Virtual Due Diligence

Posted by: Matthew Goldstein on April 28

It’s time to for authorities to start cracking down on the operators of so-called virtual offices—those fancy office suites with the receptionists and the couches in the waiting rooms that are really nothing more than glorified mail drops.

A year ago, I wrote about how virtual offices had become a magnet for financial fraud, especially for scams targeted at people living in distant locales. And in that story I discussed about the difficulty of regulators going after the operators of virtual offices because it’s hard to input knowledge of any actual crime to these virtual landlords.

But the crackdown by regulators and prosecutors on Ponzi schemes in the wake of the Bernie Madoff case shows the many ways that alleged scamsters are using virtual offices to defraud investors. So maybe it’s time to require virtual office operators to do more due diligence than simply check a person’s driver’s license before renting out use of a mailing address and office location that’s no more real than a Hollywood set.

After all, banks, in a move to stop money laundeering, are required to follow extensive know-your-customer rules.

Either way, it’s clear that virtual offices have proved to be a valuable tool for the bad guys. James Nicholson, the suburban New York hedge fund manager charged by federal prosecutors with ripping off investors to the tune of $150 million, allegedly created a fictitious accounting firm and housed it in a virtual office. In March, the Securities and Exchange Commission charged West Coast hedge fund manager Albert K. Hu with similarly using a virtual office in San Francisco as the address for his purportedly independent auditor.

And there are many other recent cases in which a virtual office helped enable would-be fraudsters to scam investors. If nothing else, investors should always check out the address for a manager or an audit firm before laying down their money to make sure it’s not a glorified mail drop.

Reader Comments

Bill Grodnik

April 29, 2009 10:10 AM

Mathew, you should be ashamed of yourself. Clearly you have not done your homework. Have you ever been to a Business Center, or an Executive Suite as the centers are often called? They only exist in every major city in the world. In New York alone ther are probably over 100 businesss Centers with well over a 1,00,000 square feet of prime office space. These are not Hollywood sets as you suggest, they are legitimate places for doing business, with offices, conference rooms, training rooms, day offices, cyber cafes, high speed wireless internet connections, and much more. Every type of business operates here, from fortune 500's to small firms including attornies, real estate brokers, insurance brokers, financial service providers, all totally legitimate businesses. Not every business needs an office space these days with the explosion of smart phones, laptops and high speed internet connections at home and elsewhere many companies choose a Virtual Office where they can still get many of the benefits of the tradtional office without the cost of full time space. Your work for Business Week and I am sure that they provide with a plush office space with a view of the Manhattan sky line, but not every business needs or can afford a New York office. The two fraudsters you mention could have done these crimes just as well without a virtual office. The virtual office has nothing do to with their crimes. Get out of your office and go visit a Business Center in New York and you will see the future of officing.

B

Larry Good

May 1, 2009 03:35 PM

Did the Fraudsters have a computer. Should computer manufactures conduct due diligence for every customer to ensure they are not using the computer to commit fraud? Did the Fraudster use the Post Office. Should the Post Office review the past behaviour of their clients before accepting mail from them? Computers and the Post Office are simply tools used to conduct business just as a Virtual Office is a tool to conduct business. Don't blame the tools, blame the Fraudster user.

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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