Failure to Perform Due Diligence (2024)

When Does Failure to Perform Due Diligence Become Investment Fraud?

Broker-managed investment accounts, mutual funds, and hedge funds are just some of the financial products that investment managers take an active role in. When financial professionals buy and sell stocks or commodities for clients, these money managers are expected to do due diligence on the investment products they buy. Likewise, company executives including CEOs and CFOs are also expected to do due diligence before signing off on any financial disclosures their companies make.

Failure to perform due diligence can get someone fired from a job and, in some cases, can result in a civil lawsuit for breach of fiduciary duty. This can have big financial consequences. The biggest legal risk, however, is that there are times when failure to perform due diligence is actually criminal.

Whether you are facing civil action, are the subject of an SEC investigation or have been charged with a crime, you need help defending and protecting yourself. At Bukh Law Firm, PLLC, our New York City investment fraud lawyers have extensive experience in representing money managers, CEOs, CFOS, and other financial professionals. We understand the complexities associated with the prosecution of white collar crimes and we know the laws inside-and-out that authorities are using to come after people in the money business. We are here and ready to provide you with assistance until all of your legal issues related to a failure to perform due diligence are resolved.

What is a Failure to Perform Due Diligence?

Due diligence simply refers to an investigation or an audit before entering into a transaction, undertaking a legal obligation, or making a purchase. The extent of the investigation that is required for someone to do his due diligence varies depending upon the situation. A person buying a few shares of a stock is going to need to do much less investigation than someone who is making a substantial investment in the purchase of a multi-million dollar commercial property.

The question of whether someone has done his due diligence before entering into a transaction is a subjective one. In the case of a real estate purchase, for example, is it sufficient due diligence to do a title search and inspection of the property or does the investor need to do a thorough review of the property’s environmental past to ensure there is no potential CERCLA liability before making the investment?

Because there may be different standards used to determine if someone has done his due diligence, there are myriad defenses you can raise if you are being accused of not doing enough. Whether you are facing civil or criminal charges for your omissions, you can raise arguments about customary practices within your industry and demonstrate the extent of the investigation you conducted. If you can raise doubts about whether your actions were enough to constitute due diligence, you should not be held civilly or criminally responsible for entering into transactions that turn out not to be good investments.

Is Failure to Perform Due Diligence a Crime?

Failure to perform due diligence usually has civil consequences, if any consequences at all. An investment manager or financial professional who owed a fiduciary duty to clients must perform due diligence when choosing investments to buy. In some cases, however, there is a possibility of criminal action.

A failure to perform due diligence could result in criminal penalties under Sarbanes-Oxley if a CEO does not perform due diligence and certifies misleading corporate financial statements as accurate. Criminal charges could also be brought against an investment advisor who does not research a stock he is promoting and who participates in a pump-and-dump scheme (aggressively pushing a stock to raise its value, after which those running the scheme sell their shares and the marketing stops so the share price falls again).

It can be difficult for prosecutors to show that a simple failure to perform due diligence actually rises to the level of a criminal act. If you are being charged with a state or a federal offense, you need to get help so your attorney can help you to begin to undermine the case against you.

Getting Help with an Investment Fraud Case

At Bukh Law Firm, PLLC, we represent clients accused of all types of investment fraud and financial crimes. Our New York City white collar crime defense lawyers can raise a vigorous defense if you are facing any legal actions for failure to perform due diligence. Call today to learn more.