Barry Minkow – Misrepresentation and Ponzi in 1987
Establishment of ZZZZ Best Company
When he was a sophomore in high school, Barry Minkow founded a carpet cleaning company - ZZZZ Best Company in his parents’ garage. At that time, the carpet cleaning industry has few entry barriers and all Minkow needed was a small amount of start-up capital. However, he soon found out that his firm was actually tough to survive in the industry as the ease of entry means fierce competition. The young man encountered a series of trouble: bad checks, complaints from customers, urge for payment from suppliers and finally the shortage of working capital. Not surprisingly, the bank refused to loan money to his low profit margin company. Minkow would like to try any method to expand his company and he came up with his own creative idea of financing the business including check kiting, credit card forgeries, committing insurance fraud and stealing grandma’s jewelry. Minkow met the insurance claims adjuster Tom Padgett at a swanky Los Angeles health club and began to step into the field of insurance restoration. With the promised payment of 100 dollars per week from Minkow, Padgett told any interested third parties that Minkow was the recipient of insurance restoration contracts which allowed Minkow to do repairing work on damaged properties. They also set up a fake company, Interstate Appraisal Services, to verify the details of restoration to Minkow’s bankers. In the late 1985, Morze joined the company as a part-time consultant to ask for loans around the country’s banks. At that time, he enticed mainly private investors of any kind: an elderly lady who ran the cigarette concession at a Las Vegas hotel, the wife of singer Tony Orlando, even a reputed local crime figure who delivered 25,000 dollars cash in a brown paper bag. In this way, the ZZZZ Best Company began to be flushed with bank loans expand and several carpets cleaning outlet were established in Southern California. The insurance restoration business, originally the sideline of company, gradually began to play an important role and finally accounted for 86 percent of the whole revenues on the financial statement. The seemingly main business of the company, the carpet cleaning work, actually became the cloak of the lies. As a young man with personal charm, Minkow managed to escape the legal sanction which encouraged him to further exploit such a benefit. “The sky is the limit”
There is no end to human’s greedy desire. Minkow began to entice some wealthy people to invest in his company and soon became not satisfied with the small scale of investment. To maximize the profit, he decided to take his company public. This idea began to be rooted in Minkow’s mind after he had hooked up with a guy from Encino, Maurice Rind--a convicted stock swindler but also a man with a reputation as a financial wizard. He helped ZZZZ Best merge with a publicly held Utah shell corporation while at the same time making it possible for the company going public. Taking the company public means that the firm will be under the supervision of SEC and there must be enough profit on the financial statements. In addition to the invention of new restoration jobs, Morze, whose earlier bookkeeping work involved only rudimentary accounting, did new tricks – check knitting. He jotted down notes on every insurance job ZZZZ Best supposedly did. He cut and pasted checks together--taking the name of a bank from one, a signature from another--then smoothed out the edges with blobs of White Out and a copying machine. "If you saw me at the end of the night making checks, I'd look in the mirror and I'd have little white dots all over me," he later remembered.i The finished copies made it look as though ZZZZ Best was paying carpet and lumber suppliers for restoration materials. He drew up phony invoices to coincide with the checks and drafted two years' worth of detailed bank statements. In January 1986, ZZZZ Best Company...
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