Minkow Empire : ZZZZ Best: the House of Cards Falls

On a crisp Sunday last November, an official of the ZZZZ Best carpet-cleaning company took the firm’s lawyer and accountant on a tour of an office building in Sacramento, a final inspection before they gave their go-ahead for a public stock sale that would bring the company into the Wall Street limelight.

The lawyer and accountant were there to see how ZZZZ Best’s most profitable line of business worked. Although the Reseda company founded by Barry Minkow was best known for its service to homeowners--it would clean two rooms of carpeting for $39.95--its ledger books showed that 86% of its revenue was from insurance jobs, repairing buildings damaged by fire or water.

The books listed a series of multimillion-dollar insurance contracts. But the crown jewel was a $7-million job in Sacramento, supposedly sprucing up a building damaged when a water main burst and its sprinkler system went off.

Looking Good

And so Mark Morze, 36, a former UCLA linebacker in charge of ZZZZ Best’s insurance projects, showed off the office tower to Larry D. Gray, a partner with the Big Eight accounting firm of Ernst & Whinney, and Mark R. Moskowitz, an attorney from Hughes Hubbard & Reed, a New York-based firm with an office in Los Angeles.

Gray and Moskowitz toured several floors of the 18-story building, Morze recalled. Although there were no workers around on a Sunday, anyone could see what a good job ZZZZ Best had done: new carpeting had been laid, wiring and ceiling tiles were ready to be installed and trash and paint cans were ready to be carted away. It was almost like there had never been any water damage.

In fact, there hadn’t been any damage, Morze said recently. ZZZZ Best had nothing to do with the office building. It was simply a new high-rise with space for lease that ZZZZ Best used as a prop in an expensive ruse.

Called a Charade

ZZZZ Best did not have a multimillion-dollar insurance job in Sacramento--or anywhere else, for that matter, Morze said. The insurance business was, in effect, a charade and the Sacramento trip was the grand performance.

“I couldn’t believe it would work. I was expecting catastrophe,” Morze said. He said he was thinking, “These are smart guys, they’ll catch on.”

But they didn’t. After the tour, the attorneys and accountants gave their blessing and two weeks later ZZZZ Best sold $13 million worth of stock. Within months, the company was a hot pick on Wall Street. Its stock quadrupled, creating paper fortunes for many, including the 21-year-old Minkow, whose holdings grew to $100 million.

Since then, ZZZZ Best has collapsed like the house of cards it was. Minkow resigned, the compa ny entered Chapter 11 bankruptcy proceedings and the firm’s board of directors is suing Minkow, Morze and others for $25 million, alleging fraud and theft.

Los Angeles Police Chief Daryl F. Gates has announced that Minkow and ZZZZ Best are under investigation for allegedly being part of a money-laundering conspiracy linked to organized crime.

While police are investigating what crimes may have been committed, ZZZZ Best investors are asking another question: How were the professionals fooled?

Asking Why

The accountants, attorneys, stock brokerage firms and ZZZZ Best’s board of directors were all supposed to provide checks and balances before the public financing.

“I screamed at my broker and cried hysterically, ‘How could you allow this to happen?’ ” said Jenny Raphael, who owns a fabric firm in New York. She bought ZZZZ Best stock at the urging of her broker when it was $16 a share, then sold at $1 a share, losing $50,000.

She is among a group of investors eager to join class-action lawsuits--some already filed in U.S. District Court in Los Angeles--against the company. Lawyers in those cases said they expect to sue ZZZZ Best’s accountants, attorneys and its board of directors as well.

Asked Raphael: “What kind of checking did they do?”

SEC Requirements

Before a company sells stock to the public, the Securities and Exchange Commission requires “full disclosure.” It is a lengthy process and a team effort, led by the stock brokerage firm that will actually sell the stock. In ZZZZ Best’s case that was Rooney, Pace, a New York firm with a history of run-ins with the SEC. Rooney, Pace went out of business in January due to financial problems unrelated to ZZZZ Best.

Over several months, three accounting firms, including Ernst & Whinney, checked ZZZZ Best’s numbers. Hughes Hubbard & Reed, ZZZZ Best’s law firm, made sure the necessary documents were filed with the SEC. The brokers, accountants and lawyers all helped write the 48-page stock prospectus that went to potential investors.

James C. Van Horne, professor of finance at Stanford Business School, said the investing public has a right to expect “that the numbers are accurate, and the underwriters and accountants have dug a little more deeply.”

Now that ZZZZ Best has collapsed, Van Horne said, “The question is how deeply did they probe in this case, and could reasonable people have detected a problem in advance?”

Based on what he has heard about ZZZZ Best, he said, “I think the answer there is yes.”

Most Aren’t Talking

Most of the professionals who worked for ZZZZ Best are not talking. Ernst & Whinney and Gray--who works out of the accounting firm’s Woodland Hills office--would not comment. Nor would Moskowitz, although a spokeswoman for his firm confirmed that the lawyer and accountant were escorted to Sacramento, where they toured an office building “represented to be in the final stages” of restoration.

Two former officials of Rooney, Pace, the defunct underwriting firm, agreed to talk about ZZZZ Best on condition that their names not be used. They said their fact-checking in this case was, if anything, more thorough than usual. Only after ZZZZ Best collapsed did their oversights became apparent, they said.

Said one of the former Rooney, Pace officials: “When I go back over the files and think of the level of deception and the extent of the fraud and cover-up, it makes my skin crawl.”

There were plenty of potential red flags, including Minkow’s receipt of loans through a reputed Los Angeles mobster, a faked letter from a major insurance company, grossly exaggerated sales, and the staged Sacramento tour.

To this day, Morze is surprised that no one caught on. “This couldn’t take close scrutiny,” he said. “All they had to do was scratch below the surface.”

Almost Made It

And yet ZZZZ Best almost became a national force in carpet cleaning. Even as things neared collapse, the company was negotiating to land a contract with the country’s biggest retailer, Sears Roebuck. Under the deal, ZZZZ Best would have cleaned carpets and upholstery for Sears customers in 34 states.

How could ZZZZ Best have gotten so far? Part of the answer is that Barry Minkow’s story was a compelling one. He was almost a caricature of the American entrepreneur. Chosen as both “most likely to succeed” and “class clown” in high school, he started ZZZZ Best in 1981 at age 15 in his parents’ Reseda garage and, by the time he left his teens, was parking his Ferrari in a gated compound of mansions.

Minkow was a young workaholic who spoke in a torrent of words. A tireless self-promoter, he built up his accomplishments much as he built up his body through hours of weight-lifting. By 18, he had hired a ghostwriter to produce his autobiography, “Making It in America.” He donated $20,000 to the YMCA in Reseda and $60,000 to drug treatment and education programs; he had a public relations firm alert the media to his generosity.

Heavy Hitters

Minkow ingratiated himself with older men, including Harold Lipman, the 59-year-old father of his girlfriend. Lipman joined the company’s board of directors last year, lending it credibility because he was the respected associate superintendent of the Simi Valley Unified School District. Neal Dem, 34, owner of a prosperous Chatsworth stationery business, agreed to be a director as well.

Minkow also invited the San Fernando Valley’s most prominent whiz kid businessman to join the board. But real estate dealer Mike Glickman, 27, whose company dominates the Valley market, quit ZZZZ Best’s board after one meeting last year. “I didn’t like the idea of young people calling him, ‘Mr. Minkow,’ ” Glickman recalled. “Everybody was just agreeing with everything he had to say.”

Despite Minkow’s prosperous image, ZZZZ Best had a history of money troubles.

In late 1984 and early 1985, ZZZZ Best overbilled customers by $72,000 by inflating their credit card charges. Minkow later admitted the problem, but blamed it on rug-cleaning subcontractors.

Money Order Case

Minkow was sued in November, 1984, for allegedly stealing and then forging about $13,000 worth of money orders from a Reseda liquor store to pay company bills. The case was settled out of court, without any admission of wrongdoing. In 1985, the IRS sued ZZZZ Best for $5,000 in back taxes.

In the spring of 1985, Minkow met Jack M. Catain Jr., whom Los Angeles law enforcement officials had long described as one of the area’s major organized crime figures. Catain was convicted in a counterfeiting case the next year, but died before he could serve time in prison.

Catain offered to help arrange loans for ZZZZ Best. Minkow later said that he was charged 2% to 5% interest a week.

The relationship became public record when the two men had a falling out and Catain sued Minkow in December, 1985, alleging that he was owed $1.3 million. The suit dragged on until Catain’s death.

In an interview earlier this year, Minkow said he was unaware of Catain’s reputation, explaining: “I was clearly fooled . . . that he was a legitimate guy and a nice guy and wanted to help.”

Minkow’s attorney, Arthur H. Barens, suggested that Minkow had been naive and fell prey to a crook.

“He is essentially a loan shark,” Barens said of Catain. “He tried to intimidate and threaten this young man and extort money out of him.”

‘Sharks’ Move In

Police believe that once Catain hooked the young entrepreneur, other mob figures were attracted to Minkow “like sharks circling a bloody fish,” one investigator said.

In legal papers, both Minkow and Catain said the loans were to be used to help a growing part of ZZZZ Best’s business, insurance restoration work.

Soon after Catain and Minkow got together, according to documents later filed with the SEC, ZZZZ Best signed a joint venture agreement with a firm called B & M Insurance Services to work on two projects worth $5 million, including a job in San Diego from Travelers Insurance.

Listed as the sole owner of B & M was Robert Victor, 51, of Woodland Hills. Minkow told friends that he had met Victor when he was a teen-ager and the older man helped him buy a car.

Gates’ Allegations

At a press conference in July, Police Chief Gates listed Victor, also known as Robert Viggiano, as among the “organized crime subjects or associates of organized crime subjects” involved in the money-laundering scheme. In 1971, Victor was indicted with the late Joseph A. Colombo Sr., reputed head of one of the New York Mafia families, in a $750,000 jewelry robbery.

Victor, who pleaded guilty to attempted grand larceny in the New York case, will not comment on Gates’ allegations.

Even if the lawyers, accountants and stock underwriters had no reason to question Victor’s background, they could have been tipped off that something was wrong by a letter filed in the Catain lawsuit. Dated Aug. 19, 1985, on Travelers Insurance stationery and addressed, “To Whom It May Concern,” it confirmed that the insurance company had awarded ZZZZ Best a $1.5-million repair job in San Diego. The letter was signed by Travelers employee Thomas Padgett on the letterhead of his boss, David L. Tengberg, manager of the claims department.

His Own Company

Padgett, who said he met Minkow years before while working out at a San Fernando Valley gym, later left Travelers to work full-time for his own company, Interstate Appraisal Services of Van Nuys and Culver City. It was Padgett’s company, according to SEC filings, that awarded ZZZZ Best millions of dollars worth of restoration contracts.

One of the Rooney, Pace officials said that a member of the underwriting team did call the insurance company to check Padgett’s background, but that Tengberg was on vacation. No one called him back.

Tengberg could have told the stock underwriters that the letter was a fabrication, and that Padgett was hardly in a position at Travelers to award multimillion-dollar contracts. Tengberg said in a recent interview that Padgett worked as a Travelers automobile appraiser. He inspected dented cars.

Padgett has refused comment.

In January, 1986, ZZZZ Best became a public company, making its stock available for purchase, by merging with an inactive but publicly held Utah mineral-exploration firm called Morningstar Investments.

‘Confidant’ Identified

Scott Dear, who worked as ZZZZ Best’s controller for part of last year, said he was told that the move was directed by Maurice Rind of Encino, who served as Minkow’s “confidant.” Rind often came by in the late afternoon, Dear recalled, to talk with Minkow in his office.

Rind, twice convicted of stock fraud in the 1970s, was described by Chief Gates at his press conference as having organized crime associations.

“It was part of the mystery of Barry’s world how he ever met these guys,” Dear said.

Rind also helped the company qualify for a listing on the computerized over-the-counter stock market. One requirement is that a company have $2 million in assets. Dear said Rind helped line up a deal to pay stock and cash for $2 million worth of power generators from a Cayman Islands firm.

Rind denied any wrongdoing, saying he and a partner “don’t do anything illegal.”

By spring, ZZZZ Best wanted to raise some money and contacted Rooney, Pace. The underwriters took one peek at the growth and profits of the small carpet-cleaning company and suggested a stock sale.

Terrific Numbers

ZZZZ Best’s numbers for the fiscal year that ended April 30, 1986, were terrific. Fueled by the insurance-restoration projects, which supposedly brought in about half the business, ZZZZ Best’s sales nearly quadrupled from the year before to $4.8 million, and its profits nearly tripled to $946,000.

Now that ZZZZ Best was a public company, somebody had to do a full audit on its numbers. George Greenspan, a New Jersey accountant, came out to Los Angeles to inspect the books and gave his OK, ZZZZ Best officials said. Greenspan declined to be interviewed.

Even better figures were coming. For the three months that ended July, 1986, ZZZZ Best reported $5.4 million in sales, more than it had in the entire previous year. Profits were nearly $900,000 for the quarter.

Minkow was fond of saying that he would build ZZZZ Best into “the General Motors of carpet cleaning.” Indeed, according to the ledger books, his company was earning about 17 cents for every $1 in sales. The real General Motors does well to earn 5 cents on the dollar.

‘Interim Review’

But Rooney, Pace said that to make the stock sale work, it wanted a larger accounting firm’s name on the books, so ZZZZ Best hired Ernst & Whinney. The Big Eight firm was not asked to do a complete audit on the fabulous July, 1986, results. Instead, it did “an interim financial review,” which does not involve independent verification of the company’s numbers.

On the surface, everything seemed fine.

Beneath the surface, however, things were frantic at ZZZZ Best, according to Morze. The company was juggling debts to several local banks and private investors, and the stock offering--which would bring an infusion of cash--was taking longer than expected.

The idea behind the insurance charade, Morze said, was to keep up appearances at least until the stock sale, then pump the money into the small, but legitimate, carpet-cleaning business to help it grow.

To build the illusion of a thriving business, when ZZZZ Best got its hands on funds from a bank or private investor, “the money would go in a loop,” Morze said. “It would go into the company or take a circuitous route so it would look like income.”

Financial Loop

He said the loop began with Padgett’s Interstate Appraisal Services--named by Gates as one of the “front” companies under investigation--which supposedly handed the insurance jobs to ZZZZ Best.

ZZZZ Best then supposedly hired a subcontractor--often Morze’s own Agoura bookkeeping firm, Marbil Management--to supply labor and materials for the repair work.

In the 18 months before ZZZZ Best collapsed it paid Marbil $18 million but never received any services, according to the lawsuit filed by ZZZZ Best’s directors against Minkow, Morze and Padgett.

In fact, Morze said, the money stayed in Marbil’s bank account “for 20 seconds” before beginning the loop again.

Minkow refused to comment on Morze’s portrayal, but his attorney branded the allegations of fraud “incredible” and suggested that Morze may have been acting on his own.

In any case, the professionals missed the ruse, although they did make a series of inquiries about ZZZZ Best and Minkow. The stock underwriters discovered the Catain lawsuit and insisted--against Minkow’s wishes, they said--that it be mentioned in the stock prospectus. The prospectus even reported that Catain was under investigation by a grand jury.

Legitimate Job

Rooney, Pace also checked out ZZZZ Best contracts for $200,000 in repair work for Crawford & Co., an Atlanta insurance adjusting firm with nationwide offices. It was legitimate work.

In late fall, however, Rooney, Pace said there would be no stock offering unless somebody outside ZZZZ Best went to Sacramento to examine the biggest insurance project. Actually eyeballing a project--as opposed to making some phone calls to check--was unusual for them, the underwriters said. But then, 86% of ZZZZ Best’s business now was coming from the one type of work.

Another ZZZZ Best associate found a new office building that could be used for the inspection tour, Morze said. “It was in the process of being leased out,” he recalled. “There were a few floors not finished.”

The associate told the building’s rental agent “we might want to lease some space,” Morze said, and asked if a group could inspect the building on their own over the weekend.

On Nov. 23, Morze escorted the accountant and attorney to Sacramento. The law firm’s spokeswoman said they saw photographs and blueprints of the project, then the building.

There Were Clues

Even if they were tricked into thinking the Sacramento building was part of a ZZZZ Best project, members of the underwriting team might have been tipped off by the elephantine $7-million price tag.

By contrast, Blackmon, Mooring Steamatic, a Fort Worth firm that has been in the insurance-restoration business for 40 years, was paid $2.1 million for its work after the Las Vegas Hilton fire a few years ago, company President Kurt Blackmon said.

Commenting on a later ZZZZ Best claim that it had won a $13.8-million contract to repair two buildings in Dallas, Blackmon said, “A $14-million contract in fire restoration would be the biggest contract ever to be let.”

After the stock sale, the public began to hear more about this remarkable young salesman named Minkow. He appeared on TV shows, pumping iron for the camera and showing off his $698,000 Woodland Hills home and his Ferrari. The television show “Eye on L.A.” called him “the Rocky of rug cleaning.”

Minkow joined other successful young entrepreneurs on “The Oprah Winfrey Show.” When another executive mentioned the difficulty of selling seasonal products like frozen yogurt or soft drinks, Minkow boasted, “I could sell frozen yogurt in a blizzard.”

Glowing Report

Last March, Bob Grossmann, an analyst with the New York stock brokerage firm of Ladenburg, Thalmann, wrote a glowing report likening ZZZZ Best to McDonald’s and 7-Eleven. He predicted fast growth “under . . . its 20-year-old master entrepreneur, Barry Minkow.”

In fact, ZZZZ Best’s carpet-cleaning business was growing--the company expanded from 374 employees and 13 offices around California at the time of the stock sale to 1,030 employees and 21 offices in three states by spring.

A $2-million television ad campaign that aired from February through June brought in new business. Actors portrayed rival carpet-cleaning salesmen as buffoons who tried to trick homeowners into paying too much for poor service. Then Minkow came on to confidently promise that ZZZZ Best was one carpet-cleaning firm that people could trust.

In April, Minkow announced the deal that would take his firm big time: ZZZZ Best planned to buy KeyServ Group, a company that did $80 million a year in carpet-cleaning for Sears customers. Drexel Burnham Lambert, a noted investment banking firm, was set to raise $25 million to finance the deal.

‘Make It Look Real’

With the Sears business in the works, Morze recalled, Minkow told him, “Just somehow hold the insurance restoration together. Make it look real.”

In May, as Ernst & Whinney was about to do its year-end audit, Morze took the accountant and ZZZZ Best’s new controller--who also did not know of the ruse--on another building tour, this one to San Diego. Unlike the situation in Sacramento, Morze said, there actually was a little work being done by a ZZZZ Best subcontractor, putting in some acoustical tiles and wallboard, although the job wasn’t worth anything like the $7 million the company claimed it was getting.

It all began to fall apart on May 22 when The Times reported on ZZZZ Best’s past credit card problems. To calm investors, Minkow issued a press release the next week saying the company would report record sales and profits.

The professionals, however, apparently began to take a closer look.

Firms Bail Out

Four days later, Drexel Burnham Lambert quit the ZZZZ Best account without public comment. On June 2, so did Ernst & Whinney, which later attributed its move to information that some of the insurance work was phony.

By now, ZZZZ Best’s board of directors had hired another Los Angeles law firm, Kadison, Pfaelzer, Woodard, to check out the newspaper reports. It tracked down Tengberg at Travelers and asked him about the Padgett letter.

Minkow was busy during this period. On June 24, according to real estate records, he got a $1-million loan from Michael L. Malamut, a ZZZZ Best board member, who took as collateral a third trust deed on Minkow’s home. Late in June, he got a $2-million loan from his personal line of credit at Prudential-Bache, using some of his ZZZZ Best stock as collateral.

On the following Monday, June 29, Minkow was in Chicago to meet with Sears executives to try to keep the KeyServ deal alive.

Minkow Resigns

But three days later, Minkow suddenly resigned as ZZZZ Best’s chairman and the succession of lawsuits and bankruptcy actions began.

Investigators are still trying to trace where all the money went. ZZZZ Best got about $12 million from its stock sale, another $7 million from a Union Bank loan and nearly $2 million from First Interstate. There was also a $10-million loan from European investors that a local businessman helped arrange.

The suit filed by ZZZZ Best after Minkow’s departure alleges that he “drained” $3 million from the company during June by signing company checks made out to cash or cashier’s checks that, among other things, supposedly paid for supplies for insurance jobs.

Law enforcement officials say they are investigating the apparent “laundering” of 30 checks from ZZZZ Best, each for $9,500, over a two-day period shortly before the firm filed for bankruptcy protection. The checks allegedly were taken to Las Vegas--investigators won’t say by whom--and used to buy chips at two casinos. Then the chips were cashed in and the money hauled back to California in brown paper bags, they said.

Hunting the Money

By the time ZZZZ Best’s bankruptcy trustee started poking through the company’s bank accounts, only about $30,000 was left.

Minkow’s attorneys say that he doesn’t have the money, that it went back into the business. He filed for personal bankruptcy on Aug. 7.

Although Minkow declined to be interviewed, Barens, one of a quartet of lawyers now representing him, said that Minkow never visited any of the major insurance job sites. Minkow relied on Morze to run that end of the business, Barens said, adding: “Mr. Morze may be aware of things based on his own activities that Mr. Minkow is not aware of.”

A private investigator working with the legal team also suggested that Minkow was victimized by others.

‘He’s Still 21’

“He’s still 21 years old,” said the San Francisco investigator, Jack Palladino. “He was out there at the point (representing) the company and having a good time selling this company. Meanwhile, more experienced people like Mark Morze are taking care of the business and keeping the accounts on the (insurance) reconstruction work.”

Palladino said Morze is now cooperating with police, hoping “to do very little time and do it in a little prison camp. And he doesn’t expect to lose his assets.”

Morze confirmed that has helped lead investigators through the paper trail. He said he is talking because too many people know what happened and “the damage has been done.”

Morze insists that Minkow knew what was going on. “Barry was the field general, the chief of state,” he said. “I worked for Barry. He’s the guy who called the shots.”

Although Morze readily admits he was a central figure in wrongdoing, he said he had hoped that ZZZZ Best would become a legitimate, profitable carpet-cleaning company.

The Sears deal could have been “the cure,” Morze said, allowing ZZZZ Best to “get rid of this bogus restoration business. . . .

“It could’ve worked where there would have been no victims. We came unbelievably close.”

THE RISE AND FALL OF ZZZZ BEST STOCK Chart based on the sale price of ZZZZ Best stock at the end of each week.

1. Dec. 9, 1986--ZZZZ Best sells $13.2 million worth of stock to the public.

2. Jan. 6, 1987--A noted New York investor, Steven A. Greenberg, takes an option to invest in ZZZZ Best and begins doing public relations and consulting work for the firm.

3. March 9-- Ladenburg, Thalmann, a New York stock brokerge firm, issues a report predicting fast growth for ZZZZ Best.

4. March 22--ZZZZ Best founder Barry Minkow celebrates his 21st birthday. His 51% of the company’s stock is worth $64 million.

5. April 16--ZZZZ Best announces that it will buy KeyServ Group, a firm that does carpet cleaning under a contract with Sears, for $25 million.

6. April 27--”I could sell frozen yogurt in a blizzard,” Minkow boasts on The Oprah Winfrey Show.

7. May 22--The Times reports that ZZZZ Best had rung up $72,000 in false credit card charges.

8. May 28--Minkow predicts record profits and sales.

9. June 17--Ernst & Whinney announces that it had quit as ZZZZ Best’s auditor on June 2.

10. July 2--Minkow tells his attorney he has resigned.

11. July 6--ZZZZ Best announces it will file for Chapter 11 bankruptcy protection, and says there appears to be fraud in its insurance restoration business. The company also files a $25 million suit against Minkow and others accusing them of theft and fraud. As panicked investors sell out, the stock closes at 75 cents.