What was the 'ZZZZ Best'

ZZZZ Best, founded by Barry Minkow, was a carpet-cleaning and restoration company that served as a front for a Ponzi scheme.  The company went public in December 1986 and was quickly valued at over $300 million.  Within seven months of the IPO, ZZZZ Best was bankrupt and its assets were auctioned for approximately $64,000.

BREAKING DOWN 'ZZZZ Best'

While in high school, Barry Minkow formed ZZZZ Best in his parents' garage.  The business performed poorly and 15-year-old Minkow was often inundated with customer complaints and supplier collection requests.  To create an illusion of a profitable business, Minkow began committing criminal acts, such as check kiting, theft, insurance scams, and fraud, to fund operations and pay suppliers.  Within a few years of ZZZZ Best's inception, Minkow launched fictitious insurance restoration and appraisal businesses.  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 of the victims except for one: a homemaker swindled out of a few hundred dollars.  

The Scheme and the Downfall

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.  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, ZZZZ Best experienced significant cash flow problems.  As a solution, Minkow planned to acquire KeyServ, Sears' authorized carpet cleaner, for $25 million.  According to Minkow, 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 that would expose more than the fraud committed against her.  The L.A. Times featured her story, which caused ZZZZ Best's stock price to sharply decline.  Lenders began to call their loans and more investigations commenced, unraveling Minkow's dark web of deceit and fraud.  Eventually, the truth behind the fictitious companies was revealed and the Ponzi scheme was exposed.

How Auditors Were Misled

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 the paperwork was provided by an independent third party, 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 after ZZZZ Best

In January 1988, Minkow and 10 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 and mail fraud.  Approximately a year later, Minkow was found guilty on all charges, was sentenced to 25 years in prison, and was ordered to pay over $26 million dollars in restitution.  After his early release in 1995, he became an ordained minister and served as a pastor of a church in California.  Minkow informally investigated and reported other Ponzi schemes.  From this success, he formed the fraudulent Fraud Discovery Institute.  In 2011, he was again convicted for fraud and sentenced to five years in prison.  A few years later, he was sentenced to an additional five years in prison for defrauding his church.  His restitution balance has increased ten-fold to $612 million.

RELATED TERMS
  1. Securities Fraud

    Securities fraud is a form of white-collar crime that disguises ...
  2. Major Fraud Act Of 1988

    The Major Fraud Act of 1988 increased the maximum penalties for ...
  3. Corporate Fraud

    Dishonest activities conducted to give an advantage to an individual ...
  4. Tax Fraud

    Tax fraud occurs when an individual or business entity willfully ...
  5. Air Loan

    An air loan is a mortgage fraud scheme in which a mortgage broker ...
  6. Mini Madoff

    Mini Madoff is a slang term for con men accused of committing ...
Related Articles
  1. Investing

    The Biggest Stock Scams Of All Time

    Where there is money, there are swindlers. Protect yourself by learning how investors have been betrayed in the past.
  2. Investing

    What Is A Ponzi Scheme?

    Protect yourself from scams by learning the structure behind this fraudulent investing scheme.
  3. Insurance

    What is Insurance Fraud?

    Fraud exists in every type of insurance, although the stakes tend to be highest with life insurance.
  4. Insights

    How to Protect Yourself From Credit Card Fraud

    Credit card fraud is sharply up. Learn the worst types and how to protect yourself.
  5. Retirement

    What Social Security Fraud Costs You

    Taxpayers lose billions of dollars every year, according to Social Security fraud statistics. What to look for.
  6. Insights

    How to Avoid the Top Financial Advisor Scams

    Investors need to be wary of financial advisor scams. Here are the most common and how you can protected yourself.
  7. Insights

    Platinum Partners: Biggest Scam Since Madoff?

    Mark Nordlicht's Platinum Partners may have been at the forefront of one of the biggest investment scandals since Bernie Madoff.
  8. Insights

    The Most Common Types Of Consumer Fraud

    You’re less likely to become a victim of consumer fraud if you know about these common scams and how to avoid them.
  9. Insights

    Five High-Profile CEO Fails

    Enron filed for bankruptcy after the SEC accused CEO Kenneth Lay and others of manipulating accounting rules and masking enormous losses and liabilities.
  10. Insights

    Identity Theft: How Much Should You Worry?

    Identity fraud cost $18 billion last year. But are enough Americans victimized – with big enough losses – that it's worth buying protection?
RELATED FAQS
  1. What is impact of Sarbanes-Oxley Act?

    Here is a detailed rundown of the provisions of the Sarbanes-Oxley Act, including strict disclosures, criminal liability ... Read Answer >>
  2. Do home appraisers use Zillow?

    When it comes to assessing a home for sale, licensed appraisers rely on detailed —and sometimes proprietary—information to ... Read Answer >>
  3. Can the IRS audit you after a refund?

    Learn how the U.S. Internal Revenue Service (IRS) can conduct a tax audit even after a taxpayer was issued a tax refund in ... Read Answer >>
Trading Center