We’ve all seen those commercials for products on TV that promise “amazing results.” Whether it’s some kitchen tool, nifty gadget, or miracle cure to some common ailment, you tend to watch with a healthy bit of skepticism.
“That couldn’t possibly work as well as it does on TV,” tends to be my line. Especially when the guy is sitting in a boat with a screen door bottom that magically isn’t leaking because some adhesive is keeping the water out.
But I’ve learned that big private equity firms have to be aware before they buy too. With the government naming the firm Riordan, Lewis and Haden (RLH) as a defendant in a case against a compounding pharmacy in which the group bought a controlling stake, it could be open season to hold investors liable for fraud committed by their portfolio companies.
I spent some time over the last week-and-a-half talking to lawyers about whether this signaled a new direction for the DOJ for my story entitled Are Private Equity Firms the New Health-Care Fraud Target?
Those lawyers had two messages: 1) This might be the sign of something new, and 2) do your due diligence.
This case may be the tip of an iceberg or just a case with specific facts that are bad news for RLH. Attorney Justin Linder told me that the allegations made against the firm were fairly egregious.
But every attorney I spoke to agreed that private equity firms need to do their due diligence and ensure the companies they are investing in employ robust compliance measures.
Some of the attorneys I spoke to told me a private equity firm has to look for sudden changes or increases in profits. That would be a sign to take a closer look to make sure everything is done on the up-and-up.
Kind of reminds me of those commercials for the Made-for-TV products. If it looks too good to be true, then it probably is.
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