Dirty Tricks, Schemes And Deceptions That Some Investors Will Use Against You

Both Weiner Man and Empty Vessel used this particular scheme. In hindsight it’s amazing to see the similarities these two investors share, so much so that it reads more like a standard process than a freak anomaly.

 

Weiner Man

You may recall from Rent Rort # 1, that when we closed the investment in A Corp with Weiner Man, he immediately said, “we have spare space, don’t waste your money on rent”. Similarly, Weiner man said we have “HR, accounting staff etc., just use our office staff and save hiring people”. Brilliant, another headache I don’t need to deal with. This would be cheaper and more efficient. Well, that was the idea.

After a few months a number of anomalies started to appear, service providers costs seemed to have increased, higher IT costs, higher printing costs etc. Enough for me to notice, and I try anything to avoid micro-management. Yet explanations were vague about overall cost increases, upgrading services etc. While busy trying to build a business, you tend to not sweat the small stuff, so much of this continued unnoticed.

It so happened that one day I went to pick up a printing order, and I’d never personally been to the printers before. They asked me what my role was in the business and seemed really friendly. I’m the founder I said, and commented on the great work they had been producing. They then seemed to be a bit uneasy and said, look, we can tell you something but you didn’t hear if from us. Ok, I said. They then told me that Weiner Man and his office ordered significant amounts of printing for their own business, and told the printers to just put it onto A Corp’s account!!

This was significant enough, that a printer, with nothing to gain, and in fact something to lose by potentially losing WeinerMan’s business, thought the extend of the misappropriation was so ethically inappropriate, that they just couldn’t ignore it. What great standards of ethics and professionalism. It hopefully ended up paying off through the positive referrals I gave about their company.

This was the trigger to realise there was deliberate theft going on by WeinerMan in A Corp and we realised that various bills were being inflated by incorporating the investors own business expenses.

I quickly exited from this business, for less than it was likely worth, but felt I could not ethically remain. This was a very fortuitous decision. A year later A Corp was sold to a public company. You may think that if WeinerMan took over A Corp and sold it to a public company, that he won out in the transaction and I lost. But in fact this was the best decision both financially and morally.

Financially it was a good decision, because when I left, all the key senior staff came with me to my new start-up. The business I then started went on to sell for 5 times what A Corp sold for.

More importantly, morally it was the right decision. The sale of A Corp was actually a fraud. WeinerMan happened to be a director of, and the largest shareholder of, the public company he sold A Corp to. He cooked the books in A Corp, and the public company he was a director and shareholder of then acquired A Corp. At the time some very angry shareholders wrote scathing letters about the conflict and how the whole transaction was only in the benefits of WeinerMan and not the shareholders. However, Weiner man had the voting support, and the sale went through. The transaction was disgraceful.

 

Empty Vessel

When I founded C Corp many years later, I thought the relationship, and the perceived reputation of Empty Vessel, was such that I was confident when we got the same line “we have HR resources, accounting resources, let us take care of that and you focus on the business”, that this time, it was the real deal. In fact the cost with Empty Vessel was significantly higher. Perhaps I naively keep making the same mistake because I will do almost anything to avoid administrative and office tasks. My passion is innovation and marketing the business. But these seemingly mundane aspects of the business, can really come back to bite.

Empty Vessel’s office provided a number of resources including using their HR manager for all our office management requirements, and their CFO, Elmo, was providing financial oversight. For about a year Empty Vessel’s HR manager contracted recruiters for all our staff hires, and purchased all office items. In a poor decision on my part, I did not closely monitor these payments and transactions. I assumed that there were layers of oversight that would be sufficient. These were:

• A seemingly professional and experienced HR manager employed by a reputable investment group
• Empty Vessel’s CFO, Elmo, oversaw the accounts
• C Corp had it’s own CFO employed full time
• A national Accounting firm managed all of the accounting

This could be seen even as over the top for a start up. For about a year things ticked along with no thought from my end. Until something unusual was discovered by one of my admin staff. They came to me and said, look, I have been trying to make sure that I have checked the situation thoroughly before bringing it to your attention but I think we have a significant problem. The admin worker went on to say that there was an issue with a recruitment hire that she wanted to look into. She asked the HR Manager to provide a copy of the recruitment companies invoice for the particular hire. Strangely, she was told by Empty Vessel’s HR manager that she didn’t need to see it, and not to worry about it. But to my staff member’s great testament, she did worry about it, and kept on asking again and again. She was fobbed off for weeks, but finally got hold of the invoice. She told me that within 2 seconds she could see a problem. The invoice looked like a poor photocopy, there was no website and no physical address.

Our admin staff member went on to discover that the apparent recruitment company engaged by C Corp, was not a real company, and actually a front for the HR manager’s own husband.  He had no recruitment background and performed no reference checks or interviews, they simply sent candidates, and charged 15% of annual revenue per candidate. They also purchased all office goods, itself strange that the one company would recruit an interstate manager, and then supply office furniture. But worse is that purchases were a scam.  Such as $400 for an office plant that in reality cost $50. Or invoicing for numerous whiteboards when the office only received a couple of them. Tv’s where we were invoiced thousands of dollars, where a quick Google search reveals that the online retail cost is actually under a thousand dollars. All told the embezzlement and deceptive invoices totalled over $300,000!!!

How could such a monumental failure of governance have occurred. Well let’s go back to the list:

• The seemingly professional HR manager (Employed by Empty Vessel)
• Empty Vessel’s CFO, Elmo (Employed by Empty Vessel)
• Our own CFO (Recruited by and a best friend of Elmo)
• National Accounting firm (Engaged by Empty Vessel and their accounting firm for over a decade)

So when peeling back the onion, what was seemingly layers of oversight, was a list of people all working for and connected to Empty Vessels office. When we confronted them with the evidence of embezzlement, they said that they knew nothing about it and promptly terminated the HR Managers employment. It is not possible to know or determine whether there was any broader collusion or if this was an isolated individual’s deception. But either they were clued into what was occurring, or were so overwhelmingly incompetent, that the entire group of resources were unable to pick up what our admin staff member said she could see was fishy in moments.

 

Legally the HR manager in question was employed by empty Vessel. Even if they had no direct fraudulent knowledge of what was occurring, a company is liable for the actions of its staff member. If a staff member at McDonalds leaves a spilt drink on the floor, and a customer trips and falls, who is responsible? McDonalds of course. They could never get away with saying, well that’s not our fault you can blame the staff member who left the drink on the floor. So what responsibility did Empty Vessel take? Well out of the over $300,000 C Corp lost, we were reimbursed a grand total of $0. Even worse, Empty Vessel actually charged us a percentage of the HR managers salary and Elmo’s salary to ensure proper oversight. So we literally payed service fee’s to watch over the embezzlement. Just to clarify, we didn’t obtain any refund of the oversight charges either. You might think this sounds more like science-fiction than reality. It is startling what can happen in the real world. I have come to a point where I genuinely believe nothing would surprise me anymore.

 

Why does this happen? Well this might sound like I am just being unnecessarily critical, but this is my honest opinion. Elmo is the most incompetent accountant I have ever come across. Utterly useless with not a single intelligent solution or piece of advice in the years we dealt with him. Empty Vessel has never had a single intelligent business innovation or idea in his career. It was like watching the blind leading the blind. Being unintelligent isn’t a crime, but what is, is employing staff as stupid as you are, just so that you can look smarter within your own office. If it were me, I would be far less concerned with ego, and try to employ the smartest people I could find.

 

What does the stupidity have to do poor business practices. Well let me give an analogy. I hate getting parking tickets. Probably everyone does. But what frustrates me so much is not the futile waste of a $70 fine I have to pay. Rather, it’s that the council’s have parking inspectors on every corner, like vultures waiting to pounce within a second. The frustration, is that with all the millions of dollars at their disposal, and the extensive resources at their disposal, the most intelligent way they can come up with to generate revenue, is to fine its residents and customers. You can imagine a council meeting going like this:

Councillor A: We generated $x million dollars this year in parking fines.

Councillor B: Our overall budget is running at a loss of $Y million dollars, what can we do to address the gap?

Councillor C: I know. Lets fine more of our residents.

 

Pathetic!

Where there is a real lack of intelligence and innovation, and Empty Vessel and Elmo are only surpassed in feeble-mindedness possibly by Weiner Man, the only option they see at their disposal is to charge and over charge companies as far as they possibly can.

 

KEY LESSONS:

• What may seem like cheaper resources and help with non core business activities, will likely cost you much more money and turn into much more of a headache. Always get third party suppliers. Even if they are a bit more expensive up-front, they will save you a lot more in the long run.
• Ensure that checks and balances have real stop-gap measures. If the checkers are within the same organisation or group or social network, they may not be providing the objective oversight you are expecting.
• Never rely on a partner to simply do the right thing. Hope for the best, but work on the basis that you need to check every aspect of the business directly.

 

Being too trusting, unfortunately,  can be a real weakness!

TOTO Pty Ltd background

Empty vessel, a very high net worth individual, loaned money, approximately $400,000, to a start-up, TOTO in return for a 30% stake in TOTO. TOTO did not achieve its business objectives and within a year, ceased to trade. The loan therefore would not be repaid. Empty Vessel now has a loan to a start up that has failed, and wants his loan repaid, in any way he can.

SIDE NOTE: WHEN AN INVESTMENT IS NOT A REAL INVESTMENT:

Note, Empty Vessel describes his financial dealings as investments, but in reality, he is not an investor, but a money lender charging interest. I have seen this happen many times where an investor is actually putting money into a start but it is treated as a repayable loan, in return for shares. It sounds far more sophisticated to call one self an “investor” rather than a “money lender”. Be very careful to be clear on whether someone is actually investing or lending money to your start up.

A Corp Pty Ltd

Empty vessel was also a money lender, in my start up A corp. The monies were always referred to as an “investment”, but were in fact were the provision of shares for money lending at high interest rates.  Within two years all the loans + interest were repaid to Empty Vessel. So Empty Vessel obtained a fabulous deal, shares in a company with $0 invested, and no outstanding loans.

 

The Loan Fiasco

Further to having no investment or loans, Empty Vessel actually borrowed money from A Corp (but when borrowing money as opposed to lending, the interest rate goes from as high as 15% to 0%). The borrowings by shareholders were agreed to and pro-rata loans were taken by all shareholders. In early 2016, it came time to call upon those loans from all shareholders. The other shareholders repaid their loans without any concerns, but when it came to Empty Vessel being asked to repay the monies he borrowed from our start up, he saw it as an opportunity to take advantage of the start-up for a personal gain, and the turn of events that followed can only be described as, well, pretty bizarre.

On the 18th of March, the company CEO and also the Financial Controller of A Corp requested via email an urgent meeting of shareholders to agree to the repayment of shareholders loans in order to meet immediate cash flow requirements of the business.

On the 18th of March 2016, a meeting was held in Empty Vessel’s offices. the CEO presented a cash flow spread sheet and all the loan amounts that had been taken by the shareholders. The CEO explained that due to timing of expenditure, our company required urgent cash in order to pay operational costs, payroll and taxes. A timetable was presented for all shareholder repayments, the following were the dates requested for re-payment by Empty Vessel:

21st March Empty Vessel loan repayment – $67,992.54

21st April Empty vessel loan repayment – $71,300.00

The timetable for loan repayments was agreed by all parties at this meeting. And the CEO and financial controller were confident about the business meeting its payment requirements on time.

 

Following the meeting A Corp’s Financial Controller emailed all parties and copied in Empty Vessels, financial Controller Elmo, and confirmed the re-payment schedule as agreed to by everyone. Following which, the CEO made repeated requests for the funds from Empty Vessel as agreed. The other shareholders paid what was required on time. But Empty Vessel didn’t pay, and more confusing, he and Elmo went completely silent. No response at all. The CEO starting to get concerned, and asked me if I knew why they were not responding to his requests for the agreed re-payment, and I replied that I was sure they were just busy and they would get back to him very soon.

Empty Vessel and his finance controller Elmo waited till after the due date of the March 21st payment, where they knew full well the urgent payments due to be made by the business. Now that the funds were overdue, and the company in quite a precarious position, Empty Vessel’s financial controller, Elmo told our CEO that he would not repay any loans he owed to A corp, unless A corp agreed to take over the loan obligation in full that he had put into the failed entity TOTO.

On the 22nd March the CEO wrote that “the amounts agreed to be transferred in Friday’s meeting are being delayed until matters regarding TOTO are finalised with Empty Vessel”. The CEO further highlighted the urgency of the need for the agreed funding, tax and rent payments, and the “major risk” of suppliers not being paid.

Effectively we were being extorted. Empty Vessel and Elmo knew that the company desperately needed the loan repayments to meet current liabilities, waiting till after its due date, then demanding “Repayment to Empty Vessel of $414,867” by A Corp for the loans it had made to a completely separate company. This may sound confusing and perhaps the assumption that here was some legal connection or commercial agreements between A corp and TOTO. In fact TOTO was an independently registered company. It had no connection legally to A corp at all. There was no loan agreement or any form of security by A Corp. In other words, TOTO, and any loans or liabilities it had to anyone, had nothing whatsoever to do with our start-up A corp.

The CEO’s urgent email was simply ignored by Empty Vessel and Elmo, and he continued to withhold the repayment of agreed loans. I was incredibly frustrated about the overdue payments the company needed to make, but outraged at the underhanded tactics to take advantage of a start up and its very difficult financial position as a threat to obtain a personal gain. I communicated to Empty Vessel in various emails that the situation was unacceptable, and that his loans owed and agreed to be repaid to A Corp had nothing whatsoever to do with any loss he suffered in TOTO. Even worse, Empty Vessel was also a director of A Corp, meaning there was a clear legal obligation to act in the best interests of A Corp, an obligation that was completely ignored for self interest.

 

I was deeply disturbed at the prospect of agreeing to a substantial liability that the company did not owe, and much more so where it was done through extortion. I flat out refused to pay the monies. I told our CEO not to worry, and that I would provide all the cash that Empty Vessel was meant to repay, so that the company would pay all its outstanding accounts. For the next few months I simultaneously provided all the cash requirements for the business, and asked repeatedly during this period for Empty Vessel to either repay his loans, or, if in fact he believes that A corp legitimately owed the $414,000, to provide any evidence whatsoever of any such obligation. Empty Vessel never provided any piece of evidence, because there was none. But that was just a technicality to Empty Vessel and Elmo.

As there was no evidence provided by Empty Vessel, and he continued to withhold much needed loan repayments for months, I sought to resolve the impass in May by providing all of the relevant background and emails I had on the matter to the officers of A Corp and to empty Vessel’s company. I requested that both offices review all the available information, and advise objectively on whether A Corp had any such liability. I asked Empty Vessel to await the outcome of this review by A corp and his own office. Seems like a pretty reasonable request? My problem was I was trying to use commercial and rational logic, but the other side were not interested in what was actually owed or not, they just wanted to get in money any way they could.

It was clear what any review would determine, even by Empty Vessel’s own office. Aside from Elmo, as the two of them concoct their schemes together. Its ironic to watch, as if they have some symbiotic relationship where they both say things they know to be scams, and make out that they are rational, but somewhere their guilt or anxiety manifests in external signs. Empty Vessel has this odd deep breathing he does when saying things that aren’t true. Elmo has this weird neck twitch. Its as if their bodies are physically uncomfortable with what their mouths are saying.

In any event, a logical evaluation would never end well for the investors, so instead of waiting for this advise, Empty Vessel resigned as director (totally fine) and tried to coerce the other directors of A corp to resign too (totally NOT fine). One of the other directors was a position filled by Empty Vessel, and so, simply resigned without so much as a single conversation with anyone in the company to understand the matter at hand. This further illustrates the imbalance investors can have, and how they can use their position to take advantage of start-up’s. This was now escalating into a significant internal issue, as all staff knew something very unsettling was occurring, and other directors were being brought into the mess. If your ever trying to get your way in a business, and have no moral compass, a brilliant strategy is to cause maximum havoc and disruption as a deliberate strategy in order to get your desired outcome, on the basis that the start-up might agree to almost anything to avoid the nuisance.

 

At that point, despite having already fronted all the cash needs for A corp, I thought the reputational damage could destroy the business, and despite the deep resentment ethically of giving into clear manipulation for self interest, I agreed to allow A corp to take over the liability of an unrelated entity in order to maintain an effective corporation and board. As soon as this was agreed to, Empty Vessel repaid the loans he had taken from A corp.

 

KEY LESSONS:

1. Don’t provide shareholders with loans on the basis that they will be given back when the company requires them. Retain cash in the bank, and avoid the option of it being used to put you over a barrel.
2. Any rorting or inappropriate actions will never be an isolated incident, but a sign of things to come. The earlier rent rort with Empty Vessel was an expensive lesson, but the TOTO incident cost us far more. After Rent Rort we should have seen a much bigger red flag, and sought ways to part company then. At the first sign of unethical practices, get out of the relationship.
3. Director appointments should be looked at very carefully when recommended by an investor. While things are going well, all will be well. But as soon as there is a misalignment, what you thought may have been a director serving the interests of the company, may quickly become a puppet diligently following the instructions of an investor.

“Once bitten twice shy!”. At least that’s how the saying is meant to go. In my case, about twelve years after Rent Rort 1, I naively fell for the same trick again.

The circumstances with empty Vessel were virtually the same as Rent Rort 1, which very sadly, shows crooked patterns in investors not one off random events. The same line was given, “we have lots of free space, just use some of the empty desks”. But this time I was more confident about the free offer for two reasons. The space we are talking about was one of the most expensive office buildings in the middle of Melbourne’s most expensive commercial strip, Collins Street.  To put into context, it was the same building as the Melbourne head office of KMPG. It would be totally unreasonable for a start-up only just registered and with 2 staff to expect to pay A grade commercial leases. Secondly, this time I was relying on a personal relationship of over a decade. In reality, this is a pretty weak excuse on my part, in fact that was even more reason to be cautious.

For over a year rent was never mentioned, no payments, no outgoings etc. The moment the company generated revenue, the invoices starting rolling in. And this time the amount was enormous. Full commercial fees, plus outgoings backdated to the date the business commenced. We were even charged part of Empty Vessels office staff salaries. If that wasn’t cheap enough, Empty Vessel even calculated the percentage our staff would have used for tea and biscuits. When we argued the point, that this was never agreed to, and not in good faith given we were told we could use empty space that was available as a start-up, the coy response “Of course we were always going to charge rent, what made you think otherwise”.

In fact this was never agreed to up front, because no reasonable thinking start-up, would agree to pay from inception, some of the most expensive real estate in the city. It would be not only excessive, but irresponsible to do so. The only benefit would be to the landlord, or in the case of Empty Vessel, in their personal interest, to the detriment of the company.

If this wasn’t miserly enough, the icing on the cake, was that we were a social enterprise that supported a philanthropic foundation that I had founded. There was a small space used which was in essence, a storage space, behind the office printers. It was used by the charity as temporary space for part time volunteers. The charity was charged tens of thousands of dollars for the use of this space. To date the only shareholder that personally charged fees and obtained a financial gain, from a charity seeking to use its money in the poorest parts of the world, was Empty Vessel.

 

Although the experience left us with a bad taste in our mouths, and led to the decision to lease and fit-out our own office space (which cost for a whole city floor less than what we were being charged charged for some shared space), the big issue at hand, is the misalignment that can occur between directors personal interests and the companies interests.

Alignment is one of the most important attributes for success. Misalignment can be disastrous. “good luck to you, so long as your interests don’t conflict with mine” (Marlon Brando, The Godfather).

If a person is both a landlord of a property, and a director of your start-up. If they are determining the terms and price of the space, they are by definition, in a conflicted position. They can either do the best thing possible for them personally as a property owner, ie charge the highest amount of rent possible on the most favourable terms, to the expense of the company. Or they can prioritise the company, giving them free or advantageous rates, at the detriment of the property ownership. The  most important lesson here, – NEVER create a situation where someone has to chose between self-interest OR your companies interests. It’s a bad position for them, and in my experience, you’re the one most likely to lose out.

 

Can this be managed effectively. Yes of course, you can have a lease in writing agreed to in advance to ensure all commercial terms are clear and documented. To avoid conflict, Empty Vessel should have had an independent estate agent, establish fair rates, if charges were in fact even agreed to at all. However, the best case is to simply remove any chance of conflict, and deal with arms length service providers at all times. If you’re ever in a situation, where an investor decides on the price of a service they have an interest in, beware, you have a Red Flag situation.

 

KEY LESSONS:

1. Misalignment of interests is a recipe for disaster. Avoid putting yourself in a situation where a director or shareholder is also a service provider.
2. Always document any services. The assumption is you don’t need to document something that isn’t been charged for. However there is no cost, and no downside in putting it to writing, “please confirm that (services) will be made available at no cost to the company for a period of (time)”.

 

I didn’t adhere to the proverb, “once bitten twice shy”, but I’m certain now to be, “twice bitten, forever shy”.

The investor, lets call him Weiner, was questionable from the outset. Ironically, I was warned about his improper conduct. But a few things made me ignore the clear warnings I was given. Firstly, I had just founded my first education company early in my career. We like most start-up’s were desperate for seed investment, and desperation is never a good position for negotiation finances. Secondly, I was a trained lawyer, and thought, if I have my eyes open and clear investment contracts, that detail rights and obligations, I could contain any malefance. I was overly optimistic!

 

Rent Rort #1

As soon as an investment amount was agreed to,  we were told, “don’t waste money on rent, we have spare space in my office”. For an early stage company, any cost saving is compelling, more funds to go to product development, marketing etc. Easy decision right?

We moved in without any further discussion, and worked hard in the same space for about a year. We never talked or emailed any rental details, no leases etc. Until that is, the company started to generate revenues. We then received an invoice for the past years back rent at full commercial rates. This was clearly a shock, unfair and clearly a ploy for Weiner to get his hands on revenues the company was now bringing in. The rent amount, would have constituted a significant portion of the whole seed investment, so in fact Weiner was in large getting his shares in the company just by providing some unused space.

 

The emotional reaction is to simply tell Weiner tough, we have no lease, no email, no evidence at all that the company is liable to pay rent. But here is where Weiner holds the trump cards.

• They are effectively the landlord, so if we refused to pay, they could theoretically refuse entry, and greatly disrupt the business
• The business is operational, stationary, fit-out, phone lines, IT. To relocate would be a massive distraction to the business
• Weiner is still a shareholder in the business. A dispute about rent, can effect the ability of the company to function effectively.
• Most relevant, there are bigger fish to fry. Weiner knows, as a mere investor, while the rest of the team are working 12 hour days, 7 days a week, that he can just sit back demanding rent and not be overly bothered. Conversely, the team has much bigger fish to fry. Like getting the next platform release out on time, big client proposals we are very keen to win etc. What Weiner knows, is that in the scheme of things, arguing about rent is less important than building the business.

 

 

KEY LESSONS OF THE RENTY RORT:

 

• Don’t take a favour at face value, get it in writing.  

Get a formal lease stating a rent free period. Or at the very least,  confirmation in writing that the business will have access to X metres of space at zero cost. Clarify if there are any charges for outgoings, IT etc.

 

• Intentions speak louder than words

The bigger question is whether there was intentionally a rort to get money, or a genuine misunderstanding. Loose comments like, “don’t worry about rent”, may be open to interpretation. On the other hand, clear statements like “we have empty space, don’t waste money on rent”, only to be charged rent when the dollars start coming in, is, unfortunately, a rent rort.

 

• Red Flags should be seen as a red hot iron

If you have been prey to a rort like this, it is NEVER an isolated incident. It is a red flag that should be seen as important enough, that you dissolve the relationship. Is this completely exaggerated over simply a dispute about rent? No. The reason being, it is tempting to try to isolate an issue to the matter at hand and move on. And that is what I tried to do, but working with a number of investors for almost 20 years tells me an undeniable truth. People fall into one of two camps, they are either ethical in their dealings, and this will giovern their actions in fairness and reasonableness at all times. Conversely, where there is unethical, greedy, self interested behaviour, this is something that equally will govern all future interactions.

 

EXPENSE RORT

Once you have identified that your dealing with a greedy and crooked investor, check expenses very closely. Remember we were co-located. I went to pick up a box of printed materials once from a printers, which I hadn’t done before, and the girl who worked there said, are you the business owner. I said that I was, she knew Weiner, and somehow knew of his dodgy dealings, enough to be disgusted by them. She said, sorry to tell you but he does printing for his other businesses and tells us to put the bills onto my companies account. This was another shock, and something I just never even contemplated, so I thgen started to look much more closely into any expenses and invoices where there were shared services and suppliers. Unsurprisingly at this stage, a number of improper activities were identified, costing the business significant amounts of money.