Barry Minkow

Barry Jay Minkow (born March 22, 1966)^[1] is an American former businessman, pastor, and convicted felon. While still in high school, he founded ZZZZ Best (pronounced "Zee 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 pastor and fraud investigator in San Diego, 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 for five years. Three years later, he admitted to defrauding his own church and was sentenced to an additional five years in prison. As a result of his crimes, he faces having to pay a total of $612 million in restitution—an amount that he will likely spend the rest of his life repaying.

Beginnings of ZZZZ Best

Minkow was born in Inglewood, California to a Jewish family, and was raised in Reseda, Los Angeles. 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 did not have a driver's license.^[2]

At first, Minkow struggled to meet basic expenses. Two banks closed his business account because California law did not 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.^[3]

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.^[4]

While most Ponzis are based on non-existent businesses, ZZZZ Best's carpet-cleaning division was very real, and won high marks for its quality.^[2] However, its insurance restoration division, which eventually accounted for 86 percent of company revenues, was nonexistent.^[5] 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.

After graduating from high school in 1985, Minkow was able to devote all of his time to ZZZZ Best. However, still short of cash, he got 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 the company'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.^[2] Other organized crime figures turned up as Minkow's advisers, which unnerved other employees.^[3] 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.^[6]

Going public

At the suggestion of a friend, Minkow took the company public in January 1986, garnering a spot on NASDAQ.^[3] The accountant who audited the company before it went public did not visit the insurance restoration sites himself. Had he done so, he would have discovered that they were mailboxes located throughout the San Fernando Valley.^[3][7] 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.^[2][3][8]

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 the company'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.^[7]

Minkow launched a massive television advertising campaign portraying ZZZZ Best as a carpet cleaner that Southern Californians could trust.^[9] He owned a Ferrari and a BMW, and bought a mansion in the wealthy Valley community of Woodland Hills.^[10] He had ambitions of making the company "the General Motors of the carpet-cleaning industry."^[6]

The company's chief financial officer, Charles Arrington, was accused of running up $91,000 in fraudulent charges against customers of his florist business.^[11] 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, anticipating that the company's stock would fall.^[12] Additionally, none of the company's four outside directors had any experience running a public company.^[13]

Downfall

By February 1987, ZZZZ Best was trading at $18 a share on NASDAQ, valuing the company at $280 million.^[14] The company now had 1,030 employees with offices across California, Arizona and Nevada.^[15] Minkow's stake was worth $100 million, and he appeared to be the ultimate American success story.^[16]

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.^[3] Drexel Burnham Lambert offered to finance the deal with a private placement of junk bonds.^[17] Morze thought that KeyServ's Sears business would give ZZZZ Best enough cash to end the Ponzi scheme sooner than planned.^[7]

Although KeyServ was double the size of Minkow's company, 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.^[3] Even as the process of merging with KeyServ got underway, Minkow had ambitions of becoming more powerful, and was already making plans to raise $700–800 million to buy ServiceMaster in a hostile takeover.^[7][17] He also had plans to expand to the United Kingdom.^[2] Outside of carpet cleaning, he had begun preliminary discussions to buy Major League Baseball's Seattle Mariners.^[17]

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 had not paid back a homemaker who had been overcharged a few hundred dollars.^[3] Minkow ignored the woman's requests to pay her back. The woman tracked down several other people who had been defrauded by Minkow^[8] 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.^[11] The story, which ran just days before the 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 detonated another bombshell. She had evidence that the Sacramento project didn't even exist. More seriously, she'd discovered that ZZZZ Best did not have a contractor's license required for large-scale restoration work.^[3] 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.^[3][8] Drexel's withdrawal stopped the deal only four to seven days before it was due to close.^[17]

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 could not explain the checks, Ernst & Whinney resigned as his company's auditor, but did not inform the SEC of its suspicions until a month later.^[8]

On July 2, Minkow abruptly resigned for "health reasons." By this time, his company's stock had tumbled to $3.50 a share—an 81 percent drop from its high in February.^[18] 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 could not produce them, prompting him to resign six days later.^[3] Later, he reportedly told a member of his board that the insurance restoration business had been a sham from the very beginning.^[5]

ZZZZ Best's new board conducted an internal investigation that largely substantiated the fraud allegations. On July 6, it sued Minkow, alleging that he had absconded with $23 million in company funds. The company claimed that its assets had been drained to the point that it was forced into Chapter 11 bankruptcy.^[19] Two days later, the Los Angeles Police Department raided ZZZZ Best's headquarters and Minkow's home, and found evidence that the company was being used to launder drug profits for organized crime.^[10][13]

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, embezzlement, 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 the company's revenue was fraudulent.^[5] On June 16, prosecutors won a superseding indictment charging Minkow with credit card fraud and two additional counts of mail fraud.^[20]

While Minkow admitted to manipulating the company'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,^[21] a story he later admitted was false.^[3] On December 14, he was found guilty on all charges.^[15] 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.

While imprisoned, Minkow had become religious.^[22] During his prison stay, he became involved in Christian ministry, completing coursework through Liberty University's School of Lifelong Learning.^[3] Following his release, he became a pastor at a church in San Diego, where he subsequently operated the Fraud Discovery Institute.^[22]

Release

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.^[16]

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.^[3] His other substantial debt is a $7 million loan from Union Bank.^[23]

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 (which eventually transpired to be a fraud itself). 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.^[24] Minkow claimed to have uncovered $1 billion worth of fraud over the years.^[25]

Shorting Stock

Minkow's motives were brought into question by multiple news stories concluding that Minkow was shorting stock before he released 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 denounced this practice as unethical, if not illegal. At least one critic accused him of engaging in short and distort, a form of securities fraud which is a reversal of a pump and dump scheme.^[26] For instance, he accused Herbalife of a "laundry list" of issues,^[27] and Minkow had "correctly revealed that Herbalife's president had inflated his résumé."^[16] Herbalife paid Minkow $300,000,^[27] after which Minkow issued a press release withdrawing all accusations and contentions against Herbalife,^[28] and removed all the accusations from his website. Additionally, Minkow made $50,000 from shorting Herbalife stock.^[29] Minkow continued to profit from his short sales position due to sharp decreases in the reported company's stock price immediately after releasing a new report.^[16]

On 20 February 2007, Minkow, distributed a 500-page report to officials at the U.S. Securities and Exchange Commission (SEC), the Federal Bureau of Investigation (FBI), and the Internal Revenue Service (IRS) accusing USANA of operating an illegal pyramid scheme.^[30][31] USANA countered by lodging suits against Minkow and his company claiming defamation and stock manipulation.

On the day Minkow's report was released, USANA's shares had traded at $61.19 but by August the share price had tumbled to less than $35.^[30][32] Minkow, acknowledged that he was shorting USANA's shares, hoping to profit from a drop in the stock price.^[33] However, in reference to USANA's lawsuit, news columnist Herb Greenberg commented that the criticism of Minkow "is a bunch of malarkey; he has a right to publish his research, as long as people know his position [in the stock]." Minkow had revealed in the report that he was betting for the stock to go down.^[30] USANA dropped the defamation suit and in March 2008 U.S. District Judge Tena Campbell threw out four of the five claims brought by USANA against Minkow ruling that USANAs claims violated California’s anti-SLAPP law for suing Minkow for fair criticism.^[34] and that USANA did not show a reasonable probability of winning on those claims.^[35] The judge also cited two examples where USANA failed to refute Minkow's claims that their products were overpriced and of no better quality than other lower-priced brands.^[35] The remaining charge of stock manipulation was settled in July 2008 when USANA and Minkow reached an undisclosed settlement, which included the removal of all USANA-related materials from the Fraud Discovery Institute website, a related Chinese website, and from YouTube. Minkow also agreed to never trade in USANA's stock again.^[36] Separately from the settlement, the company paid $142,510 in attorney fees to Minkow and his institute under an order from federal Magistrate Samuel Alba. Court documents show that USANA never pursued others whom they suspected of being part of the alleged stock manipulation nor did they ask for an injunction, their only avenue of release in this case.^[35]

Minkow almost always held a position in securities on which he reported.^[37] However, he has since stated that while his lawyers advised him this practice was legal, it was probably unethical.^[26] Several companies have sued Minkow for making false accusations against them, most of which have been settled out of court.^[24]

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.^[38] 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.^[26] 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.^[16]

Lennar responded by adding Minkow as a defendant in a libel-and-extortion suit against Marsch. Minkow was initially unconcerned, since he had prevailed before in similar cases on free-speech grounds.^[26] According to court records, Minkow had shorted Lennar stock, buying $20,000 worth of options in a bet that the stock would fall.^[38] Even more seriously, he also bought Lennar stock after his FDI report, believing the stock would rebound after its dramatic plunge.^[39] 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 had hired for the case could not 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.^[16]

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 perpetrated "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.^[40][41]

Insider trading guilty plea

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.^{[38][42][43][44]}

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.^[45][46][47] 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.^[48]

On March 30, 2011, 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, 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.^[49][50][51]

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.^[52]

In a pre-sentencing evaluation performed on May 10, 2011, Minkow was diagnosed by a Dr. Michael Brannon as having antisocial personality disorder, narcissistic personality disorder, attention deficit hyperactivity disorder, anxiety disorder, opioid dependence, anabolic steroid abuse, and migraine headaches.^[53][54]

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.^[51] With interest, the bill could easily approach a billion dollars—far more than he stole in the ZZZZ Best scam.^[55]

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.^[56][57] This was the second time Minkow's sentencing had been postponed; it was originally slated for June 16 but was postponed to July 6.

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.^[25][56][58]

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.^[59] He may be released sooner since he is taking part in a drug treatment program.^[60]

At sentencing and in interviews with media, Minkow claimed that he committed securities fraud because he had become addicted to his migraine headache medication Oxycontin.^[53][61][62]

Church fraud guilty plea

On June 14, 2011; KGTV 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.^[63]

On January 22, 2014, Minkow pleaded guilty to one count each of conspiracy to commit bank fraud, wire fraud, mail fraud and to defraud the federal government. He admitted to embezzling over $3 million in donations to Community Bible Church from 2001 to 2011. He opened unauthorized bank accounts purportedly on the church's behalf, forged signatures on church checks, diverted money from legitimate church accounts for his personal use, and charged unauthorized personal expenses on church credit cards. He also concealed $890,000 of income and $250,000 in taxes from the IRS.^[64][65] Among his victims were a widower who gave $75,000 to fund a supposed hospital in Sudan to honor his wife after she died of cancer, and a woman who gave Minkow $300,000 that would have otherwise gone to help raise her teenage granddaughter.^[66]

On April 28, 2014, Judge Michael M. Anello sentenced Minkow to five years in prison, the maximum possible sentence under his plea bargain. It is to be served after Minkow completes his sentence for securities fraud. While Minkow's attorneys asked for a sentence of 41 months, Anello felt he had to impose the maximum for what he called a "despicable, inexcusable crime."^[67] On June 2, Minkow reached an agreement with federal prosecutors that called for him to pay $3.4 million in restitution.^[68] This will potentially be a ruinous amount for Minkow, on top of the restitution he still owes Lennar, Union Bank and the ZZZZ Best victims. Earlier, he said that the $26 million restitution for the ZZZZ Best scam alone was large enough that he would be writing restitution checks to the ZZZZ Best victims for the rest of his life.^[16] As a result of his latest sentence, Minkow's earliest possible release date is now June 6, 2019.

Film Adaptation

Prior to his 2011 conviction production began on a film detailing Barry Minkow's life and redemption. The film featuring Mark Hamill, Justin Baldoni, Talia Shire, and Ving Rhames was partially funded by donations Minkow solicited from his congregation. Minkow insisted on playing the middle aged version of himself in the film. Following his arrest the film's release was cancelled and work began on a new ending.^[69][70][71]

References

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)
• 60 Minutes segment on Minkow August 27, 2006

External links

• Inmate information from United States Bureau of Prisons
• Fraud Discovery Institute website (archived)
• http://nypost.com/2013/09/25/ponzi-schemer-barry-minkow-facing-third-strike/