Discussion III – Fraud Psychology

In our readings thus far, we have read about the role of auditors, both internal and external. We have also seen some discussion about the difference between a traditional financial audit and a fraud, or forensic audit. In addition, we have had discussions from Chapters 2 and 3 about various fraud theories and the motivations behind fraud. We have explored evidence and identifying signs of deception.

One of the more “colorful” fraud perpetrators in recent years is Barry Minkow, of ZZZZ Best infamy, among other things. Without going into detail, Mr. Minkow has had a very colorful history stretching from the 1980’s to today. To give you a good flavor of his history, I have gathered the following list of resources that tell some of his story. Please start with the video “Cooking the Books” that can be found under M1 videos. After watching the video, review the other items below and any additional research that you care to do to understand his story.

Once you have a good understanding of his story over the years, please post a ½ to one-page summary exploring Barry and his colorful history, specifically focused on your observations of his story and what you, as a potential forensic accountant/fraud examiner, can most learn from his story

.

https://www.nbcsandiego.com/news/local/barry-minko…

https://fortune.com/2014/05/06/barry-minkow-con-man-nonpareil-gets-five-more-years/

https://fortune.com/2014/05/06/barry-minkow-con-ma…

Biography
HAPPY
BIRTHDAY
Rob Lowe
Barry Minkow
Minister (1967–)
Barry Minkow is a convicted felon who used his carpet-cleaning
business as a front for a massive Ponzi scheme and investor fraud.
Synopsis
NAME
Barry Minkow
OCCUPATION
Minister
BIRTH DATE
March 17, 1967 (age 49)
PLACE OF BIRTH
Reseda, California
ZODIAC SIGN
Pisces
Barry Minkow was born on March 17, 1967 in Reseda, California. At
age 15, he started a carpet-cleaning business called Zzzz Best, which
came to be valued at $280 million. The company was a front for a Ponzi
scheme, and Minkow was sentenced to 25 years (serving less than
eight). He converted to Christianity in prison and entered the ministry
but has since been tied to further fraud.
Profile
Early Years
Born March 17, 1967, in Reseda, California, Barry Minkow grew up in a
Jewish family in a modest suburb in the San Fernando Valley. At age 15, he started a carpetcleaning business in his parents’ garage called Zzzz Best. In four years, the company grew to
1,400 employees and counted the Genovese mafia among its clientele. Zzzz Best became a
national sensation, and Minkow gave lectures at business schools and appeared on television and
in magazines. The company’s stock rose to $18 a share, valuing Zzzz Best at more than $280
million.
Arrest and Release
The company, however, was little more than a front for Barry Minkow’s illegitimate business
empire. With smoke and mirrors, Minkow was able to mislead accountants and investigators.
However, in 1987, after the Los Angeles Times broke the story about Minkow’s largely fictional
contracts, the young entrepreneur was arrested and indicted. He was sentenced to 25 years in
prison but served less than eight.
While in prison, Minkow became involved with the Christian ministry, and upon his release in 1995,
he began his career in church service. Since 1997, he has served as pastor of Community Bible
Church in San Diego. He has also reinvented himself as a fraud investigator and co-founded the
Fraud Discovery Institute. It is reported that 30 percent of his current salary goes to pay
outstanding debts, which total around $19 million, from his original judgment on behalf of investors
and lenders.
Later Trouble
Despite Minkow’s claims to have reformed his life, he ran into trouble with the law again a few
years later. Minkow was under investigation by the Securities and Exchange Commission for
insider trading. On March 16, 2011, Minkow resigned as senior pastor of his church, saying that he
was “no longer qualified to be a pastor.”
BIOGRAPHY
St. Patrick
CLOSE
On March 30, 2011, Minkow pleaded guilty to one charge of insider trading. He entered a plea
agreement, and instead of the maximum sentence of 30 years, he was sentenced to five years in
prison and ordered to pay $584 million in damages to Lennar, a home-building corporation.
Minkow has since been accused by congregants from his former church of swindling them, a claim
the FBI is currently investigating.
Minkow is serving his sentence at Federal Medical Center in Lexington, Kentucky. Minkow and his
wife, Lisa, have two adopted Guatemalan children.
Article Title
Barry Minkow Biography
Author
Biography.com Editors
Website Name
The Biography.com website
URL
http://www.biography.com/people/barry-minkow-234623
Access Date
March 17, 2016
Publisher
A&E Television Networks
Original Published Date
n/a
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February 25, 1990
NOTHING BUT ZZZZ BEST
by JOANNE B. CIULLA; Joanne B. Ciulla teaches business ethics at the Wharton School of the University of Pennsylvania.
WONDER BOY
Barry Minkow – The Kid Who Swindled Wall Street.
By Daniel Akst.
280 pp. New York:
Charles Scribner’s Sons. $19.95.
The true tale of Barry Minkow, the amazing teen-age swindler, resembles the story ”The Emperor’s
New Clothes.” Mr. Minkow turned an insolvent carpet-cleaning business into a public company with a
paper value of more than $200 million. He was lionized in the press, indulged on the Oprah Winfrey
show and given a hero’s welcome on Wall Street. But only a few people saw, or wanted to see, that his
business scarcely existed.
Daniel Akst, a former reporter for The Los Angeles Times and The Wall Street Journal, was one of
those who was fooled. In 1985, he wrote an admiring feature story about Mr. Minkow for The Los
Angeles Times. Two years later, he discovered that the subject of his piece was a fraud. ”Wonder Boy”
is Mr. Akst’s witty and insightful account of how an amoral individual still in his teens was able to sell
what the author calls a ”hologram” of a corporation to Wall Street.
Mr. Minkow grew up in a middle-class neighborhood in Reseda, Calif. In 1982, at the age of 16, he
started his own rug-cleaning business in his parents’ garage and called it ZZZZ Best. He seemed like a
model young entrepreneur, except for the fact that he never actually ran a profitable business.
Instead, Mr. Minkow focused his talents on getting capital for his company in any way he could. He
arranged burglaries in order to collect insurance money. He borrowed $2,000 from his grandmother
and then stole her pearls. When he needed cash in 1984, he forged $13,000 worth of money orders
from a Reseda liquor store.
His thefts grew with his appetite for money. In 1985, Mr. Minkow opened a merchant’s account at a
local bank, which allowed him to accept credit card payments. For the next few years, whenever he
needed money, he would add bogus charges to his customers’ credit card accounts and receive ready
cash from the bank. If a customer complained, Mr. Minkow blamed the forgeries on crooked
employees, paid up and carried on.
When he wasn’t directly stealing money, he was raising it fraudulently, with a little help from his
friends, a bizarre crew of retainers. He helped set up Interstate Appraisal Services, a fake company that
verified ZZZZ Best’s business dealings, and installed his weird buddy Thomas Padgett as owner and
operator. Mr. Minkow convinced bankers and investors that he had won large contracts from
insurance companies to restore buildings damaged by fire and water. Mr. Padgett, a gun-collecting
body builder with a fondness for Hitler and SS jewelry, confirmed the jobs, while a ZZZZ Best vice
president forged all the documents and contracts.
According to Mr. Akst, ”There was always a quality about Barry that suggested he held an MBA from
the Dada School of Business.” When Mr. Minkow wanted to take his company public, an auditor for
Ernst & Whinney insisted on seeing a ZZZZ Best restoration job. Mr. Minkow had skirted this kind of
request before by claiming that the sites were confidential. This time, however, he dispatched Mr.
Padgett to rent a building and fix it up to look like a ZZZZ Best work site. It was a convincing show,
and the auditor gave ZZZZ Best a clean bill of health.
In December 1986, ZZZZ Best made its debut on Wall Street. By March, Mr. Minkow’s shares were
worth $64 million, and a month later they ascended to $110 million. While the stock was on the rise,
Mr. Akst began hearing about Mr. Minkow’s credit card fraud. On May 22, 1987, he wrote an article
that carried the headline ”Behind ‘Whiz Kid’ Is a Trail of False Credit-Card Billings.” The next day
ZZZZ Best stock lost 28 percent of its value. By the time the scam fully unraveled, investors had lost
over $100 million. In December 1988, Mr. Minkow was convicted on 57 counts of fraud and sentenced
to 25 years in jail.
Why did so many people fall for his tricks? Mr. Akst lines up all the usual suspects – greed, Reaganism,
charisma, human frailty, even the wacky ways of southern California. Yet these account for only part of
Mr. Minkow’s success. The other part has to do with the fact that business relies on some pragmatic
ethical assumptions – for example, that a contract is a real contract and that a promise will be kept.
Characters like Mr. Minkow do more than break the law. They create moral anarchy by wreaking havoc
with the trust and good will that lie at the heart of business practice. As Mr. Akst correctly observes,
”Barry wasn’t just a thief. He had mocked the very idea of business.”
Copyright 2016 The New York Times Company
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March 17, 2011, 7:58 PM ET
Plea Deal Puts Minkow Redemption Movie in
Limbo
ByRobbie Whelan
Bloomberg News
Barry Minkow
After the news broke on Wednesday that Barry Minkow, an ex-con stock fraudster turned Christian
pastor and corporate whistle-blower, would plead guilty to an insider trader charge related to his
shorting the stock of homebuilder Lennar Corp., there was one other big, burning question in our minds:
What will become of his blockbuster biopic?
A film called “Minkow,” which detailed its title character’s rise, fall, jailhouse conversion and ultimate
redemption, was supposed to be released this spring by Los Angeles-based production house Insomnia
Media Group. The project had not yet secured a distribution deal (producers were hoping it would debut
at the Cannes Film Festival), but the film itself seemed legit: A financial thriller with a solid (if aging) cast
including James Caan, Ving Rhames and Luke Skywalker himself, Mark Hamill.
Heart-throb soap star Justin Baldoni was to debut in a lead role as the young Barry, who swindled Wall
Street investors out of tens of millions by starting a fictitious carpet-cleaning company called ZZZZ Best
that produced precocious TV ads (“ZZZZ Best: The last word in carpet cleaning!”) and eventually
became a public company worth more than $100 million. The real Barry Minkow spent seven years in
jail for 57 counts of fraud related to the ZZZZ Best incident.
In the movie, he meets Peanut (Ving Rhames) behind bars and undergoes a conversion to Christianity
(the real Barry became a pastor at Community Bible Church in San Diego) and comes out the other side
as a reformed man who would go on to cooperate with the SEC, the FBI and others on financial
investigations that blew the lid off corporate misdeeds across multiple industries.
The movie, like “Cleaning Up: One Man’s Redemptive Journey Through the Seductive World of
Corporate Crime,” the book Mr. Minkow wrote in 2005, would have been part and parcel of Mr. Minkow’s
highly-publicized, self-styled comeback story. It was even based on a short pilot film that was originally
titled “Redemption,” and it has a Hollywood producer’s ideal combination of heroic plot arc and human
fallibility. Here’s a guy, the movie suggested, who has his faults, but overcame them, through a literal
and figurative conversion, to become a good person.
Problem is, he didn’t. In agreeing to plead, Mr. Minkow is admitting, at the very least, that he was
illegally betting, using non-public information, against the stock of a company – Lennar – that he had
mounted a vicious public campaign against, at the behest of a disgruntled California real estate
developer who was already battling Lennar over several soured real estate deals. It was a classic ragsto-riches …to rags once again story.
Mr. Minkow was an executive producer on the movie, and its director, a first-time feature director named
Bruce Caulk, first met Mr. Minkow about six years ago when he was a preacher at his San Diego
church. Developments reached out to Mr. Caulk to ask him what he plans to do now.
“We’re definitely revising the ending. Clearly it needs to have some more information,” he said by phone
from California.
So if you’re Mr. Caulk, what do you do? Re-do the film as a people-never-change tragedy? Defend
Barry to the end, and produce a film that suggests, despite his guilty plea, that he’s actually innocent?
“I’ve got a hunch that we’re going to be able to put together a revised cut, and it may not make the
perfect redemption story, but it’ll be an interesting story,” Mr. Caulk said. “Barry’s done some good
things, and he’s done some bad things. Maybe the audience needs to decide.”
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NEWS
By Kaja Whitehouse
September 25, 2013 | 2:53pm
Barry Minkow delivers a sermon on materialism at the Community Bible Church in San Diego while wearing his prison jump suit in 2002.
Photo: AP
Two-time felon Barry Minkow is facing financial fraud charges for a third time.
Minkow could be hauled before a judge soon over allegations that he misused funds and swindled members of the San Diego church
where he became head pastor after serving prison time for the ZZZZ Best investment scam in the 1980s, court documents reveal.
The former financial whiz kid is serving a five-year sentence in the Federal Medical Center in Lexington, Ky., for a second fraud case in
which he admitted to conspiring to drive down the stock of Florida-based home builder Lennar Corp. He is slated to be released in early
2014 — assuming the San Diego feds don’t get him first.
Minkow is “likely to be transported soon, via a writ, to the Southern District of California in connection” with the church allegations, Jerrob
Duffy, the Miami federal prosecutor who handled the Lennar case, wrote in a letter to a federal judge in Florida.
Duffy was responding to Minkow’s recent request for an extended halfway-house stint, which Minkow has since withdrawn. Duffy asked US
District Judge Patricia Seitz to deny the request, saying he believed it was part of a ploy to delay the pending California charges.
“The government respectfully suggests … the motion is in part designed by the defendant to try to obtain an order from this court that
somehow delays [or takes advantage of] any expected writ to California,” Duffy wrote to the judge.
Minkow’s lawyers didn’t return requests for comment.
Minkow rose to fame when he took his carpet-cleaning company ZZZZ Best, which he founded while still in high school, public in 1986. At
18, he was a millionaire.
But most of the revenues were a fantasy, complete with phony invoices and fake offices. When the scheme collapsed, he was sentenced in
1989 to 25 years in prison. After his release in 1995, he built a new life as the charismatic pastor of the Community Bible Church in San
Diego.
He also launched a career as a fraud investigator until 2009, when he was accused by Lennar of making unsubstantiated claims about the
company’s financials. He later admitted to fraudulently shorting the stock.
What’s more, feds in San Diego have been investigating claims that he commingled the church’s money with his own, including using
church funds to support his corporate investigations business.
FILED UNDER
BARRY MANILOW, CRIME, FRAUD, PONZI SCHEMES
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