This is the second article in our three-part series on employee background checks in the hedge fund industry.  The occasion for this series is a growing recognition in the industry that people can be either the best asset of a manager or a manager’s worst liability.  The potential value of people is implicit in the impressive returns of some managers; the road of good returns invariably leads back to human insight.  And – less pleasantly – the industry graveyard is littered with management companies laid low by human foibles rather than investment mistakes.  See, e.g., “Former Rajaratnam Prosecutor Reed Brodsky Discusses the Application of Insider Trading Doctrine to Hedge Fund Research and Trading Practices,” Hedge Fund Law Report, Vol. 6, No. 13 (Mar. 28, 2013); and “Rajaratnam Prosecutor and Dechert Partner Jonathan Streeter Discusses How the Government Builds and Prosecutes an Insider Trading Case against a Hedge Fund Manager,” Hedge Fund Law Report, Vol. 5, No. 45 (Nov. 29, 2012).  How can managers obtain the data necessary to identify aspects of a prospective employee’s background that are or may become problematic?  The high-level answer is: By conducting background checks.  But since a background check is a capacious concept – covering everything from a Google search to a private investigation – managers can benefit from more detail on the topic.  This series is designed to provide that detail.  In particular, the first article in this series outlined the case for conducting background checks, cataloging the wide range of regulatory and other risks presented by employees (including discussions of insider trading, Rule 506(d), pay to play, track record portability, restrictive covenants and other topics).  See “Why and How Should Hedge Fund Managers Conduct Background Checks on Prospective Employees? (Part One of Three),” Hedge Fund Law Report, Vol. 6, No. 38 (Oct. 3, 2013).  This article discusses the mechanics of conducting a background check, including four specific activities that managers or their service providers should undertake; identifies three common mistakes made by hedge fund managers in conducting background checks; and details four legal risks in conducting background checks.  The final article in this series will weigh the benefits and burdens of outsourcing background checks versus conducting them in-house.