ZZZZ Best was a carpet cleaning and restoration company founded by Barry Minkow that served as a front for a famous Ponzi scheme. The company went public in December 1986 and was quickly valued at over $300 million. Within just seven months of the initial public offering (IPO), however, ZZZZ Best was bankrupt and its assets were auctioned for approximately $64,000.
Key Takeaways
- ZZZZ Best was a company set up as a front for a Ponzi scheme.
- Barry Minkow engaged in a range of criminal acts including insurance scams and check kiting.
- Minkow and his business associate, Tom Padgett, set up a fake company called Interstate Appraisal Service 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.
- The fraud was discovered by a woman who chased the paper trail, all due to an overcharge of only a few hundred dollars.
Crafting an Illusion: The Genesis of ZZZZ Best
Barry Minkow formed ZZZZ Best in his parents’ garage. The business performed poorly and fifteen-year-old Minkow was often inundated with customer complaints and supplier collection requests. To create the illusion of a profitable business, Minkow began committing criminal acts, such as check kiting, theft, insurance scams, and various forms of fraud to fund operations and pay suppliers.
The Scheme: Building a Facade Through Deceptive Practices
Minkow launched fictitious insurance restoration and appraisal businesses within a few years of ZZZZ Best’s inception. While active, ZZZZ Best was at the center of a credit card scheme involving over $70,000 in fraudulent charges. Although Minkow assigned blame to contractors and employees, he repaid all the victims except for one: a homemaker swindled out of a few hundred dollars.
The Downfall: Fraud Unveiled Through Persistence
Minkow and business associate Tom Padgett created Interstate Appraisal Service, a fictitious company, to defraud banks and other lending institutions out of millions. Conspiring with Minkow, Padgett, an insurance claims adjuster, forged documents crediting ZZZZ Best for restoration work and used Interstate Appraisal Service 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’s firm. Minkow claimed his fraudulent actions were driven by a need to repay organized crime.
As the Ponzi scheme continued, ZZZZ Best experienced significant cash flow problems. As a solution, Minkow planned to acquire KeyServ, Sears’ authorized carpet cleaner, for $25 million. Minkow believed the revenues from KeyServ would provide enough cash flow to end the Ponzi scheme. Before the deal was closed, the jilted homemaker sparked a campaign against ZZZZ Best which exposed broader fraudulent activities.
The Los Angeles Times featured her story, resulting in ZZZZ Best’s stock price declining sharply. Lenders began to call their loans, and further investigations commenced, unraveling Minkow’s extensive web of deceit and fraud. Eventually, the Ponzi scheme was fully revealed.
Deceiving the Auditors: A Case of Corporate Illusion
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 certified public accountant (CPA) firm Ernst & Whinney (now Ernst & Young) audited ZZZZ Best’s financials to verify if the financial statements were free of material misstatement.
Assuming an independent third party provided the paperwork, the CPAs used false appraisal documents to perform their 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.
Life After ZZZZ Best: A Story of Recurrence
In January 1988, Minkow and eleven 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. Separately, Minkow was also indicted on counts of credit card fraud. Approximately a year later, Minkow was found guilty on all charges and sentenced to 25 years in prison with an order to pay over $26 million in restitution.
Released early in 1995, Minkow became an ordained minister and served as a pastor in California. He informally investigated and reported other Ponzi schemes, subsequently forming the fraudulent Fraud Discovery Institute.
In 2011, Minkow was again convicted for fraud and sentenced to five years in prison. It was discovered that while filming and producing his biography, he used his anti-fraud company to short stocks of companies he was investigating. A few years later, Minkow was sentenced to an additional five years in prison for defrauding his church and tax evasion. His restitution balance has increased ten-fold to $612 million.
Frequently Asked Questions
What Accounting Procedures Did ZZZZ Best Fail to Follow?
ZZZZ Best failed because it was a Ponzi scheme and followed almost no proper accounting procedures. However, it took the company going public before the fraud was discovered, highlighting Minkow’s manipulation skills.
How Was the ZZZZ Best Fraud Discovered?
A homemaker, overcharged just a few hundred dollars by Minkow, tracked down a few others who Minkow had defrauded. She passed her findings onto the Los Angeles Times, which ran a story exposing Minkow’s relatively minor fraud. This caused a domino effect, and ZZZZ Best was quickly outed as a Ponzi scheme.
When Did Barry Minkow Get Out of Prison?
Barry Minkow was most recently released from prison in 2018 after serving time for insider trading and embezzlement from his church. Before that conviction, he served a significant jail sentence from 1989 to 1995, being released only six years into his 25-year sentence.
Is There a Barry Minkow Movie?
There was a Barry Minkow movie made in 2011, eventually released in 2018, titled Con-Man. During the filming, Barry was arrested and pleaded guilty to insider trading charges. In January of 2022, a docuseries titled King of the Con was released on Discovery+.
The Bottom Line
Barry Minkow’s company ZZZZ Best committed serious fraud and stands as one of the most notorious Ponzi schemes in history. Despite being released from prison early and provided a second chance, Minkow squandered it and ended up back in prison due to further fraudulent activities. Although his story has been portrayed – multiple times – in cinematic forms, Minkow remains a cautionary example and not a role model. At one point valued at over a quarter billion dollars, ZZZZ Best became bankrupt shortly afterward.
Related Terms: Ponzi scheme, fraud, financial scandal, Barry Minkow.
References
- Yahoo Finance. “This Day In Market History: The Liquidation Of Corporate Fraud ZZZZ Best”.
- The New York Times. “Nothing But ZZZZ Best”.
- MoneyWeek. “Great Frauds in History: ZZZZ Best”.
- Global Financial Data. “Worst and The Frankenstein of Fraudsters”.
- The Los Angeles Times. ‘“Like the 3 Stooges’ : ZZZZ Best: How the Big Bubble Burst”.
- FBI. “Conman Turned Pastor Sentenced to Five Years”.
