Barry Minkow - Downfall

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, Arizona 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.