CC Capital, which he created in 2017 after ending his 25-year stint working on multi-billion-dollar transactions for Blackstone.
A week before the Constellation acquisition closed, an FBI agent and a Department of Justice lawyer called a member of BofA’s fraud team, according to an official note of the meeting that lawyers for Constellation’s former chief executive say they received from prosecutors. BofA provided a $130m loan to finance the acquisition. Constellation filed for bankruptcy last year, and it is uncertain how much the lender will recover. Details of the FBI’s warning to BofA emerged in court papers filed by lawyers for Constellation’s founding chief executive Paul Parmar.
Mr Parmar created “fictitious operating companies that [Constellation] purportedly acquired in sham acquisitions that the co-conspirators simply made up”, according to legal filings by prosecutors, and were part of “an elaborate scheme to defraud [CC Capital] and others out of hundreds of millions of dollars,” the filings added. Prosecutors have identified CC Capital as a victim of the alleged fraud, and have not accused Mr Chu of any wrongdoing.
Mr Parmar’s lawyers have seized on the FBI’s warning to BofA in an effort to discredit the charges, arguing that “one simply cannot defraud a party who is in actual possession of accurate information and who insists on proceeding in spite of that knowledge”. Law enforcement officials alerted BofA to public records showing that Constellation had acquired a series of companies just days after they were created and valued the questionable entities at as much as $20m, according to the documents. A DoJ official “expressed concern that Bank of America may not be seeing the same thing,” the FBI memorandum states, “and suggested [the bank] ensure due diligence on the transaction”. BofA declined to comment.