The investment community continues to digest the Dodd-Frank legislation amidst constant news updates about arrests and convictions in the Galleon Group insider trading case and the Bernie Madoff scandal.

These high-profile events reinforce the inevitable reality that private equity firms will soon face government scrutiny. Investors need to be prepared. Background checks are the ideal intelligence tool that serve to not only protect investors from any unnecessary and unwarranted distractions but also to encourage trust among limited partners and co-investors.

And by background checks I do not mean a criminal-record check and running a credit report. (Madoff and Allen Stanford did not have criminal records until now.) I am talking about thorough investigative research that alerts investors to information that impacts the deal's integrity and the character of the individuals involved.

Sometimes you learn an individual has been sanctioned by the Financial Industry Regulatory Authority, or Finra, for various types of bad behavior that was not previously disclosed. Other times a background check will alert you to a blatant lie (an executive who claims to have an Ivy League degree that doesn't exist) or a minor exaggeration (a CFO who really didn't have 10 years' experience). Whether the information causes investors to leverage their position or run, the key is in the knowledge. As I write in my book, "Digging for Disclosure: Tactics for Protecting Your Firm's Assets from Swindlers, Scammers, and Imposters," comprehensive background checks provide investors with the intelligence necessary to fortify their deals.

Conflicts of interest and nondisclosure of material information are the two red flags we see most often when conducting background checks for investors. While the two have some common ground, the conflicts of interest we routinely identify include an individual's involvement in a pattern of lawsuits or being sued by investors, business interests that distract an executive's attention and rumors of impropriety. For instance, we discovered a CEO of a company formed a real estate development company a month after investors began discussions with him. The investors hadn't done a background check and were wondering why the CEO was never available. It turned out the CEO had planned to use some of his new cash to try his hand at development but spent his days pouring his energy (and his money) into the new company. The investors approached the CEO, who confessed to his dalliances and returned to his already successful day job.

The other warning signs we find in background checks deal with nondisclosure of facts. For investors who strive for transparency, these issues are critical. When a fund manager or any individual involved in the deal represents him- or herself as something they are not, investors must question whether that person's commitment to the deal will be a façade.

We were once hired by an investor making a sizable commitment to a tech company that was about to go public. The young guys who founded the company disclosed to the investor that they had been arrested while in college for smoking marijuana. While the voluntary disclosure was certainly a nice gesture, we found that the founders had underplayed the actual situation, to say the least: They had been indicted for running a nationwide drug ring and had served time in federal prison. Ultimately, the investors decided to simply remove the founders from the positions of officers and directors of the companies yet allowed them to remain shareholders so that once the company went public (which it did), there would not be any problems with the Securities and Exchange Commission or other investors.

If investors rely more on background checks as a proactive preventative method to avoid fraud on the predeal side, they should also consider the same approach post-deal. Some precautionary post-deal steps include monitoring any attention the company is receiving, from chat rooms to major news publications, and conducting routine updated background checks. Also consider implementing an ethics hot line, a phone system that allows employees, investors, board members and others to anonymously report any wrongdoing. With employees, the hot line fosters trust, as the message you send is "we care," and with investors, LPs and potential acquirers, the hot line is an instrument of compliance that shows your commitment to a fraud-free operation.

There is no disadvantage to intelligence. Let information be your map in your pursuit for the ideal investment.

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Kenneth Springer, a certified fraud examiner and former Federal Bureau of Investigation special agent, is president and founder of Corporate Resolutions Inc.