Famous Scams: ZZZZ Best

Published in Investing on 2 November 2009

Insurance scams, credit card fraud, money-laundering -- ZZZZ Best tried the lot.

Barry Minkow became the youngest person ever to float a company on the US stock market, in 1986, when his company, ZZZZ Best (pronounced "Zee Best"), began trading on NASDAQ.

The company, which began in the carpet cleaning business and moved into the restoration of buildings damaged by water and fire, on behalf of large insurance companies, was at one point worth more than $200m -- on paper at least. Minkow became a hero of the American Dream and the toast of Wall Street, and even got himself an appearance on the Oprah Winfrey show.

It was bogus

But there was only one problem. ZZZZ Best's insurance restoration contracts didn't really exist, and Minkow had never been able to turn a profit in the carpet cleaning business. Instead of the business prodigy that his admirers had held him up as, Minkow was nothing more than a successful con artist and thief, and his skills lay in fraudulently raising capital rather than running a business.

Minkow started ZZZZ Best as a rug cleaning business, in his parents' garage, in 1982 at the age of 16, but the company was perpetually short of cash. To keep it afloat, Minkow used all the imagination at his disposal, and his money-raising schemes included faking burglaries in order to claim the insurance money, borrowing money from his grandmother, stealing and selling her jewellery, and credit card fraud.

Although not a great success, ZZZZ Best did actually have some customers, and these proved another fruitful source of dishonest cash for Minkow. The tactic this time was to charge bogus amounts to customers' credit card accounts, and when some of them complained, he repaid the cash and blamed it on a staff member, but carried on milking other customers' accounts.

Insurance renovation

If the carpet cleaning company was adventurously dishonest, Minkow's venture into insurance restoration was truly bizarre. With an accomplice, Tom Padgett, an insurance loss adjuster, Minkow obtained a number of faked documents claiming that ZZZZ Best was engaged in a number of contracts with Padgett's company, restoring damaged buildings on behalf of insurance companies. 

Minkow and Padgett also formed a fake company, Interstate Appraisal Services, to pose as an intermediary between ZZZZ Best and its insurance company customers, verifying the details of the business to ZZZZ Best's bankers. On the back of such testimony and the company's impressive set of faked contracts, large bank loans were forthcoming, and ZZZZ Best managed to expand and open several offices across Southern California.

Going public

Still needing money, and still not really making any profit, in 1985 Minkow hit on the idea of floating ZZZZ Best. His plan, apparently, was to raise enough money from the Initial Public Offering (IPO) to enable him to turn the company into a legitimate business, and by the time US securities law allowed him to sell off any of his own initial shares, he would be able to pay off everyone he had fraudulently borrowed money from.

When accountants wanted to inspect the business, Minkow used borrowed offices to masquerade as the non-existent Interstate Appraisal Services, and passed off an unfinished building as one of his insurance restoration projects. The accountant was satisfied with what he saw, along with the company's faked accounts and other documents, and the IPO went ahead, making Minkow an instant millionaire on paper.

ZZZZ Best expanded, with offices in three states and 1,400 employees, valuing Minkow's share of the business at around $100m.

Rumbled

But Minkow had defrauded too many people to get away with it for ever, and one of them -- a woman who had been overcharged a few hundred dollars -- was following him closely. She managed to identify other people who had been similarly cheated, for a total of $72,000. The story made the Los Angeles Times, prompting ZZZZ Best's bankers to threaten to foreclose.

Other reporters followed up the story and discovered that a number of the ZZZZ Best's insurance renovation contracts didn't exist, and that the company didn't even have the requisite license needed to undertake such work. Minkow was eventually asked to provide the details of all of the company's contracts for investigation, and the game was up. Eventually, police investigators discovered that ZZZZ Best was being used to launder drug money.

Born again

Minkow panicked, miraculously saw the light, and became a born-again Christian. And after serving a 7-year sentence, he has stayed with the Church.

Minkow today also works for the Fraud Institute in San Diego, putting to good use his skills in fraud and deception. And he is still paying back his debts from his ZZZZ Best years -- but with $19m to go, it'll be a while before he's done.

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