Virtual Due Diligence

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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.

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