How many family offices are real and how many of them are fake? OK, most of them are real, but some are also fake, and investors should be wary of people saying they have a family office, or have access to family office money even if they have all the right credentials.
Here’s a cautionary tale to explain why. The big fraud story doing the rounds in Wall Street now involves a guy called Andrew Caspersen. Vanity Fair features an excellent piece on the case, which illustrates how someone with impeccable credentials can allegedly carry out a sophisticated fraud on other sophisticated investors. The case also involves the use of a family office, or at least what was stated to be a family office.
The article says that Caspersen, with an impressive CV, including degrees from Princeton and Harvard, and jobs at top financial institutions, used an elaborate process to secure money from other investors as part of his investment scheme. Part of this process was telling other investors that he had “secured commitments of $30 million from ‘his family office’, as well as from ‘two others’,” as quoted in the Vanity Fair article. The link to family office money, it would appear, helped to perpetuate the fraud.
Whether Caspersen had a family office, or not, isn’t disclosed, but it’s unlikely that he did, given his and his family’s financial circumstances at the time of the supposed fraud. Of course, because single-family offices aren’t regulated, someone can claim to have a family office and there is little way of finding out whether it’s bona fide, or not. There’s no official definition of what a single-family office is in terms of assets under management. Does one have to manage $500 million or more, or could a family office manage as little as $100,000? If the latter is the case then maybe Caspersen did have a family office. But if that’s the case there would be millions of them and the term would be meaningless.
As Family Capital has said in the past, the lack of a clear definition and a regulatory framework around family offices makes them vulnerable to manipulation. Someone can claim to represent their family’s family office when in reality they have little, or no money. And as the Caspersen case suggests people with impeccable backgrounds and connections can use the term family office as part of their elaborate fraud – and convince other sophisticated investors they are telling the truth.
Family Capital would recommend extra diligence when dealing with family offices for the first time, especially if the people connected to them are asking for money. Of course, mostly they will be telling the truth, but you never know…