Times of economic uncertainty can lead some people of questionable character to bend or break the rules in desperation to either simply get by or perhaps get one by their investors. While there is no way to predict one’s future actions with one-hundred percent accuracy, there are tools available to help hedge fund investors gauge what type of person their fund manager is before handing over millions of dollars. One small and relatively inexpensive tool to sniff out fraudsters is a background check.

Yet, as important as it is to learn all one can about their manager, investors also need to be educated not only about what type of information will be provided on a background check but also as to how this information was obtained. One area where misinformation still abounds concerns criminal records.

What consumers need to know is what comprises these supposed nationwide databases and how inaccurate this information actually is. Many investigative firms claim to provide a nationwide search for a relatively small fee, sometimes for tens of dollars. In such cases, what you pay for is what you get: very little.

So-called nationwide criminal databases obtain their information from state prison records. This means they contain information on every defendant found guilty of a felony and sentenced to time in prison. This also means these databases are missing a great deal of information: misdemeanors and felony convictions that don’t result in prison time. According to the United States Department of Justice, prison sentences are typical in about 40% of all felony convictions.¹ This means that on top of missing misdemeanor information, these nationwide databases will be missing the 60% of felonies that resulted in a jail sentence or probation. 

The closest thing that exists to a national criminal database is the National Crime Information Center (NCIC) or as it’s informally known: the FBI database. While not open to the majority of the public, some private institutions are granted access for the purpose of conducting background checks. This index contains information regarding criminal history, fugitives, stolen properties and missing persons. As thorough as the information seems, there are still some flaws in the system. For instance, most misdemeanors are not reported. Additionally, the index relies on county records to be reported to the state level, who then in turn reports that information to the FBI. These multiple steps can lead to breakdowns in the information due to simple human error. Knowing this, in 2003 the FBI exempted the NCIC from the Privacy Act of 1974 stating that “it is impossible to determine in advance what information is accurate, relevant, timely and complete”.²

The best and most comprehensive approach to criminal records is a combination of database and direct records from the courthouse where the information is physically filed. Firms such as ours use database information as a guide, directing us where to conduct our on-the-ground research through address and work histories or perhaps media references. By going directly to the source, this ensures that the information gathered on subjects is the most accurate and up-to-date.

So before spending money to vet your manager, it may be prudent to spend some time to vet your background check service provider.

References:

1. Sentencing statistics for years 1992, 1994, 1996, 1998, 2000, 2002 and 2004 can be found at http://www.ojp.usdoj.gov/bjs/sent.htm

2. Source: http://edocket.access.gpo.gov/2003/03-6926.htm

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