ZZZZ BEST (pronounced as Zeee Best) was a carpet-cleaning company set up in Inglewood, California in 1982 by a 16-year-old boy named Barry Jay Minkow, while he was still in school. At that age, while a sophomore Clevand High School, Minkow started ZZZZ Best in his parents' garage with three employees and four phones.
At first, Minkow struggled to meet basic expenses. Two banks closed his business account because California law of the time did not allow minors to sign binding contracts, including checks. To create an illusion of a profitable business he started committing criminal acts via check kiting, stealing and selling his grandmother's jewellery, staging break-ins at his offices, and running up fraudulent credit card charges. However, it was actually a front to attract investment for a massive Ponzi Scheme. The company found a way to make a large amount of money by when it branched out into carpet restoration for insurance firms. The apparent success of the business enabled ZZZZ Best to float in 1986 reaching a peak market capitalization of $280m.
At the suggestion of a friend, Minkow took the company public in January 1986, garnering a spot-on NASDAQ. 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 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 offered him a way to cover up his fraudulent activities. 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. The public offering closed in December and Minkow became the youngest person to lead a company through an IPO in American financial history.
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 to Minkow’s Bankers. Flush with loans from banks, Minkow expanded ZZZZ BEST across Southern California. Increasingly, investors and bankers developed an interest in ZZZZ Best based on fraudulent financial statements produced by Minkow’s firm. As the Ponzi Scheme continued the company faced cash-flow problems. To overcome this Barry planned to acquire KeyServ authorized carpet cleaner for $25 Million. Before the deal was closed, KeyServ sparked a campaign against ZZZZ BEST. The L.A. Times published an article detailing that Minkow had previously been involved in $72,000 worth of fraudulent charges and was still refusing to pay some victims back. This caused banks to pull their credit lines; the investment bankers overseeing the KeyServ deal forced an immediate postponement. At the same time, it was revealed that some major restoration contracts that ZZZZ Best claimed to have won were made up which lead the stock price of the company decline massively. Soon the truth behind the fictitious company was revealed, and the Ponzi Scheme was exposed. As the company 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.
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. Assuming an independent third party provided the paperwork, the CPAs used false appraisal documents to perform its audit. 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 and 10 other ZZZZ Best insiders were indicted by a Los Angeles federal grand jury in January1988 on 54 counts of racketeering securities fraud, money laundering, embezzlement, mail fraud, tax evasion and bank fraud. Prosecutors estimated that as much as 90 percent of the company's revenue was fraudulent. On June 16, prosecutors won. 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, a story he later admitted was false. 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. The SEC subsequently banned him from ever serving as an officer or director of a public company again.
1988:25 years in federal prison, 5 years’ probation, $26 million in restitution.
2011: Five years in federal prison, $583.5million in restitution
2014: Five years in federal prison, $3.4 million in restitution
He further committed frauds. They are listed below:
1. Shorting stock
2. Lennar
3. Insider trading guilty plea
4. Church fraud guilty plea
5. Fraud Discovery Institute.
Write-up by: Nivedha Iyer
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