Business Investigations

Clearwater breaks our business investigative client services into three major practices: 1) Corporate Intelligence, 2) Financial Investigations, and 3) Asset Recovery. It started with an article written in The Economist on January 5, 2013 entitled “Corporate Intelligence: The bloodhounds of capitalism.” Globalization, the article suggested, has given rise to a little known industry that only in the past several years has just surfaced as a major player in advising corporations and governments. Since 2008 the industry has seen a steady increase in revenues. “Hard times often expose wrongdoing by causing scams to collapse,” the article pointed out mentioning the mega-fraud perpetrated by Bernie Madoff. The rise of cyber-attacks has created more work in digital forensics, e-discovery and cyber-security, and globalization has increased money-laundering and other suspicious banking transactions. The article prompted the firm to review its own history and experiences in business investigations.

Since its founding in 1992 CSC Capital has undertaken numerous business investigations on behalf of restructuring, merger and acquisition, and consulting clients. Even in the firm’s very first Company Profile, written prior to the firm’s conception mentioned services such as “Risk management assessment and feasibility studies,” as well as “Minimizing human resource liability and risk.” Even “Information campaigns” and the “Dissemination of information” were services offered in the course of strategy consulting engagements. However, over the years CSC Capital major client contributions in business investigations were in company and personnel due diligence investigations, accounting ill-regularities, and asset recovery and bad debt collection services. Therefore, the firm’s experiences with its current range of investigative practices has been extensive and our successes time-tested.

Because of the firm’s corporate restructuring-based approach to client services, we bring a unique perspective to an industry largely dominated by private investigators and corporate “gumshoes.” Our approach is systematic, step-by-step and steeped in business acumen. Interestingly, the firm’s investigative motto has been “Leave No Stone Unturned,” for years. And it seemed that for every stone turned over a new set of “bugs” emerged. One client mentioned that the firm’s approach to business investigations was more exhaustive and complete than a audit by the IRS. However, like CSC Capital’s holistic restructuring services, and our holistic Risk Management services, Clearwater also views business investigations in a holistic manner. In a largely investigative engagement under the heading of a “restructuring” a client once wrote “There is nothing in the market that matches CSC’s restructuring services.”

Conducting a business investigation holistically allows the process to proceed faster and with more accuracy. Clearwater’s incident response timetable is shortened because often investigations have a “window of opportunity.” And our fact-finding methodology is steady, reliable and consistent. Because “the language of business is accounting,” if relevant to the investigation, we typically take a financial investigative approach and trace every accounting number to its source. As the first line of communications in business we tackle business investigations with a thorough examination of the numbers. Behind every accounting number our founder is fond of saying, “lies a human face or faces.” The income statement and balance sheet is just the point of departure; accounting data comes in many useable and unusable forms so it is normally wise to reinvent or reformat the all relevant financial data to accurately expose problems. And sometimes not only does this reinvention process expose problems relevant to the business investigation but also for the need of a specific risk management solution or even an entire corporate-wide restructuring in order for eliminate the possibility of the problem or problems ever surfacing again. This is where the synergistic interplay of client services from both Clearwater Risk Management services and CSC Capital Corporate Restructuring services are useful as well as appropriate.

Corporate Intelligence Practice

A board term, corporate intelligence generally means defining, gathering, and analyzing useful corporate information in order for a business to gain competitive advantage. Clearwater’s corporate intelligence practice specifically targets it’s investigative efforts toward helping clients understand more about the integrity, activities, background, reputation, forecasted track record, source of funds and financing arrangements, and connections of merger and acquisition targets, business partners, agents, distributors, vendors, customers, licensees, investors, joint ventures, alliance partners and competitors. We also provide similar background inquiries on potential board members as well as senior and key management appointments.

Our corporate intelligence services are narrowly confined to conduct advanced due diligence and screening on businesses and individuals, and we generally focus on the external business environment. Our fact-finding process includes both the dissemination of widely available factual information and more difficult to access open-source intelligence and secondary information. We then add value through intensive global primary research by creatively identifying and interviewing a variety of participants that assist us in formulating a well-rounded, corroborated view of the salient opinions and facts. We apply the highest ethical standards in gathering hard-to-find information on companies and individuals – we do not engage in industrial espionage. Nor do we take for granted that what is stated about businesses and individuals by journalists or bloggers on the internet is fact.

Clearwater’s unique approach to investigative analysis for corporations and businesses separate us from our competitors. Our advisors’ years of hands-on business investigation experience along with CSC Capital’s expertise in holistic restructuring, mergers and acquisitions, and financing provide us with the ability to read between the lines and specifically the numbers of the gathered information, allowing us to add critical insights thus forming an unbiased hypothesis of the analysis to-date. We then selectively re-interview participants who can add additional value to our findings. In the end, our final analysis is built on credible, real-world data as well as our world-class primary research skills. And our requisite knowledge and expertise in complex corporate development and restructuring situations along with our business and finance acumen gives us the ability to provide more insightful recommendations. Of course, the depth of fact-finding and analysis is situational based upon the size, complexity and global reach of the investigated business, but our process of due diligence and analysis is consistent with every engagement.

After a demonstration of our investigative findings which includes a detailed and carefully sourced business analysis that addresses the key strategic questions and concerns, including our conclusions, Clearwater works with our client and other decision-makers to develop action plans and strategies.

Clearwater’s due diligence on individuals is conducted in the same fashion as for businesses; first researching open-source and secondary sources, then conducting our own extensive global primary investigative search, including interviews with select participants. Similar to the detailed background checks of a U.S. military top secret clearance, we verify the backgrounds, associations, and resumes of potential new partners, board members, top management and key appointments. Clearwater’s tailored screening process helps companies mitigate financial risk and enhance compliance by ensuring the surface quality of potential partners, new hires, etc. Our process includes criminal history checks, motor vehicle record abstracts, credit checks, property searches, drug and health screening, I-9 and E-Verify services, and employment and education verifications. On completion of our findings, clients receive a detailed and carefully sourced report that addresses the key requirements for the appointment and seeks to draw conclusions and make recommendations.

Financial Investigation Practice

Where money comes from, how it moves, and how it is used? These three simple questions frame the overall subject as well as the objectives of financial investigations. However, financial investigations are far from simple. When used as legal evidence in a court of law a financial investigation is known as forensic accounting and when used to probe deeply into a company’s financial condition to provide reasonable assurance that the financial statements are presented fairly the investigation is called an audit. But in all cases a financial investigation goes much further and deeper than a typical financial analysis. In most situations it is designed to uncover something that is perceived wrong or to verify that the financial statements are accurate and justified. CSC Capital over the years has conducted internal financial investigations and audits from both points of view for clients. We do not offer independent third party audit opinions for shareholders, banks, regulators, courts of law, or other parties. We work solely for our clients.

Clearwater uses both advanced management accounting techniques and standard financial accounting procedures when conducting our investigations. In particular what makes our probe unique is the use of our proprietary and highly detailed management accounting techniques rarely used by forensic or public accountants. This gives us more creativity as our process is a means to an end, rather than an end in itself. Again our approach is holistic and our analysis is conducted only after the complete reformation and recreation of the financial statements.

Using the same restructuring-based financial restructuring methods that CSC Capital has employed for two decades, our investigative process reconstructs the financial statements around all designated profit and cost centers by all geographic areas and facilities. We then incorporate a detailed integration of all sales, cost of goods sold, and expenses within each profit center creating gross and contribution margins for each product line and for each responsibility center, including all profit and cost centers. Then by absorbing all corporate overhead accurately into each responsibility center we are then able to create actual real-time bottom-lines for otherwise invisible financial areas. Finally, the comparisons of all line-item ratios by sales volumes that were also previously invisible provides us to see the trends as well as the flow of money into every old and newly created account. This provides clients with both a holistic and introspective view of their companies not usually obtainable. Sometimes in order to provide specific aspects of the information needed, we procure and reconstruct certain electronic data into useable information. Nonetheless, in all situations using this technique exposes where all the “skeletons and bodies are buried.”

At this point our investigation becomes rather academic; trace all ill-regular and suspicious cost of goods sold and expenses line-item cash flows, including all general and administrative overhead expenses to their original monetary source. Compare all vendor and supplier purchases by posted cost of goods sold line-items and by bank statements. Break out regular pay, benefits, overtime (both abused and managed), and incentives and commissions separately comparing posted amounts vs. actual payments, and verify legitimate employee expenditures on company credit cards, etc. On the balance sheet side, conduct a valuation of all asset categories, including a determination of obsolete and excessive inventories, validating actual inventory needs by product sales. Compare excessive product build-ups to each vendor and supplier as well as by all internal purchasing agents. Review and compare accounts and notes receivable aging reports by each customer noting whether customers with aging issues have had their credit lines cut off. Analyze all heavy equipment and vehicle acquisitions or leases to sales, warehousing and traffic requirements, including all maintenance equipment and tools. Review the accuracy of all balance sheet liabilities, comparing actual debt owed to the reported numbers, and investigate all off-balance sheet assets and liabilities ensuring that all items are not owned by or is the legal responsibility of the company, generally speaking.

Clearwater combines unparalleled management accounting expertise with investigative financial acumen for clients who have already discovered wrong-doing or are suspicious of malfeasance. Our practice is unique due to our synergy with CSC Capital’s holistic methodology and using the firm’s restructuring-based approach in financial investigations. We work with clients from initial detection of a problem through to its resolution, whether it be employee termination or the separation of a business relationship, litigation or referral to the appropriate law enforcement agency. Besides the formatted financial structure quantitatively documenting our analysis, we provide clients with a qualitative analysis report of our findings, including a narrative as to what occurred, who was responsible, and a plan to prevent such situations from ever occurring in the future. If necessary and upon our client’s approval we will prepare separate documents for third parties. Finally, if there is need for asset recovery services, specifically in the expedient and high valued liquidation of obsolete and excessive inventories, equipment and vehicles, or in the collection activities of aged receivables or bad debt, Clearwater stands ready to advise.

Asset Recovery Practice

To any distressed company there is nothing more critically important than cash flow. CSC Capital’s turnaround services over the past twenty years has made it our business that being on the “front line” of a restructuring means ethically “getting your hands dirty.” Revenue and profit enhancement improvements, more cost-effective procedures, and reductions in personnel and expenses generally bring results in the mid-to-long term, but rarely do such intervention tactics immediately create additional cash, or eliminate unnecessary liabilities. This is where CSC Capital’s asset recovery processes provide the “cash bridge” from the emergency phase to the stabilization phase when profit improvements can be seen on the bottom-line or until necessary financing can be raised. Through CSC Capital’s innovative techniques Clearwater applies the same force of action to raise cash in the short term for either distressed companies or profitable companies just wanting to increase liquidity or decrease their debt-to-equity ratio, improve their current ratio, or redistribute tax free earnings back to stockholders.

Clearwater undertakes three major liquidity generating strategies for clients who carry raw materials or stock inventory, are equipment and vehicle intensive or offer credit to customers: 1) Liquidation of unnecessary inventory assets and/or negotiating with vendors and suppliers to take back these assets at cost or at a small re-stocking charge. Generally, vendors will cooperate in order to secure the account for future sales. 2) The sale and/or liquidation of unnecessary equipment and vehicles. In distressed situations, when the equipment or vehicles are not fully owned we negotiate with the suppliers to take back the equipment and vehicles to stop further payments. 3) The stepped-up debt collection activities for aged and difficult to collect accounts receivable and bad debt and the discontinuation of credit for customers with any receivables over a pre-determined time period. Our success in all three strategies lies in our ability to successfully restructure the company, thus again utilizing the synergistically alliance with CSC Capital.

Inventory liquidation. First things first, if a company has to liquidate inventory for any reason it is because they did not conduct the purchase correctly. Inan articleentitled “Maximize return on inventory-invested dollars,” in the April 2002 issue of The Merchant Magazine, we wrote that there were three elements to prevent excessive and obsolete inventories. 1) Have forecasted knowledge of product sales provided from the sales department. Do not rely on past inventory levels or computer generated minimum and maximum levels. Past sales do not reflect future sales. 2) Have knowledge of present sales transactions in order to check the reliably of forecasted product sales from the sales department. Sales managers may to too optimistic or pessimistic in their forecasting, thus it is important review current sales activity. 3) Attention to detail and buyer/management commitment to keep inventory at optimum levels. Most purchasing agents choose to invest far more than necessary to achieve the same dollar return, which is often caused by having too many purchasing agents or agents having too much time on their hands. Just like any asset purchased inventory is an investment. Fast turning inventory is a wise investment; slow turning inventory is an unwise investment, and obsolete inventory is a waste of money.

CSC Capital’s ability to liquidate unnecessary inventory has become legendary, but importantly the firm’s ability to create a system to maximize inventory-invested dollars is not only well documented, but perhaps the most innovative and effective in the industry. Clearwater’s asset recovery services not only relieve our client’s companies of the burden of carrying the costs of unnecessary inventory, but we create the system that will prevent the effective situation from every happening again.

Equipment sales or liquidation. Like inventory, equipment and vehicle purchases should be conducted based upon current sales or correctly forecasted sales volume. Too many times we have seen enormous amounts of equipment and vehicles languishing in warehouses and fleet yards. Again a wasted return on investment. Better to have the cash accumulating interest or the equivalent amount of liquidity available for necessary spending than holding the depreciating asset. In economics this is known as the “liquidity preference theory.” However, the sale or liquidation of these hard long term assets can be considered a liquidating dividend when a company desires to distribute the cash on a pro rata basis back to its stockholders, as there is no tax paid on the earnings. This is often an personal incentive for owners to approve a liquidation sale of unnecessary or wasted assets. In either case there are cost savings associated with such sales as the company has reduced, just like inventory, its holding costs, such as storage and unnecessary handing costs, taxes and insurance.

Clearwater’s process is a organized and step-down laddered orderly approach. First negotiating “take-backs” with original equipment manufacturers, conducting well advertised nation-wide clearance sales, contacting competitors and high volume customers with discount packages, and finally the use, if necessary, of liquidators. The firm’s restructuring experiences has documented numerous times our ability to obtain top value on asset sales because the buyers see the preference of cooperating for future equipment and vehicle sales vs. the prospect of no future sales, similar to inventory suppliers. Also in many situations the original supplier might have recognized the unnecessary build-up in the first place, adding to their willingness to assist in an out-of-court restructuring rather than be noticed by the court as a vendor who oversold especially if there were recent transactions.

Debt collection services. CSC Capital’s origins in assisting restructuring clients collect money was born because of necessity not because of a planned strategy. Outsourcing collections to attorney’s and agencies met with mixed results. In essence the firm fell into the role for three reasons. First, due to a lack of the sense of urgency by professional collectors despite the gravity of our client’s financial situation. Second, we understood the problems with our client’s in-house credit and collections process and an in-depth sales and collection history of customer relationships that both contributed to the collections issue. Lastly, we understood deeply the connection of the importance of extending borrowing bases when working capital lines of credit could otherwise be ratcheted-down preventing the use of uncollected funds. On this last point, working with both lender and the default customer added the leverage necessary to solve both problems at the same time.

Clearwater’s collection activities are strictly business-to-business related. We do not acquire unsecured consumer bad debt balances at a fraction of their costs, applying a wide range of collection methods, some ethical some not. Our collection activities are focused on in-house business credit advances to their business customer who is either near or in default. Our background experiences in restructuring and turnarounds provides a profound knowledge as well as masterful techniques in collections unmatched by collection attorneys, business investigation firms who conduct collections, and traditional collection agencies. In the end, the synergy between Clearwater and CSC Capital ensures that the most sophisticated restructuring methods are used, whether or not the client is engaged in a CSC Capital Corporate Restructuring, though it is many times advisable.

With all Clearwater’s asset recovery services, clients are charged a certain percentage of collected funds and/or liquidated assets. In domestic debt collection activities clients are typically charged 25% of collected funds or higher, with global clients being charged 30% or higher. We typically charge on a graduated scale the more aged an account. The actual price received of an liquidated, or otherwise disposed asset is also charged a contingency success fee varying upon the item and amount liquidated. With all asset recovery services an initial weekly retainer is charged to partially cover our expenses due to the fact that we have to work on the client’s site determining asset valuations, working with suppliers, credit customers, lenders and prospect asset purchasers. If a restructuring engagement emerges from these services a reduction of restructuring services is pro-rated to the client.