Barry Minkow
Encyclopedia
Barry Jay Minkow is a former businessman, pastor and convicted felon. While still in high school, he founded ZZZZ Best , which appeared to be an immensely successful carpet-cleaning and restoration company. However, it was actually a front to attract investment for a massive Ponzi scheme
. It collapsed in 1987, costing investors and lenders $100 million—one of the largest investment frauds ever perpetrated by a single person, as well as one of the largest accounting frauds
in history. The scheme is often used as a case study of accounting fraud.
After being released from jail, Minkow became a preacher and a fraud investigator, and spoke at schools about ethics. This all came to an end in 2011, when he admitted to helping deliberately drive down the stock price of homebuilder Lennar and was ordered back to prison.
. When he was nine years old, his mother got him a job as a telemarketer with the carpet-cleaning business where she worked. At the age of 15--while a sophomore at Cleveland High School
, Minkow started ZZZZ Best in his parents' garage with three employees and four phones. In the early years, he had to rely on friends to drive him to jobs since he didn't have a driver's license.
At first, Minkow struggled to meet basic expenses. Two banks closed his business account because California law didn't allow minors to sign binding contracts, including checks. He was also plagued by customer complaints and demands for payment from suppliers. At times, he found it difficult even to meet payroll. Faced with a shortage of operating capital, he financed his business via check kiting
, stealing and selling his grandmother's jewelry, staging break-ins at his offices, and running up fraudulent credit card charges
.
Soon after, Minkow branched into the "insurance restoration" business. With the help of Tom Padgett, an insurance claims adjuster, Minkow forged numerous documents claiming that ZZZZ Best was involved in numerous restoration projects for Padgett's company. Padgett and Minkow formed a fake company, Interstate Appraisal Services, that verified the details of the restorations to Minkow's bankers. Flush with loans from these banks, Minkow expanded ZZZZ Best across Southern California.
ZZZZ Best differed in part from a typical Ponzi in that its carpet-cleaning business was very real. Indeed, the carpet-cleaning division won high marks for its quality. However, its insurance restoration division, which eventually accounted for 86 percent of company revenues, was nonexistent. Minkow raised money by factoring
his accounts receivable
for work under contract, as well as floating funds through several banks in an elaborate check kiting scheme.
Minkow was able to devote his entire time to ZZZZ Best after graduating in 1985. However, still short of cash, he was forced to get a loan from Jack Catain, a Los Angeles businessman who had ties to organized crime
. Catain later sued Minkow for not paying him his share of ZZZZ Best's profits, but Minkow claimed Catain was a usurer
. The suit was still working its way through the courts at the time of Catain's death in 1987. Other organized-crime figures turned up as Minkow's advisers, which unnerved several ZZZZ Best employees. For instance, a major shareholder, Maurice Rind, had been convicted of securities fraud
in 1976. Minkow was also a business partner with Robert Viggiano, a convicted jewel thief and reputed loanshark.
. The accountant who audited the company before it went public didn't visit the insurance restoration sites himself. Had he done so, he would have discovered that they were mailboxes located throughout the San Fernando Valley. Minkow retained a 53 percent controlling interest, making him an instant millionaire on paper. Going public seemingly offered him a way to cover up his fraudulent activities. Under securities law of the time, he had to retain his personal shares for two years. He planned to sell a million of his shares to the public in January 1988, believing this would give him enough money to pay everyone off and go completely legitimate.
In order to obtain more financing, Minkow was persuaded to raise $15 million of capital through an initial public offering
of ZZZZ Best stock. When accountants wanted to inspect ZZZZ Best's operations, Minkow borrowed fake offices for a tour of "Interstate Appraisal Services" and used an incomplete building to present a fake restoration job. Mark Morze, ZZZZ Best's financial consultant, tricked the accountants sent to perform the necessary due diligence
by faking thousands of documents. The public offering closed in December, and Minkow became the youngest person to lead a company through an IPO in American financial history.
Minkow launched a massive television advertising campaign portraying ZZZZ Best as a carpet cleaner that Southern Californians could trust. He owned a Ferrari
and a BMW
, and bought a mansion in the wealthy Valley community of Woodland Hills
. He had ambitions of making ZZZZ Best "the General Motors
of the carpet-cleaning industry."
There were problems on the horizon, but investors chose to ignore them. The company's chief financial officer
, Charles Arrington, was accused of running up $91,000 in fraudulent charges against customers of his florist business. When the Feshbach brothers, a pair of short-sellers, learned that Minkow still stood behind Arrington, they did further investigating and discovered ZZZZ Best's claimed $7 million contract to clean carpets in Sacramento
was likely a fraud. The Feshbachs and other short-sellers began taking positions, betting ZZZZ Best's stock would fall. Additionally, none of the company's four outside directors had any experience running a public company.
and Nevada
. Minkow's stake was worth $100 million, and he appeared to be the ultimate American success story.
However, it was still facing severe cash flow shortages from paying investors for the nonexistent restoration projects. Minkow needed another infusion of cash, and thought he had it when he heard that KeyServ, the authorized carpet cleaner for Sears, was being sold by its British parent. Drexel Burnham Lambert
offered to finance the deal with a private placement of junk bonds. Morze thought that KeyServ's Sears business would give ZZZZ Best enough cash to end the Ponzi scheme sooner than planned.
Although KeyServ was double the size of ZZZZ Best, the two companies agreed to a $25 million deal in which ZZZZ Best would be the surviving company. The merger would have made Minkow the president and chairman of the board of the largest independent carpet-cleaning company in the nation. Even as the process of merging with KeyServ got underway, Minkow had ambitions of becoming more powerful. He was already making plans to raise $700–800 million to buy ServiceMaster
in a hostile takeover. He also had plans to expand to the United Kingdom
. Outside of carpet cleaning, he'd begun preliminary discussions to buy Major League Baseball
's Seattle Mariners
.
Then, almost as rapidly as ZZZZ Best rose, it fell due to the credit card fraud of several years earlier. Minkow had blamed the fraudulent charges on unscrupulous contractors and another employee, and paid back most of the victims. However, he didn't pay back a homemaker who had been overcharged a few hundred dollars. Minkow ignored the woman's requests to pay her back. The woman tracked down several other people who had been defrauded by Minkow and gave a diary of her findings to the Los Angeles Times
. The Times then wrote a story revealing that Minkow had run up $72,000 in fraudulent credit card charges in 1984 and 1985. The story, which ran just days before the ZZZZ Best-KeyServ merger was to close, sent ZZZZ Best stock plunging 28 percent.
Within hours of the story breaking, ZZZZ Best's banks either called their loans or threatened to do so. Drexel postponed closing until it could investigate further. Later that day at a press conference, a reporter indicated that the Sacramento project not only didn't exist, but ZZZZ Best didn't have a contractor's license required for large-scale restoration work. To calm nervous investors, Minkow issued a press release touting record profits and revenues, but did so without notifying Ernst & Whinney (now part of Ernst & Young
), the firm responsible for auditing the company prior to the KeyServ deal. The press release also implied that Drexel had cleared ZZZZ Best of any wrongdoing, briefly stopping the decline. However, Drexel abruptly pulled out of the deal a few days later, causing the stock price to fall again. Drexel's withdrawal stopped the deal only four to seven days before it was due to close.
The day after this press release, Ernst & Whinney discovered that Minkow had written several checks to support the validity of the nonexistent contracts. Many of them had been written to an associate who later told Ernst & Whinney officials about the fraud. Minkow denied knowing the man, but shortly after the checks were discovered, Ernst & Whinney discovered that Minkow had cut two checks to him for an unrelated matter. When Minkow couldn't explain the checks, Ernst & Whinney resigned as ZZZZ Best's auditor, but did not inform the SEC of its suspicions until a month later.
On July 2, Minkow abruptly resigned for "health reasons." By this time, ZZZZ Best stock had tumbled to $3.50 a share—an 81 percent drop from its high in February. It turned out that on June 27, an independent law firm ZZZZ Best retained to investigate the allegations of wrongdoing asked for the addresses for all of the company's restoration jobs. Minkow knew he couldn't come up with them, prompting him to resign six days later. Later, he reportedly told a member of his board that the insurance restoration business had been a sham from the very beginning.
ZZZZ Best's new board conducted an internal investigation that largely substantiated the fraud allegations. On July 6, it sued Minkow, alleging that he'd absconded with $23 million in company funds. ZZZZ Best claimed that its assets had been drained to the point that it was forced into Chapter 11 bankruptcy. Two days later, the Los Angeles Police Department
raided ZZZZ Best's headquarters and Minkow's home, and found evidence that ZZZZ Best was being used to launder
drug profits for organized crime.
, mail fraud, tax evasion
and bank fraud
. The indictment accused Minkow of bilking banks and investors of millions of dollars while systematically draining his company of assets. It also accused Minkow of setting up dummy companies, writing phony invoices and conducting tours of purported restoration sites. Prosecutors estimated that as much as 90 percent of ZZZZ Best's revenue was fraudulent. On June 16, prosecutors won a superseding indictment charging Minkow with credit card fraud and two additional counts of mail fraud.
While Minkow admitted to manipulating ZZZZ Best's stock, he claimed that he was forced to turn the company into a Ponzi scheme under pressure from the organized-crime figures who secretly controlled his company (a story he later admitted was false). On December 14, he was found guilty on all charges. On March 27, 1989, he was sentenced to 25 years in prison. He was also placed on five years probation and ordered to pay $26 million in restitution. In sentencing him, U.S. District Court Judge Dickran Tevrizian
described Minkow as a man without a conscience. He rejected Minkow's plea for a lighter sentence as "a joke" and "a slap on the wrist" for someone who had manipulated the financial system. The SEC subsequently banned him from ever serving as an officer or director of a public company again. He served under seven and a half years, most of them at Federal Correctional Institution, Englewood
.
During his prison stay, he became involved in Christian ministry, completing coursework through Liberty University
's School of Lifelong Learning.
In 1995, he wrote a first-hand account of the ZZZZ Best scam, Clean Sweep. All of the book's proceeds went toward repaying his victims. He believes that he will be paying the $26 million restitution bill for the rest of his life. His other substantial debt is a $7 million loan from Union Bank.
In 1997, he became pastor of Community Bible Church in San Diego. Soon after his arrival, a church member asked him to look into a money management firm in nearby Orange County
. Suspecting something was amiss, Minkow alerted federal authorities, who discovered the firm was a $300 million pyramid scheme
. This was the beginning of the Fraud Discovery Institute, a for-profit investigative firm. His original targets were penny stock
companies, which are often havens for fraud. However, he soon attracted the attention of The Wall Street Journal
and Bloomberg News. He also began appearing on Your World with Neil Cavuto
as a fraud expert. Minkow first gained national attention when 60 Minutes
aired a profile of him in August 2006. Several Wall Street investors liked what they saw, and sent him enough money to go after bigger targets. By Minkow's estimate, he has uncovered $1 billion worth of fraud over the years.
Minkow's recent motives have been brought into question by multiple news stories concluding that Minkow was shorting stock before he releases a report on a public company. According to the San Diego Union-Tribune, Minkow had engaged in this practice as early as 2006. Minkow's critics have denounced this practice as unethical, if not illegal. At least one critic has accused him of engaging in short and distort
, a form of securities fraud which is a reversal of a pump and dump
scheme. For instance, when he issued a report accusing Herbalife
founder Mark R. Hughes
of embellishing his resume, he made $50,000 by shorting Herbalife stock. Numerous FDI reports have proven to be false, yet Minkow continues to profit from his short sales position due to sharp decreases in the reported company's stock price immediately after releasing a new report. Minkow almost always holds a position in securities that he reports on. However, he has since stated that while his lawyers advised him this practice was legal, it was probably unethical.
Many companies have sued Minkow for making false accusations against them. However, most of the suits have gone nowhere since criticizing public companies is usually considered to be protected free speech. This has led many of Minkow's targets to settle out of court, paying him as much as $300,000 to stop his attacks on them.
Lennar responded by adding Minkow as a defendant in a libel-and-extortion
suit against Marsch. Minkow initially wasn't concerned, since he'd prevailed before in similar cases on free-speech grounds. According to court records, Minkow had shorted Lennar stock, buying $20,000 worth of options in a bet that the stock would fall. Even more seriously, he also bought Lennar stock after his FDI report, believing the stock would rebound after its dramatic plunge. Minkow initially denied doing this, only to be forced to recant when confronted with trading records. Minkow also forged documents alleging misconduct on Lennar's part, and lied about having to go to the emergency room on the night before he was first scheduled to testify. He also went forward with the report even after a private investigator he'd hired for the case couldn't substantiate Marsch's claims. In an unrelated development, it was also revealed that Minkow operated the FDI out of the offices of his church and even used church money to fund it—something which could potentially jeopardize his church's tax-exempt status.
On December 27, 2010, Florida Circuit Court Judge Gill Freeman issued terminating sanctions against Minkow in response to a motion by Lennar. Freeman found that Minkow had repeatedly lied under oath, destroyed or withheld evidence, concealed witnesses, and deliberately tried to "cover up his misconduct." According to Freeman, Minkow had even lied to his own lawyers about his behavior. Freeman determined that Minkow had perpetuated "a fraud on the court" that was so egregious that letting the case go any further would be a disservice to justice. In her view, "no remedy short of default
" was appropriate for Minkow's lies. She ordered Minkow to reimburse Lennar for the legal expenses it incurred while ferreting out his lies. According to legal experts, it is extremely rare for a judge to issue terminating sanctions, since they are reserved for particularly egregious misconduct and have the effect of revoking a litigant's right to defend himself. Earlier, Freeman had been so angered by Minkow's behavior that she called him a liar in open court, a rarity for a judge. Lennar estimates that its attorneys and investigators spent hundreds of millions of dollars exposing Minkow's lies.
On March 16, 2011, Minkow announced through his attorney that he was pleading guilty to one count of insider trading
. According to his lawyer, Minkow had bought his Lennar options using "nonpublic information." The plea, which is separate from the civil suit, came a month after Minkow learned he was the subject of a criminal investigation. Minkow claimed not to know at the time that he was breaking the law. The SEC had already been probing Minkow's trading practices. On the same day, Minkow resigned as senior pastor of Community Bible Church, saying in a letter to his flock that since he was no longer "above reproach," he felt that he was "no longer qualified to be a pastor." Six weeks earlier, $50,000 in cash and checks was stolen from the church during a burglary
. Though unsolved, it was noted as suspicious due to Minkow's admitted history of staging burglaries to collect insurance money.
The nature of the "nonpublic information" became clear a week later, when federal prosecutors in Miami filed a criminal information charging Minkow with one count of conspiracy to commit securities fraud. Prosecutors charged that Minkow and Marsch (listed as an unindicted co-conspirator
in the complaint) conspired to extort money from Lennar by driving down its stock. The complaint also revealed that Minkow had sent his allegations to the FBI, SEC and IRS, and that the three agencies found his claims credible enough to open a formal criminal investigation into Lennar's practices. Minkow then used confidential knowledge of that investigation to short Lennar stock, even though he knew he was barred from doing so. Minkow opted to plead guilty to the conspiracy charge rather than face charges of securities fraud and market manipulation
, which could have sent him to prison for life.
On March 30, Minkow pleaded guilty before Judge Patricia A. Seitz
. Minkow's attorney, Alvin Entin, admitted that his client had acted recklessly, but had been "deluded and taken advantage of" by Marsch. He faced a maximum of five years in prison, and may have to pay as much as $350,000 in fines and penalties and $500 million in restitution. However, he has agreed to cooperate with the government in its probe of Marsch.
The Los Angeles Times
obtained a copy of the plea agreement, in which Minkow admitted to issuing his FDI report on Lennar at Marsch's behest. According to the agreement, Marsch offered to have Minkow retract his report if Lennar paid him in cash and stock. It also said that Minkow's report triggered a bear raid
which temporarily reduced the market capitalization of Lennar by $583 million. Minkow faced a minimum of 30 years in prison had the case gone to trial.
On June 16, Freeman ordered Minkow to pay Lennar $584 million in damages—roughly the amount the company lost as a result of the bear raid. Freeman's ruling stated that Minkow and Marsch had entered into a conspiracy to wreck Lennar's stock in November 2008. With interest, the bill could easily approach a billion dollars—far more than he stole in the ZZZZ Best scam.
On July 21, Seitz sentenced Minkow to five years in prison. However, he could serve as few as three years depending on how well he cooperates in the federal investigation of Marsch. In imposing the sentence, Seitz said that Minkow had "no moral compass that says 'Stop.'" Seitz also ordered him to pay Lennar $583.5 million in restitution—an amount that had been imposed a month earlier in the civil case. This could be a potentially ruinous amount for Minkow, on top of the money he still owes the ZZZZ Best victims and Union Bank.
Seitz had recommended that Minkow serve his sentence at Federal Prison Camp, Montgomery in Montgomery, Alabama
. However, on September 20, he was ordered to begin his sentence at Federal Medical Center, Lexington
in Lexington, Kentucky
.
in San Diego interviewed several members of Minkow's former church, who said Minkow swindled them. One woman said Minkow asked her for $300,000, purportedly to help finance a movie about his redemption. The FBI is investigating.
Almost a month later, on July 6, it emerged that officials with Community Bible Church had accused Minkow of running the Fraud Discovery Institute with church funds, applying for credit cards in the names of church members and leading his flock into bad investments. Church officials had made the claims as part of a confidential pre-sentencing report. When Minkow's attorney, Alvin Entin, got word of the letter, he asked for and was granted two weeks to review the allegations and respond to them. This pushed Minkow's sentencing back to July 21. This was the second time Minkow's sentencing had been postponed; it was originally slated for June 16 but was postponed to July 6.
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
. It collapsed in 1987, costing investors and lenders $100 million—one of the largest investment frauds ever perpetrated by a single person, as well as one of the largest accounting frauds
Accounting scandals
Accounting scandals, or corporate accounting scandals, are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations...
in history. The scheme is often used as a case study of accounting fraud.
After being released from jail, Minkow became a preacher and a fraud investigator, and spoke at schools about ethics. This all came to an end in 2011, when he admitted to helping deliberately drive down the stock price of homebuilder Lennar and was ordered back to prison.
Beginnings of ZZZZ Best
Minkow grew up in a Jewish family in Reseda in the San Fernando ValleySan Fernando Valley
The San Fernando Valley is an urbanized valley located in the Los Angeles metropolitan area of southern California, United States, defined by the dramatic mountains of the Transverse Ranges circling it...
. When he was nine years old, his mother got him a job as a telemarketer with the carpet-cleaning business where she worked. At the age of 15--while a sophomore at Cleveland High School
Cleveland High School (Los Angeles, California)
Grover Cleveland High School is a public school serving grades 9-12. Cleveland Humanities Magnet is part of Cleveland High School. The school is located in Reseda, in the San Fernando Valley of Los Angeles, California....
, Minkow started ZZZZ Best in his parents' garage with three employees and four phones. In the early years, he had to rely on friends to drive him to jobs since he didn't have a driver's license.
At first, Minkow struggled to meet basic expenses. Two banks closed his business account because California law didn't allow minors to sign binding contracts, including checks. He was also plagued by customer complaints and demands for payment from suppliers. At times, he found it difficult even to meet payroll. Faced with a shortage of operating capital, he financed his business via check kiting
Check kiting
Cheque fraud/check fraud refers to a category of criminal acts that involve making the unlawful use of cheques in order to illegally acquire or borrow funds that do not exist within the account balance or account-holder's legal ownership...
, stealing and selling his grandmother's jewelry, staging break-ins at his offices, and running up fraudulent credit card charges
Credit card fraud
Credit card fraud is a wide-ranging term for theft and fraud committed using a credit card or any similar payment mechanism as a fraudulent source of funds in a transaction. The purpose may be to obtain goods without paying, or to obtain unauthorized funds from an account. Credit card fraud is also...
.
Soon after, Minkow branched into the "insurance restoration" business. With the help of Tom Padgett, an insurance claims adjuster, Minkow forged numerous documents claiming that ZZZZ Best was involved in numerous restoration projects for Padgett's company. Padgett and Minkow formed a fake company, Interstate Appraisal Services, that verified the details of the restorations to Minkow's bankers. Flush with loans from these banks, Minkow expanded ZZZZ Best across Southern California.
ZZZZ Best differed in part from a typical Ponzi in that its carpet-cleaning business was very real. Indeed, the carpet-cleaning division won high marks for its quality. However, its insurance restoration division, which eventually accounted for 86 percent of company revenues, was nonexistent. Minkow raised money by factoring
Factoring (finance)
Factoring is a financial transaction whereby a business job sells its accounts receivable to a third party at a discount...
his accounts receivable
Accounts receivable
Accounts receivable also known as Debtors, is money owed to a business by its clients and shown on its Balance Sheet as an asset...
for work under contract, as well as floating funds through several banks in an elaborate check kiting scheme.
Minkow was able to devote his entire time to ZZZZ Best after graduating in 1985. However, still short of cash, he was forced to get a loan from Jack Catain, a Los Angeles businessman who had ties to organized crime
Organized crime
Organized crime or criminal organizations are transnational, national, or local groupings of highly centralized enterprises run by criminals for the purpose of engaging in illegal activity, most commonly for monetary profit. Some criminal organizations, such as terrorist organizations, are...
. Catain later sued Minkow for not paying him his share of ZZZZ Best's profits, but Minkow claimed Catain was a usurer
Usury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
. The suit was still working its way through the courts at the time of Catain's death in 1987. Other organized-crime figures turned up as Minkow's advisers, which unnerved several ZZZZ Best employees. For instance, a major shareholder, Maurice Rind, had been convicted of securities fraud
Securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
in 1976. Minkow was also a business partner with Robert Viggiano, a convicted jewel thief and reputed loanshark.
Going public
At the suggestion of a friend, Minkow took the company public in January 1986, garnering a spot on NASDAQNASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
. The accountant who audited the company before it went public didn't visit the insurance restoration sites himself. Had he done so, he would have discovered that they were mailboxes located throughout the San Fernando Valley. Minkow retained a 53 percent controlling interest, making him an instant millionaire on paper. Going public seemingly offered him a way to cover up his fraudulent activities. Under securities law of the time, he had to retain his personal shares for two years. He planned to sell a million of his shares to the public in January 1988, believing this would give him enough money to pay everyone off and go completely legitimate.
In order to obtain more financing, Minkow was persuaded to raise $15 million of capital through an initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
of ZZZZ Best stock. When accountants wanted to inspect ZZZZ Best's operations, Minkow borrowed fake offices for a tour of "Interstate Appraisal Services" and used an incomplete building to present a fake restoration job. Mark Morze, ZZZZ Best's financial consultant, tricked the accountants sent to perform the necessary due diligence
Due diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
by faking thousands of documents. The public offering closed in December, and Minkow became the youngest person to lead a company through an IPO in American financial history.
Minkow launched a massive television advertising campaign portraying ZZZZ Best as a carpet cleaner that Southern Californians could trust. He owned a Ferrari
Ferrari
Ferrari S.p.A. is an Italian sports car manufacturer based in Maranello, Italy. Founded by Enzo Ferrari in 1929, as Scuderia Ferrari, the company sponsored drivers and manufactured race cars before moving into production of street-legal vehicles as Ferrari S.p.A. in 1947...
and a BMW
BMW
Bayerische Motoren Werke AG is a German automobile, motorcycle and engine manufacturing company founded in 1916. It also owns and produces the Mini marque, and is the parent company of Rolls-Royce Motor Cars. BMW produces motorcycles under BMW Motorrad and Husqvarna brands...
, and bought a mansion in the wealthy Valley community of Woodland Hills
Woodland Hills
Woodland Hills is the name of various communities in the United States, including:*Woodland Hills, Cleveland, a neighborhood on the east side of Cleveland, Ohio.* Woodland Hills, Los Angeles, a neighborhood in Los Angeles, California...
. He had ambitions of making ZZZZ Best "the General Motors
General Motors
General Motors Company , commonly known as GM, formerly incorporated as General Motors Corporation, is an American multinational automotive corporation headquartered in Detroit, Michigan and the world's second-largest automaker in 2010...
of the carpet-cleaning industry."
There were problems on the horizon, but investors chose to ignore them. The company's chief financial officer
Chief financial officer
The chief financial officer or Chief financial and operating officer is a corporate officer primarily responsible for managing the financial risks of the corporation. This officer is also responsible for financial planning and record-keeping, as well as financial reporting to higher management...
, Charles Arrington, was accused of running up $91,000 in fraudulent charges against customers of his florist business. When the Feshbach brothers, a pair of short-sellers, learned that Minkow still stood behind Arrington, they did further investigating and discovered ZZZZ Best's claimed $7 million contract to clean carpets in Sacramento
Sacramento
Sacramento is the capital of the state of California, in the United States of America.Sacramento may also refer to:- United States :*Sacramento County, California*Sacramento, Kentucky*Sacramento – San Joaquin River Delta...
was likely a fraud. The Feshbachs and other short-sellers began taking positions, betting ZZZZ Best's stock would fall. Additionally, none of the company's four outside directors had any experience running a public company.
Downfall
By February 1987, ZZZZ Best was trading at $18 a share on NASDAQ, valuing the company at $280 million. The company was now a 1,030-employee colossus with offices across California, ArizonaArizona
Arizona ; is a state located in the southwestern region of the United States. It is also part of the western United States and the mountain west. The capital and largest city is Phoenix...
and Nevada
Nevada
Nevada is a state in the western, mountain west, and southwestern regions of the United States. With an area of and a population of about 2.7 million, it is the 7th-largest and 35th-most populous state. Over two-thirds of Nevada's people live in the Las Vegas metropolitan area, which contains its...
. Minkow's stake was worth $100 million, and he appeared to be the ultimate American success story.
However, it was still facing severe cash flow shortages from paying investors for the nonexistent restoration projects. Minkow needed another infusion of cash, and thought he had it when he heard that KeyServ, the authorized carpet cleaner for Sears, was being sold by its British parent. Drexel Burnham Lambert
Drexel Burnham Lambert
Drexel Burnham Lambert was a major Wall Street investment banking firm, which first rose to prominence and then was forced into bankruptcy in February 1990 by its involvement in illegal activities in the junk bond market, driven by Drexel employee Michael Milken. At its height, it was the...
offered to finance the deal with a private placement of junk bonds. Morze thought that KeyServ's Sears business would give ZZZZ Best enough cash to end the Ponzi scheme sooner than planned.
Although KeyServ was double the size of ZZZZ Best, the two companies agreed to a $25 million deal in which ZZZZ Best would be the surviving company. The merger would have made Minkow the president and chairman of the board of the largest independent carpet-cleaning company in the nation. Even as the process of merging with KeyServ got underway, Minkow had ambitions of becoming more powerful. He was already making plans to raise $700–800 million to buy ServiceMaster
ServiceMaster
ServiceMaster is a privately held Fortune 500 company that provides various services to residences and firms. Its headquarters are located in Memphis, Tennessee after moving there from Downers Grove, Illinois in early 2007. Brands operated by ServiceMaster include: TruGreen, Terminix, American...
in a hostile takeover. He also had plans to expand to the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. Outside of carpet cleaning, he'd begun preliminary discussions to buy Major League Baseball
Major League Baseball
Major League Baseball is the highest level of professional baseball in the United States and Canada, consisting of teams that play in the National League and the American League...
's Seattle Mariners
Seattle Mariners
The Seattle Mariners are a professional baseball team based in Seattle, Washington. Enfranchised in , the Mariners are a member of the Western Division of Major League Baseball's American League. Safeco Field has been the Mariners' home ballpark since July...
.
Then, almost as rapidly as ZZZZ Best rose, it fell due to the credit card fraud of several years earlier. Minkow had blamed the fraudulent charges on unscrupulous contractors and another employee, and paid back most of the victims. However, he didn't pay back a homemaker who had been overcharged a few hundred dollars. Minkow ignored the woman's requests to pay her back. The woman tracked down several other people who had been defrauded by Minkow and gave a diary of her findings to the Los Angeles Times
Los Angeles Times
The Los Angeles Times is a daily newspaper published in Los Angeles, California, since 1881. It was the second-largest metropolitan newspaper in circulation in the United States in 2008 and the fourth most widely distributed newspaper in the country....
. The Times then wrote a story revealing that Minkow had run up $72,000 in fraudulent credit card charges in 1984 and 1985. The story, which ran just days before the ZZZZ Best-KeyServ merger was to close, sent ZZZZ Best stock plunging 28 percent.
Within hours of the story breaking, ZZZZ Best's banks either called their loans or threatened to do so. Drexel postponed closing until it could investigate further. Later that day at a press conference, a reporter indicated that the Sacramento project not only didn't exist, but ZZZZ Best didn't have a contractor's license required for large-scale restoration work. To calm nervous investors, Minkow issued a press release touting record profits and revenues, but did so without notifying Ernst & Whinney (now part of Ernst & Young
Ernst & Young
Ernst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers ....
), the firm responsible for auditing the company prior to the KeyServ deal. The press release also implied that Drexel had cleared ZZZZ Best of any wrongdoing, briefly stopping the decline. However, Drexel abruptly pulled out of the deal a few days later, causing the stock price to fall again. Drexel's withdrawal stopped the deal only four to seven days before it was due to close.
The day after this press release, Ernst & Whinney discovered that Minkow had written several checks to support the validity of the nonexistent contracts. Many of them had been written to an associate who later told Ernst & Whinney officials about the fraud. Minkow denied knowing the man, but shortly after the checks were discovered, Ernst & Whinney discovered that Minkow had cut two checks to him for an unrelated matter. When Minkow couldn't explain the checks, Ernst & Whinney resigned as ZZZZ Best's auditor, but did not inform the SEC of its suspicions until a month later.
On July 2, Minkow abruptly resigned for "health reasons." By this time, ZZZZ Best stock had tumbled to $3.50 a share—an 81 percent drop from its high in February. It turned out that on June 27, an independent law firm ZZZZ Best retained to investigate the allegations of wrongdoing asked for the addresses for all of the company's restoration jobs. Minkow knew he couldn't come up with them, prompting him to resign six days later. Later, he reportedly told a member of his board that the insurance restoration business had been a sham from the very beginning.
ZZZZ Best's new board conducted an internal investigation that largely substantiated the fraud allegations. On July 6, it sued Minkow, alleging that he'd absconded with $23 million in company funds. ZZZZ Best claimed that its assets had been drained to the point that it was forced into Chapter 11 bankruptcy. Two days later, the Los Angeles Police Department
Los Angeles Police Department
The Los Angeles Police Department is the police department of the city of Los Angeles, California. With just under 10,000 officers and more than 3,000 civilian staff, covering an area of with a population of more than 4.1 million people, it is the third largest local law enforcement agency in...
raided ZZZZ Best's headquarters and Minkow's home, and found evidence that ZZZZ Best was being used to launder
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
drug profits for organized crime.
Conviction and prison
Minkow and 10 other ZZZZ Best insiders were indicted by a Los Angeles federal grand jury in January 1988 on 54 counts of racketeering, securities fraud, money laundering, embezzlementEmbezzlement
Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted....
, mail fraud, tax evasion
Tax evasion
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...
and bank fraud
Bank fraud
Bank fraud is the use of fraudulent means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently representing to be a bank or financial institution. In many instances, bank fraud is a criminal offense...
. The indictment accused Minkow of bilking banks and investors of millions of dollars while systematically draining his company of assets. It also accused Minkow of setting up dummy companies, writing phony invoices and conducting tours of purported restoration sites. Prosecutors estimated that as much as 90 percent of ZZZZ Best's revenue was fraudulent. On June 16, prosecutors won a superseding indictment charging Minkow with credit card fraud and two additional counts of mail fraud.
While Minkow admitted to manipulating ZZZZ Best's stock, he claimed that he was forced to turn the company into a Ponzi scheme under pressure from the organized-crime figures who secretly controlled his company (a story he later admitted was false). On December 14, he was found guilty on all charges. On March 27, 1989, he was sentenced to 25 years in prison. He was also placed on five years probation and ordered to pay $26 million in restitution. In sentencing him, U.S. District Court Judge Dickran Tevrizian
Dickran Tevrizian
Dickran M. Tevrizian, Jr. was a United States federal judge for the Central District of California. Confirmed in 1985, he is the first United States federal judge of Armenian ancestry....
described Minkow as a man without a conscience. He rejected Minkow's plea for a lighter sentence as "a joke" and "a slap on the wrist" for someone who had manipulated the financial system. The SEC subsequently banned him from ever serving as an officer or director of a public company again. He served under seven and a half years, most of them at Federal Correctional Institution, Englewood
Federal Correctional Institution, Englewood
The Federal Correctional Institution Englewood is a Federal Bureau of Prisons low security facility for male offenders, located in unincorporated Jefferson County. FCI Englewood is located off of U.S. Route 285 and Kipling Street, southwest of Denver...
.
During his prison stay, he became involved in Christian ministry, completing coursework through Liberty University
Liberty University
Liberty University is a private Christian university located in Lynchburg, Virginia. Liberty's annual enrollment is around 72,000 students, 12,000 of whom are residential students and 60,000+ studying through Liberty University Online...
's School of Lifelong Learning.
Release and Short Selling
After Minkow's early release from prison in 1995, he went to work at the Church at Rocky Peak in Chatsworth, California as Director of the Bible Institute and Pastor of Evangelism.In 1995, he wrote a first-hand account of the ZZZZ Best scam, Clean Sweep. All of the book's proceeds went toward repaying his victims. He believes that he will be paying the $26 million restitution bill for the rest of his life. His other substantial debt is a $7 million loan from Union Bank.
In 1997, he became pastor of Community Bible Church in San Diego. Soon after his arrival, a church member asked him to look into a money management firm in nearby Orange County
Orange County, California
Orange County is a county in the U.S. state of California. Its county seat is Santa Ana. As of the 2010 census, its population was 3,010,232, up from 2,846,293 at the 2000 census, making it the third most populous county in California, behind Los Angeles County and San Diego County...
. Suspecting something was amiss, Minkow alerted federal authorities, who discovered the firm was a $300 million pyramid scheme
Pyramid scheme
A pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public...
. This was the beginning of the Fraud Discovery Institute, a for-profit investigative firm. His original targets were penny stock
Penny stock
In the United States, penny stocks are common shares of small public companies that trade at less than $1.00. In some countries, similar shares of stock are known as cent stocks.-Concerns for investors:...
companies, which are often havens for fraud. However, he soon attracted the attention of The Wall Street Journal
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....
and Bloomberg News. He also began appearing on Your World with Neil Cavuto
Your World with Neil Cavuto
Your World with Neil Cavuto , which debuted as the Cavuto Business Report on the network's launch in 1996, is an American business television program appearing on Fox News Channel.-About the program:...
as a fraud expert. Minkow first gained national attention when 60 Minutes
60 Minutes
60 Minutes is an American television news magazine, which has run on CBS since 1968. The program was created by producer Don Hewitt who set it apart by using a unique style of reporter-centered investigation....
aired a profile of him in August 2006. Several Wall Street investors liked what they saw, and sent him enough money to go after bigger targets. By Minkow's estimate, he has uncovered $1 billion worth of fraud over the years.
Minkow's recent motives have been brought into question by multiple news stories concluding that Minkow was shorting stock before he releases a report on a public company. According to the San Diego Union-Tribune, Minkow had engaged in this practice as early as 2006. Minkow's critics have denounced this practice as unethical, if not illegal. At least one critic has accused him of engaging in short and distort
Short and distort
"Short and distort" is a type of securities fraud in which Internet investors short sell a stock and then spread negative rumors about the company in an attempt to drive down stock prices...
, a form of securities fraud which is a reversal of a pump and dump
Pump and dump
"Pump and dump" is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price....
scheme. For instance, when he issued a report accusing Herbalife
Herbalife
Herbalife International is a global nutrition, weight-loss and skin-care company. The company was founded in 1980 and it employs around 4,000 people worldwide. Herbalife reported net sales of USD 2.7 billion in 2010...
founder Mark R. Hughes
Mark R. Hughes
Mark Reynolds Hughes was an American businessman who was founder, chairman and CEO of Herbalife International Ltd.- Early life :...
of embellishing his resume, he made $50,000 by shorting Herbalife stock. Numerous FDI reports have proven to be false, yet Minkow continues to profit from his short sales position due to sharp decreases in the reported company's stock price immediately after releasing a new report. Minkow almost always holds a position in securities that he reports on. However, he has since stated that while his lawyers advised him this practice was legal, it was probably unethical.
Many companies have sued Minkow for making false accusations against them. However, most of the suits have gone nowhere since criticizing public companies is usually considered to be protected free speech. This has led many of Minkow's targets to settle out of court, paying him as much as $300,000 to stop his attacks on them.
Lennar
In 2009, Minkow issued a report accusing major homebuilder Lennar of massive fraud. Minkow claimed that irregularities in Lennar's off-balance-sheet debt accounting were evidence of a massive Ponzi scheme. Minkow accused Lennar of not disclosing enough information about this to its shareholders, and also claimed a Lennar executive took out a fraudulent personal loan. In an accompanying YouTube video, Minkow denounced Lennar as "a financial crime in progress" and "a corporate bully." Lennar's stock plummeted in the wake of Minkow's reports. From January 9 (when Minkow first made his accusations) to January 22, Lennar's stock tumbled from $11.57 a share to only $6.55. Minkow issued the report after being contacted by Nicholas Marsch, a San Diego developer who had filed two lawsuits against Lennar for fraud. Indeed, the language of the FDI report echoed that used in Marsch's filings. One of Marsch's suits was summarily thrown out; the other ended with Marsch having to pay Lennar $12 million in counterclaims.Lennar responded by adding Minkow as a defendant in a libel-and-extortion
Extortion
Extortion is a criminal offence which occurs when a person unlawfully obtains either money, property or services from a person, entity, or institution, through coercion. Refraining from doing harm is sometimes euphemistically called protection. Extortion is commonly practiced by organized crime...
suit against Marsch. Minkow initially wasn't concerned, since he'd prevailed before in similar cases on free-speech grounds. According to court records, Minkow had shorted Lennar stock, buying $20,000 worth of options in a bet that the stock would fall. Even more seriously, he also bought Lennar stock after his FDI report, believing the stock would rebound after its dramatic plunge. Minkow initially denied doing this, only to be forced to recant when confronted with trading records. Minkow also forged documents alleging misconduct on Lennar's part, and lied about having to go to the emergency room on the night before he was first scheduled to testify. He also went forward with the report even after a private investigator he'd hired for the case couldn't substantiate Marsch's claims. In an unrelated development, it was also revealed that Minkow operated the FDI out of the offices of his church and even used church money to fund it—something which could potentially jeopardize his church's tax-exempt status.
On December 27, 2010, Florida Circuit Court Judge Gill Freeman issued terminating sanctions against Minkow in response to a motion by Lennar. Freeman found that Minkow had repeatedly lied under oath, destroyed or withheld evidence, concealed witnesses, and deliberately tried to "cover up his misconduct." According to Freeman, Minkow had even lied to his own lawyers about his behavior. Freeman determined that Minkow had perpetuated "a fraud on the court" that was so egregious that letting the case go any further would be a disservice to justice. In her view, "no remedy short of default
Default judgment
Default judgment is a binding judgment in favor of either party based on some failure to take action by the other party. Most often, it is a judgment in favor of a plaintiff when the defendant has not responded to a summons or has failed to appear before a court of law...
" was appropriate for Minkow's lies. She ordered Minkow to reimburse Lennar for the legal expenses it incurred while ferreting out his lies. According to legal experts, it is extremely rare for a judge to issue terminating sanctions, since they are reserved for particularly egregious misconduct and have the effect of revoking a litigant's right to defend himself. Earlier, Freeman had been so angered by Minkow's behavior that she called him a liar in open court, a rarity for a judge. Lennar estimates that its attorneys and investigators spent hundreds of millions of dollars exposing Minkow's lies.
On March 16, 2011, Minkow announced through his attorney that he was pleading guilty to one count of insider trading
Insider trading
Insider trading is the trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company...
. According to his lawyer, Minkow had bought his Lennar options using "nonpublic information." The plea, which is separate from the civil suit, came a month after Minkow learned he was the subject of a criminal investigation. Minkow claimed not to know at the time that he was breaking the law. The SEC had already been probing Minkow's trading practices. On the same day, Minkow resigned as senior pastor of Community Bible Church, saying in a letter to his flock that since he was no longer "above reproach," he felt that he was "no longer qualified to be a pastor." Six weeks earlier, $50,000 in cash and checks was stolen from the church during a burglary
Burglary
Burglary is a crime, the essence of which is illicit entry into a building for the purposes of committing an offense. Usually that offense will be theft, but most jurisdictions specify others which fall within the ambit of burglary...
. Though unsolved, it was noted as suspicious due to Minkow's admitted history of staging burglaries to collect insurance money.
The nature of the "nonpublic information" became clear a week later, when federal prosecutors in Miami filed a criminal information charging Minkow with one count of conspiracy to commit securities fraud. Prosecutors charged that Minkow and Marsch (listed as an unindicted co-conspirator
Unindicted co-conspirator
An unindicted co-conspirator, or unindicted conspirator, is a person or entity that is alleged in an indictment to have engaged in conspiracy, but who is not charged in the same indictment...
in the complaint) conspired to extort money from Lennar by driving down its stock. The complaint also revealed that Minkow had sent his allegations to the FBI, SEC and IRS, and that the three agencies found his claims credible enough to open a formal criminal investigation into Lennar's practices. Minkow then used confidential knowledge of that investigation to short Lennar stock, even though he knew he was barred from doing so. Minkow opted to plead guilty to the conspiracy charge rather than face charges of securities fraud and market manipulation
Market manipulation
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency...
, which could have sent him to prison for life.
On March 30, Minkow pleaded guilty before Judge Patricia A. Seitz
Patricia A. Seitz
Patricia Ann Seitz is an American lawyer and judge.Seitz was born in Washington, D.C., in 1946. Her father is Lieutenant General Richard J. Seitz, former commanding general of the 82nd Airborne Division and the XVIII Airborne Corps....
. Minkow's attorney, Alvin Entin, admitted that his client had acted recklessly, but had been "deluded and taken advantage of" by Marsch. He faced a maximum of five years in prison, and may have to pay as much as $350,000 in fines and penalties and $500 million in restitution. However, he has agreed to cooperate with the government in its probe of Marsch.
The Los Angeles Times
Los Angeles Times
The Los Angeles Times is a daily newspaper published in Los Angeles, California, since 1881. It was the second-largest metropolitan newspaper in circulation in the United States in 2008 and the fourth most widely distributed newspaper in the country....
obtained a copy of the plea agreement, in which Minkow admitted to issuing his FDI report on Lennar at Marsch's behest. According to the agreement, Marsch offered to have Minkow retract his report if Lennar paid him in cash and stock. It also said that Minkow's report triggered a bear raid
Bear raid
A bear raid is a type of stock market strategy, where a trader attempts to force down the price of a stock to cover a short position...
which temporarily reduced the market capitalization of Lennar by $583 million. Minkow faced a minimum of 30 years in prison had the case gone to trial.
On June 16, Freeman ordered Minkow to pay Lennar $584 million in damages—roughly the amount the company lost as a result of the bear raid. Freeman's ruling stated that Minkow and Marsch had entered into a conspiracy to wreck Lennar's stock in November 2008. With interest, the bill could easily approach a billion dollars—far more than he stole in the ZZZZ Best scam.
On July 21, Seitz sentenced Minkow to five years in prison. However, he could serve as few as three years depending on how well he cooperates in the federal investigation of Marsch. In imposing the sentence, Seitz said that Minkow had "no moral compass that says 'Stop.'" Seitz also ordered him to pay Lennar $583.5 million in restitution—an amount that had been imposed a month earlier in the civil case. This could be a potentially ruinous amount for Minkow, on top of the money he still owes the ZZZZ Best victims and Union Bank.
Seitz had recommended that Minkow serve his sentence at Federal Prison Camp, Montgomery in Montgomery, Alabama
Montgomery, Alabama
Montgomery is the capital of the U.S. state of Alabama, and is the county seat of Montgomery County. It is located on the Alabama River southeast of the center of the state, in the Gulf Coastal Plain. As of the 2010 census, Montgomery had a population of 205,764 making it the second-largest city...
. However, on September 20, he was ordered to begin his sentence at Federal Medical Center, Lexington
Federal Medical Center, Lexington
The Federal Medical Center, Lexington is a federal prison in Lexington, Kentucky housing 1,464 male inmates at high security and 296 female inmates at a low security camp.-History:...
in Lexington, Kentucky
Lexington, Kentucky
Lexington is the second-largest city in Kentucky and the 63rd largest in the US. Known as the "Thoroughbred City" and the "Horse Capital of the World", it is located in the heart of Kentucky's Bluegrass region...
.
Former church members speak out
On June 14, 2011; KGTVKGTV
KGTV, digital channel 10, is the ABC television affiliate in San Diego, California. The station can be seen on Cox Communications, Time Warner Cable, and AT&T U-verse on cable channel 10 in standard definition. Cox Communications and Time Warner Cable carry its high definition signal on cable...
in San Diego interviewed several members of Minkow's former church, who said Minkow swindled them. One woman said Minkow asked her for $300,000, purportedly to help finance a movie about his redemption. The FBI is investigating.
Almost a month later, on July 6, it emerged that officials with Community Bible Church had accused Minkow of running the Fraud Discovery Institute with church funds, applying for credit cards in the names of church members and leading his flock into bad investments. Church officials had made the claims as part of a confidential pre-sentencing report. When Minkow's attorney, Alvin Entin, got word of the letter, he asked for and was granted two weeks to review the allegations and respond to them. This pushed Minkow's sentencing back to July 21. This was the second time Minkow's sentencing had been postponed; it was originally slated for June 16 but was postponed to July 6.
Further reading
- Minkow, Barry, Clean Sweep:The Inside Story of the Zzzz Best Scam... One of Wall Street's Biggest Frauds, ISBN 0-7852-7916-4
- Minkow biography at Fraud Discovery Institute web site (Archived: site closed)
- Minkow Beneath the Iceberg August 10, 2011
- 60 Minutes segment on Minkow August 27, 2006
External links
- Inmate information from United States Bureau of Prisons
- Fraud Discovery Institute website (archived)