ZZZZ Best, founded by Barry Minkow, was a carpet-cleaning and, later, insurance restoration company. It also had ties to organized crime and was essentially run as a Ponzi scheme. Auditors, investment bankers, attorneys, and federal investigators were badly fooled by Minkow and his associates, and stockholders lost more than $240 million when the fraud was uncovered.
Barry Minkow started his own carpet-cleaning business, ZZZZ Best Company, when he was just sixteen years old, and within two years he was the president of his own corporate empire. However, that empire, which expanded to include insurance restoration, was mostly nonexistent. Minkow had been perpetrating a gigantic fraud—one of the largest of the twentieth century. His real business was to create an attractive company that induced investors to hand over their money to ZZZZ Best.
Minkow’s carpet-cleaning business never was profitable, so he had to borrow money to buy equipment and pay off debts. When it came time to repay his loans, Minkow began creating phony financial statements to fool the bankers. To make it look like he had more business than he really had, Minkow created the phony insurance restoration business, claiming to clean and remodel buildings that had suffered fire and other damage losses. Although this part of his business was fabricated, it nevertheless produced 90 percent of the company’s revenues. Critical to Minkow’s success was convincing the large international auditing firm of Ernst & Whinney (now Ernst & Young) that his restoration business was real.
The ultimate fraud would be to make ZZZZ Best a public company and thereby open the doors to investors around the United States. ZZZZ Best’s chief financial officer, Mark Morze, had convinced Minkow that going public would enable the company to grow, and grow it did. Investors quickly pushed the company’s market price up to eighteen dollars per share. Minkow’s share of the company (52 percent after the public offering) was worth well over $100 million, making him the so-called boy-wonder of Wall Street. He appeared on many television shows, including Oprah, and was the subject of numerous magazine articles.
Minkow used many tricks to convince auditors that his nonexistent clients really existed: One of those tricks was check kiting, that is, he wrote checks to his own company using an account without funds. His financial statements would show an account receivable, or payment, from a nonexistent customer. If an auditor tried to determine the validity of that receivable, Minkow would be able to show that the customer had indeed paid the account on the due date. However, it was Minkow himself who would pay the ZZZZ Best account with a check written on a ghost account—an account of a “customer.”
In another instance, Minkow bribed a security guard to allow him to take auditors into a building in Sacramento, California, purportedly restored by Minkow’s company after a fire. The auditors had no reason to doubt Minkow. Many critics would later argue that auditors failed to do their jobs, which made the scheme even more successful.
Minkow was aided in his fraud scheme by Morze and Tom Padgett, an insurance claims adjuster whom he had earlier befriended. Minkow, Padgett, and Morze, through their fictitious business Interstate Appraisal Services, prepared phony documents to support the scheme, so documentation was always available for auditors. The fraud involved the use of a copy machine for invoices and stationery for customers and suppliers—neither of which existed. Minkow, Padgett, and Morze worked hard to make the fraud look real, spending several million dollars to convince auditors that the company’s restoration jobs were authentic.
Minkow’s lifestyle also exuded success. He lived in a large mansion and drove one of the world’s highest-priced cars, a Ferrari Testarossa. He lectured at business schools, and the mayor of Los Angeles even declared a Barry Minkow Day for the city. The glitz apparently blinded the auditors, lawyers, and underwriters. Minkow later stated that he tried to become friends with the auditors and their spouses so they would not be suspicious of him. He also manipulated the auditors by asking for their business advice; the result was that they spent their time as consultants rather than investigators. It would take the curiosity of a homemaker in Los Angeles to bring down Minkow’s fraud scheme.
One of Minkow’s minor schemes was overcharging customers who paid their carpet-cleaning bills with a credit card. If they complained about the overcharge, he would eventually refund their money. However, one woman whom he had cheated told her story to a reporter with the
Los Angeles Times, which ran a damning story about ZZZZ Best and Minkow on May 22, 1987. At the time, Minkow also was trying to buy a rival carpet-cleaning company, KeyServe, for eighty million dollars. The price of ZZZZ Best stock dropped and subsequent investigations found that many of the ZZZZ Best customers did not exist. Another story alerted the Federal Bureau of Investigation that Minkow had done some work for the Genovese crime family. Essentially, a combination of media sources, initiated by one woman’s anger at being overcharged for carpet cleaning, uncovered the full extent of the fraud.
Minkow and nine others associated with the fraud scheme were indicted on January 15, 1988, by a Los Angeles federal grand jury. Charges included racketeering, securities fraud, and tax fraud. Minkow was found guilty on December 15 and was sentenced to twenty-five years in prison but served just over seven years before being paroled in 1995. At the time of his indictment, he was twenty years old. While in prison, Minkow said that he found religion, and he also enrolled in a college program through Liberty University, founded by Christian conservative Jerry
Following his parole in 1995, Minkow became the associate pastor of a church near his hometown in the San Fernando Valley of Los Angeles, and in 1997 he became the pastor of Community Bible Church in San Diego. He speaks as an expert on corporate fraud and is associated with the
The bankruptcy of ZZZZ Best came at a time when other companies, including ESM Government Securities and a host of banks and savings and loan associations, were facing similar fraud charges. The ZZZZ Best fraud, which bilked $240 million from duped investors and others, led the U.S. Congress to begin its own investigation of the auditing industry. Partners from large accounting firms were called to testify to a congressional committee about how such blatant frauds were missed by auditors. An Ernst & Whinney partner said that the ZZZZ Best fraud, for example, was too complex for any single auditor. The committee members then asked why, then, did it take Los Angeles police a fraction of the time to solve the case against Minkow, Padgett, Morze, and others, once the scheme was brought to the attention of law enforcement. The auditor responded, “The police were tipped off.”
Auditing and accounting firms would suffer the consequences of the scandal, mostly in the form of professional embarrassment. The American Institute of Certified Public Accountants soon changed the auditing standards of the accounting profession in the United States, leading auditors to be more proactive in combating fraud.
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Akst, Daniel. Wonder Boy: Barry Minkow, the Kid Who Swindled Wall Street. New York: Charles Scribner’s Sons, 1990. The Los Angeles Times reporter who broke the story on Minkow describes the details behind the ZZZZ Best multimillion-dollar fraud. -
Domanick, Joe. Faking It in America: Barry Minkow and the Great ZZZZ Best Scam. Chicago: Contemporary Books, 1989. An analysis of the fraud by an independent, somewhat cynical author. Domanick questions whether the auditors, lawyers, and underwriters really wanted to find anything wrong at ZZZZ Best. He claims they were all making too much money as consultants for the company. -
Minkow, Barry. Clean Sweep. Nashville, Tenn.: Thomas Nelson, 1995. Minkow’s autobiography, in which he discusses his leadership of one of the largest corporate frauds of the late twentieth century. -
_______. Cleaning Up: One Man’s Redemptive Journey Through the Seductive World of Corporate Crime. New York: Thomas Nelson, 2005. Minkow’s come-back story. Discusses his work with the Fraud Discovery Institute. Analyzes fraud as a crime and the reasons why people commit fraud. Also discusses his relationships with principals in the fraud and fellow inmates in prison. -
Podgor, Ellen S., and Jerold H. Israel. White Collar Crime in a Nutshell. 3d ed. St. Paul, Minn.: West, 2004. Chapters on white collar crime and corporate fraud, written in a concise and accessible format. Includes a breakdown of securities fraud, tax fraud, corporate criminal liability, conspiracy, and bribery.
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