ZZZZ Best Fraud: How a Teen Conned Wall Street

Key Takeaways

• ZZZZ Best looked like a booming carpet cleaner but ran mostly on fake insurance-restoration contracts.
• Founder Barry Minkow took it public in 1986; a 1987 newspaper exposé collapsed it within weeks.
• He was convicted in 1988 on 57 felony counts and ordered to pay about $26 million in restitution.
• Auditors and bankers were fooled by staged job sites and forged documents, not by math.

Background

Barry Minkow founded ZZZZ Best, pronounced "Zee Best," around 1982 at about age 15 or 16, running a carpet-cleaning service out of his parents' garage in Reseda, California. According to the EBSCO Research Starters account and Fortune's reporting, the legitimate cleaning work was real but thin-margin, and the teenage Minkow turned almost immediately to illegal financing to keep it growing. Early on that meant check kiting, overbilling customers' credit cards, and at least one staged burglary to collect on insurance.

The pivot that built the apparent empire was insurance restoration. ZZZZ Best claimed to win large contracts to repair buildings damaged by fire, flood, or other disasters, work supposedly steered to it by an independent appraisal firm. That story let Minkow report fast-rising revenue. By the mid-1980s the company was reporting tens of millions of dollars in annual sales, and its offering documents stated that the large majority of revenue came from insurance-restoration jobs.

The restoration business was largely fictional. Minkow created a shell called Interstate Appraisal Services, run by a confederate, to act as the "independent" source of the contracts and to vouch for them when outsiders asked. Receivables from these nonexistent projects were then used to borrow from banks and to impress the investors and underwriters who would later take the company public.

To the outside world in 1985 and 1986, ZZZZ Best looked like a Reagan-era success story: a clean-cut teenager who had built a fast-growing company from nothing. Minkow appeared on television, including a memorable spot on a daytime talk show, and was held up as a model young entrepreneur. That public image is part of what kept skeptics at bay.

What Happened

ZZZZ Best went public through a stock offering in 1986 and traded on NASDAQ. The stock opened around $4 per share and climbed past $18 within months. At its height the company carried a market value in the low-to-mid hundreds of millions of dollars, and Minkow's majority stake was worth roughly $100 million on paper, making him one of the youngest people to take a company public in U.S. history. The unraveling came not from the accounting but from a string of old, small consumer complaints.

• c. 1982: Minkow founds ZZZZ Best at about age 15-16 in his parents' Reseda garage. (Earmark CPE; Fortune)
• 1984-1985: Customers are overbilled on credit cards; at least $72,000 in disputed charges later surface. (The Hustle; EBSCO)
• Mid-1980s: Fabricated insurance-restoration contracts, routed through Interstate Appraisal Services, become the bulk of reported revenue. (EBSCO; Earmark CPE)
• 1986: ZZZZ Best completes its IPO; the stock runs from about $4 to above $18. (Earmark CPE; The Hustle)
• Early 1987: Auditors and others tour a staged "restoration" site in San Diego and a building in Sacramento, dressed up to look like ZZZZ Best projects. (EBSCO; Earmark CPE)
• May 22, 1987: The Los Angeles Times publishes Daniel Akst's article, "Behind 'Whiz Kid' Is a Trail of False Credit Card Billings." (The Hustle; Earmark CPE)
• May 1987: The stock drops sharply, losing about a quarter of its value the next day, as the credit-card billing story spreads. (The Hustle)
• June 2, 1987: Auditor Ernst & Whinney resigns the engagement. (EBSCO; Earmark CPE)
• July 1987: ZZZZ Best files for bankruptcy; its assets are later auctioned for a tiny fraction of the company's former value. (Benzinga; The Hustle)

The trigger was Robin Swanson, an aerospace-company secretary who had been overcharged about $600 on her credit card for a flower delivery tied to a Minkow-controlled business. As The Hustle recounts, she refused to let it go, tracked down other victims, and compiled a file that eventually reached Daniel Akst at the Los Angeles Times. Akst's May 22, 1987 story documented at least $72,000 in bogus 1984-1985 credit-card charges and put the "whiz kid" image into question for the first time in print.

Once the press started pulling threads, the larger fraud came apart fast. Reporters and the auditors began to find that key restoration projects could not be verified, that ZZZZ Best did not hold the contractor's license such work would require, and that Minkow had written checks to an informant who had alleged fraud. Ernst & Whinney resigned on June 2, 1987 without issuing a report on the company's year-end financial statements. With its credibility gone and its lenders calling, ZZZZ Best slid into bankruptcy within weeks.

Why It Happened

The mechanics of the ZZZZ Best fraud were old-fashioned, which is part of what makes the case useful. There was no exotic derivative or off-balance-sheet vehicle. There was a fake line of business, documents to support it, and a sustained effort to keep anyone from checking.

Start with the revenue. Insurance restoration was a clever choice for a fraud because it is lumpy, project-based, and hard for an outsider to inspect after the fact. A finished restoration looks like an ordinary building. Minkow could claim large contracts, book the receivables, and borrow against them, while the supposed counterparties were entities he or his associates controlled. The offering documents leaned heavily on this fabricated business, which various accounts put at roughly 80 to 90 percent of reported revenue or profit.

The second ingredient was social engineering of the gatekeepers. The most cited detail is the staged site. To satisfy auditors and others who insisted on seeing a real project, Minkow's team leased a building in San Diego and fitted it out to look like a restoration job in progress, and arranged access to a building in Sacramento dressed with company signage. The point was to convert a paper claim into something a visitor could walk through.

The audit failures compounded this. The accounts in EBSCO's and Earmark CPE's write-ups describe an auditor who agreed to a confidentiality arrangement that discouraged independent follow-up calls to the supposed contractors, building owners, and insurers, which would have been the obvious way to confirm the contracts. Minkow also worked to befriend the audit team and to pull them toward giving business advice rather than testing his numbers. The sole practitioner who confirmed an earlier large contract did so by contacting the principal of Interstate Appraisal Services, the very confederate running the fake-contract machine, and admitted he had not inspected the restoration sites.

Underneath all of it was the cash-flow problem common to this kind of scheme. Fabricated profits do not generate real cash, so Minkow constantly needed new money, from check kiting and loan sharks in the early days to bank loans and then public investors as the company grew. That treadmill is why the fraud had to keep expanding and why a relatively small consumer scandal, the credit-card overbilling, was enough to collapse the whole structure once the press connected it to the founder.

By the Numbers

• Founding: about 1982, at roughly age 15-16, in a Reseda, California garage. (Earmark CPE; Fortune)
• Reported revenue: tens of millions of dollars annually by the mid-1980s, the bulk attributed to insurance restoration. (Earmark CPE; The Hustle)
• IPO and stock: went public in 1986; shares ran from about $4 to above $18. (Earmark CPE; The Hustle)
• Peak valuation: a market value in the low-to-mid hundreds of millions; reported figures range from above $200 million to nearly $300 million. (Benzinga; The Hustle)
• Founder's paper wealth: roughly $100 million at about age 20. (Fortune; EBSCO)
• Disputed credit-card charges: at least $72,000 in bogus 1984-1985 billings cited in the Los Angeles Times. (The Hustle)
• Auditor resignation: Ernst & Whinney quit on June 2, 1987. (EBSCO; Earmark CPE)
• Asset auction: the company's assets later sold for only tens of thousands of dollars, a tiny fraction of the former market value. (Benzinga)
• Conviction and restitution: 57 felony counts; about $26 million in restitution ordered. (Fortune; Times of San Diego)
• Sentence: 25 years in prison; served roughly 7 years before release in 1995. (EBSCO; Fortune)

Aftermath

The criminal case moved through 1988 and into 1989. Minkow and a group of associates were indicted in January 1988 on charges that included racketeering, securities fraud, mail and bank fraud, and tax violations. A federal jury convicted him in December 1988. According to Fortune's reporting, he was convicted of 57 federal felonies, sentenced to 25 years in prison, and ordered to pay about $26 million in restitution to defrauded investors. He served roughly seven years and was released in 1995. Estimates of the total damage vary widely by source and by whether banks and other creditors are counted, from the roughly $26 million restitution figure up to looser press tallies in the $100 million range.

Minkow's second act was unusual. After prison he became an evangelical pastor, eventually leading the San Diego Community Bible Church, and built a parallel career as a fraud investigator. He co-founded the Fraud Discovery Institute and publicized accusations against other companies, and he assisted federal investigators on a number of fraud cases.

That reinvention ended in two further convictions. In March 2011 Minkow pleaded guilty in federal court in Miami to conspiracy tied to a scheme to drive down the stock of homebuilder Lennar Corporation. Court and FBI records describe how, beginning in January 2009, he used press releases, the internet, videos, and the mail to broadcast false and misleading statements about Lennar to depress its share price, a so-called short-and-distort scheme. He was sentenced to five years in prison and ordered to pay restitution of $583,573,600, the amount of Lennar shareholder value the case attributed to the scheme. The SEC separately barred him from the securities industry in a November 2011 administrative order.

Then came his own church. In 2014, Minkow pleaded guilty to conspiracy to commit mail fraud, wire fraud, and bank fraud for embezzling more than $3 million from the San Diego Community Bible Church, where he had served as pastor. Prosecutors said he opened unauthorized accounts in his own name, forged checks, charged personal expenses to church credit cards, and diverted member donations and collection-plate money. On April 28, 2014, a federal judge sentenced him to five years in prison, to run after a related Florida term. The judge called it about as serious as nonviolent crime gets.

Lessons for Investors

1. A story you cannot independently verify is a red flag, no matter how good the numbers look. ZZZZ Best's revenue came from restoration contracts that outsiders were structurally unable to confirm, because the counterparties were controlled by the fraudster. When the source of a company's growth is hard for anyone outside the company to check, treat the reported results as a claim, not a fact.

2. A clean audit is a floor, not a guarantee. Auditors toured staged sites and accepted confirmations from a confederate, and still signed off until the press intervened. An unqualified opinion means the auditor found nothing it could prove was wrong, not that the business is real. Read what the auditor actually tested, and notice when access to the underlying evidence is limited.

3. Charisma and a flattering media profile are not due diligence. Minkow's whiz-kid image on television and in the press did real work in keeping skeptics quiet. A compelling, likeable founder can be a reason to look harder, not a reason to relax, because likeability is exactly what a con depends on.

4. Follow the cash, not the earnings. Fabricated profits never produced the cash the income statement implied, which is why the company always needed fresh borrowing and new investors. A business that reports rising profits while constantly raising money to stay afloat is showing you a gap between accounting and reality.

5. Reformed insiders can re-offend. Minkow rebuilt trust as a pastor and fraud investigator, then defrauded both public shareholders and his own congregation. A track record of reform is reassuring, but it is not a substitute for the same controls and verification you would apply to anyone handling other people's money.

Frequently Asked Questions

What was the ZZZZ Best fraud in simple terms? The ZZZZ Best fraud was a 1980s scheme in which teenager Barry Minkow made his carpet-cleaning company look hugely profitable by inventing fake insurance-restoration contracts, took it public, and fooled auditors and bankers until a newspaper exposed it in 1987. Investors lost millions and Minkow went to prison.

Why did the ZZZZ Best fraud happen? Minkow fabricated a large insurance-restoration business, complete with a fake appraisal firm, forged documents, and even staged job sites, so the company could report rising revenue and borrow against phantom receivables. Auditors and lenders did not independently verify the contracts, so the fiction held until outside reporting forced the truth out.

How much money was lost in the ZZZZ Best fraud? Minkow was ordered to pay about $26 million in restitution to defrauded investors after his 1988 conviction. Looser estimates that include banks and other creditors run higher, into the tens or hundreds of millions, and the company's assets later sold at auction for only a tiny fraction of its former value.

Could a ZZZZ Best-style fraud happen again today? Yes, in spirit. Auditing standards and verification practices have tightened since the 1980s, but frauds built on a fake or unverifiable line of business, supported by forged documents and a charismatic founder, still recur. The core defense, independently confirming where revenue and cash actually come from, has not changed.

What is the main lesson from the ZZZZ Best fraud? The decisive weakness was that almost no one independently checked whether ZZZZ Best's biggest business was real. When growth depends on contracts or counterparties that outsiders cannot verify, the safest assumption is that the burden of proof sits with the company, not with the skeptic.

Sources

1. U.S. Securities and Exchange Commission. Investment Advisers Act Release No. 3320, In the Matter of Barry Minkow (administrative bar). November 22, 2011. https://www.sec.gov/litigation/admin/2011/ia-3320.pdf
2. Federal Bureau of Investigation. Barry Minkow Pleads Guilty to Conspiracy to Manipulate Common Stock of Lennar Corporation. March 30, 2011. https://www.fbi.gov/miami/press-releases/2011/barry-minkow-pleads-guilty-to-conspiracy-to-manipulate-common-stock-of-lennar-corporation
3. EBSCO Research Starters. ZZZZ Best Founder Is Indicted on Federal Fraud Charges. https://www.ebsco.com/research-starters/law/zzzz-best-founder-indicted-federal-fraud-charges
4. Earmark CPE. A $600 Credit Card Complaint Unraveled One of the Biggest Frauds of the 1980s. https://earmarkcpe.com/a-600-credit-card-complaint-unraveled-one-of-the-biggest-frauds-of-the-1980s/
5. The Hustle. The secretary who helped uncover one of America's strangest Ponzi schemes. https://thehustle.co/the-secretary-who-helped-uncover-one-of-americas-strangest-ponzi-schemes
6. Fortune. Barry Minkow, All-American Con Man. January 5, 2012. https://fortune.com/2012/01/05/barry-minkow-all-american-con-man
7. Times of San Diego / Associated Press. Con Man Pastor Who Bilked $3M from San Diego Church Sentenced to 5 Years in Prison. April 28, 2014. https://timesofsandiego.com/crime/2014/04/28/con-man-pastor-bilked-3m-san-diego-church-sentenced-5-years-prison/
8. Benzinga. This Day In Market History: The Liquidation of Corporate Fraud ZZZZ Best. https://www.benzinga.com/general/education/18/07/12065025/this-day-in-market-history-the-liquidation-of-corporate-fraud-zzzz-

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.