Search

How can we help?

Icon

Avoid investment fraud with essential due diligence

It is well known that a high percentage of transactions or investments fail to meet their expected targets. Case studies suggest that this can most often be mitigated by a proper due diligence exercise.

The importance of due diligence

For a buyer or an investor, due diligence offers the chance to truly understand the ins and outs of their potential target, and the associated risks and pitfalls that may accompany ownership or investment. For a seller or founder, this critical evaluation of its business is a crucial opportunity to identify and make good any issues prior to buyer/investment involvement and will help deliver a smooth path to completion.

There are great risks of running an insufficient or inaccurate due diligence, our experience confirms that this often remains an overlooked, or underestimated, part of the investment, or transaction, timeline.

The Theranos founder conviction

Recently, the media has been dominated by the conviction, by a Californian jury, of four counts of fraud by Elizabeth Holmes founder of Theranos. The meteoric rise and capitulation of Theranos, the purported life-changing health technology company, makes for a fascinating case study.

Founded by Ms Holmes in 2003, the company claimed to have created blood-test technology that required only a very small sample to provide automated and rapid results for conditions such as cancer and diabetes. By 2015 the technology’s validity was under huge scrutiny from medical researchers and investigative journalists.

Exposes were published and by 2018 the company had dissolved. By this point however, Ms Holmes had already raised $700 million from investors, including some very high-profile and influential individuals. Investor fraud was alleged, and, at the beginning of this year, Ms Holmes was convicted.

Whilst the fraud charges relate to the information provided to the Investors, and are not a reflection of the investors themselves, this remains a good reminder of the importance of robust financial and legal due diligence.

For a buyer or an investor, due diligence offers the chance to truly understand the ins and outs of their potential target, and the associated risks and pitfalls that may accompany ownership or investment.

How to conduct due diligence?

It is important to have the support of an experienced advisors in this area, and together go through the due diligence checklist

Three types of due diligence include:

  • Legal due diligence -lawyers will check the legal contracts that the business has legal title to sell, ownership of all the assets and that regulatory and litigation issues are fully addressed
  • Financial due diligence – checking the numbers and making sure consistency and no hidden financial issues
  • Commercial due diligence – finding out the business’ place in the marketplace, checking competitors and the regulatory environment
    Whilst by no means a guarantee of protection against criminal actions, any ability to mitigate the risks associated with investing into a business should have a high value attributed to it.

Due diligence is most often the key to reassuring the buyer/investor that financial, operational and legal processes have been complied with and whether there are any areas which need to be addressed or which may impact their decision to proceed. If you are involved in a merger or acquisition, contact our commercial solicitors.

Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

Author profile

About this article

Read, listen and watch our latest insights

art
  • 15 September 2025
  • Immigration

Sharp rise in Sponsor Licence Revocations – What employers need to know

The Home Office has reported a record number of sponsor licence revocations over the past year, as part of its intensified efforts to crack down on abuse of the UK’s immigration system.

art
  • 10 September 2025
  • Commercial Real Estate

Trouble at the Table: The Challenges Facing the UK Hospitality Sector in the run up to Christmas 2025

The UK hospitality sector, long celebrated for its vibrancy and resilience, is facing a perfect storm of economic, operational, and structural challenges in 2025.

art
  • 09 September 2025
  • Commercial Real Estate

Le bail commercial anglais: quelques points essentiels à considérer

Typiquement, les baux commerciaux en Angleterre sont de court terme, d’une durée de 5 ou 10 ans, avec un loyer de marché et des ajustements du loyer périodiques en fonction de l’inflation ou d’autres facteurs. 

art
  • 09 September 2025
  • Corporate and M&A

The Failure to Prevent Fraud Offence – be prepared to avoid criminal liability

The failure to prevent fraud offence is a new corporate offence which has come into force on 1 September 2025.

art
  • 08 September 2025
  • Employment

Can employers still make changes to contracts after the Employment Rights Bill?

The short answer is yes but it will be much more difficult for employers following the introduction of the Employment Rights Bill because their ability to fairly dismiss employees who do not agree contractual changes is being restricted. 

art
  • 05 September 2025
  • Privacy and Data Protection

When Ignoring a DSAR Becomes a Criminal Offence

On 3 September 2025, Mr Jason Blake appeared at Beverley Magistrates Court and was fined for failing to respond to a data subject access request (DSAR).