Danny Pang's Lesson for Investors

As I sit down to write the first post of my new blog, one of the big business stories of the day was the Wall Street Journal's apparent exposure of Danny Pang, the head of the $4 billion Private Equity Management Group of Irvine, Ca.

Not only was Private Equity Management based partly on a Ponzi scheme, according to one of its former executives, but Pang's entire presentation of himself may have been based on lies.

The University of California at Irvine, where Pang claimed to have graduated and earned an MBA, has no record of his earning a degree, the Journal reported. And Morgan Stanley, where Pang told associates he had worked as an investment banker, reportedly had no record of his employment.

Pang also may have been fired for stealing from a venture capital firm where he worked in the 1990s, according to the Journal's reporting.

The amounts of money involved in Pang's case may prove to be relatively small compared to what Bernard Madoff stole and what Allen Stanford is accused of.

But in one aspect, I find Pang's case more shocking than Madoff's or Stanford's, and that is how easy Pang's apparent lies should have been to uncover.

Graduation records from public universities are easy to check, and checking with the personnel office at an institution like Morgan Stanley also should have been pretty simple, especially for the sort of people who invest in something like the Private Equity Management Group.

You see, the sort of wealthy people and institutions that invest in hedge funds and private equity funds are supposed to have sophisticated consultants and advisers to help them investigate the background, skills, finances, and strategies of those they're investing with. 

These consultants and "fund of fund" managers are supposed to be doggedly thorough. Or at least that's been their PR.

Hedge fund manager Barton Biggs wrote about starting his fund in his 2006 book "Hedghogging." In it, the process he described of trying to pass muster with fund of fund managers sounds almost intrusive. They, at one point, grilled Biggs' partner about his wife's pregnancy and whether that would prevent him from maintaining his focus on their clients' investments.

But the Madoff case seems to suggest that some of the people who investigate the wealthy's fund managers could be won over by keeping memberships at the right Florida country clubs. And Pang's case may suggest that some of these people just didn't do very much homework.

These cases are coming at a time when much of what most of us thought was the best financial advice of the last several years has been called into serious question. Who of us weren't advised that real estate was the best long term investment? We were told this by the media and anyone we knew in real estate or the mortgage industry until nearly everyone around seemed to believe it, even if their own personal finances and local economic trends should have told them differently.

The lesson going forward is to be wary of compelling sales pitches. And to be as hardheaded as the wealthy's investment advisers were once rumored to have been.