What Is ZZZZ Best?
ZZZZ Best, founded by Barry Minkow, was a carpet-cleaning and restoration company that served as a front for a Ponzi scheme.聽The company went public in December 1986 and was quickly valued at over $300 million.聽Within seven months of the IPO, ZZZZ Best was bankrupt and its assets were auctioned for approximately $64,000.
- ZZZZ Best was a company set up as a front for a Ponzi scheme, founded by Barry Minkow.
- Barry Minkow engaged in a range of criminal acts including insurance scams and check kiting.
- Minkow and Padgett set up a fake company called Interstate Appraisal to defraud financial institutions out of millions.
- Minkow was eventually sentenced to 25 years in prison for fraud. When released, he ended up convicted for fraud again and sentenced to five more years.
Understanding ZZZZ Best
While in high school, Barry Minkow formed ZZZZ Best in his parents' garage.聽The business performed poorly and 15-year-old Minkow was often inundated with customer complaints and supplier collection requests.聽To create an illusion of a profitable business, Minkow began committing criminal acts, such as check kiting, theft, insurance scams, and fraud, to fund operations and pay suppliers.
Within a few years of ZZZZ Best's inception, Minkow launched fictitious insurance restoration and appraisal businesses.聽While active, ZZZZ Best was at the center of a credit card scheme involving over $70,000 in fraudulent charges.聽Although Minkow assigned blame to contractors and employees, he repaid all of the victims except for one: a homemaker swindled out of a few hundred dollars.
The Scheme and the Downfall
Minkow and business associate Tom Padgett created a fictitious company, Interstate Appraisal Service, to defraud banks and other lending institutions out of millions of dollars. Tom Padgett, an insurance claims adjuster, conspired with Minkow to forge documents crediting ZZZZ Best for restoration work and use Interstate Appraisal Services as the source to verify the claims. Increasingly, investors and bankers developed an interest in ZZZZ Best based on fraudulent financial statements produced by Minkow鈥檚 firm.聽
As the Ponzi scheme continued, ZZZZ Best experienced significant cash flow problems.聽As a solution, Minkow planned to acquire KeyServ, Sears' authorized carpet cleaner, for $25 million.聽According to Minkow, the revenues from KeyServ would provide enough cash flow to end the Ponzi scheme.聽Before the deal was closed, the jilted homemaker sparked a campaign against ZZZZ Best that would expose more than the fraud committed against her.聽
The L.A. Times featured her story, which caused ZZZZ Best's stock price to decline sharply.聽Lenders began to call their loans and more investigations commenced, unraveling Minkow's dark web of deceit and fraud.聽Eventually, the truth behind the fictitious companies was revealed and the Ponzi scheme was exposed.
How Auditors Were Misled
To launch an IPO, the Securities and Exchange Commission (SEC) requires a firm to compile a prospectus, which must include a set of audited financial statements. Independent CPA firm Ernst & Whinney (now Ernst & Young) audited ZZZZ Best's financials to provide an opinion as to whether the financial statements were free of material misstatement.聽Assuming an independent third party provided the paperwork, the CPAs used false appraisal documents to perform its audit.聽When the CPA firm requested to visit a building refurbishing customer site, Minkow and his associates rented a building and created a bogus customer job site.
Minkow After ZZZZ Best
In January 1988, Minkow and 10 other company insiders were indicted by a grand jury on counts of racketeering, money laundering, securities fraud, embezzlement, mail fraud, bank fraud, and tax evasion.聽Separately, Minkow was also indicted on counts of credit card fraud and mail fraud.聽Approximately a year later, Minkow was found guilty on all charges, was sentenced to 25 years in prison and was ordered to pay over $26 million in restitution.聽
After his early release in 1995, he became an ordained minister and served as a pastor of a church in California.聽Minkow informally investigated and reported other Ponzi schemes.聽From this success, he formed the fraudulent Fraud Discovery Institute.聽In 2011, he was again convicted for fraud and sentenced to five聽years in prison.聽A few years later, he was sentenced to an additional five years in prison for defrauding his church.聽His restitution balance has increased ten-fold to $612 million.