Investors fail to engage in elemental due diligence when they do not understand the underlying technology. This results in a superficial understanding of their investment materials, which unfortunately leads to them being taken advantage of. Likewise, they rely on the investment seeker’s professional services firms to act in an ethical manner throughout their engagements with their clients.
This can lead to disastrous consequences.
The founder, former Chief Executive Officer, and former Chairman of the Board of Directors of Kubient, Inc. engaged in a scheme to defraud investors and auditors about the quality of his company’s anti-fraud software, which is ironic, and earnings from its sales. The company’s employees were instructed to create fake analyses that claimed successfully performed beta tests. These fake analyses were referenced in fraudulent investment materials that wrongfully recognized $1.3 million in revenue derived from the success of the tests.
This fraudulent scheme enabled Kubient to raise more than $12.5 million in its IPO resulting in its shares being publicly traded on the Nasdaq stock exchange, and more than $20 million in its secondary public offering in December 2020.
We must assume that no investor understood how the company’s software actually worked. In fact, we must question whether any investor reviewed the underlying reports. This made them easy targets. Kubient’s Investors–like all other investors–relied on the Kubient’s professional services firms to make statements that are truthful and accurate to the best of their knowledge. But when these professional services firms fail to act after learning their clients provided them false information, the investors are completely unprotected.
Therefore, investors who do not follow the Peter Lynch school of investing–invest in areas you are familiar with–should recognize that they are totally out of their element. Proper due diligence needs to be performed for any size of an investment. The extent to which you engage in due diligence will ultimately be up to you, so the only suggestion we can make is: do not be shy about asking for information.
Trust me, I also learned this lesson the hard way.
David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, and other issues.
He can be reached at david@seidmanlawgroup.com or 312-399-7390.
This blog post is not legal advice. Please consult an experienced attorney to assist with your legal issues.
Photo Credit: Asking Questions
