Great frauds in history: ZZZZ Best

ZZZZ Best was a carpet-cleaning company set up in 1982 by 16-year-old Barry Minkow, who would use it to run a Ponzi scheme that netted millions.

937_MW_P33_Profile_Bottom

ZZZZ Best was a carpet-cleaning company set up in Inglewood, California in 1982 by the then 16-year-old Barry Minkow, while he was still in school. The company initially struggled for survival. Minkow (pictured) only survived by engaging in credit-card fraud, stealing money from relatives and staging burglaries in order to collect on the insurance. However, the company seemed to find a way to make large amounts of money when it branched out into carpet restoration for insurance firms. The apparent success of this business enabled ZZZZ Best to float in 1986, reaching a peak market capitalisationof $280m.

How did it work?

It didn't the restoration service was completely invented. Minkow created a fake firm, Interstate Appraisal Services, which posed as ZZZZ Best's client. To keep the business running, Minkow took loans from various dubious figures, and shuttled money between bank accounts, in a Ponzi-style scheme. This deception was convincing enough for banks to lend him enough money not only to support an advertising blitz, but also to come close to taking over KeyServ, a competitor.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

What happened next?

By May 1987, on the eve of the takeover, the Los Angeles Times published an article detailing that Minkow had previously been involved in $72,000 worth of fraudulent charges and was still refusing to pay some victims back. This caused banks to pull their credit lines; the investment bankers overseeing the KeyServ deal forced an immediate postponement. At the same time it was revealed that some major restoration contracts that ZZZZ Best claimed to have won were made up. By July Minkow resigned as CEO, and was jailed a year later for various counts of fraud.

Lessons for investors

Shareholders in ZZZZ Best were wiped out by the bankruptcy, although they did win a settlement of $35m from the firm's auditors, Ernst & Whinney. One big red flag that things were not how they seemed was that Minkow employed convicted criminals as senior executives. His chief financial officer stayed in place even after being accused of stealing money from customers of his previous firm. For his part, Minkow didn't seem to learn his lesson and was jailed in 2011 for insider trading.

Advertisement

Recommended

Visit/520446/great-frauds-in-history-reed-slatkins-investment-club
Great frauds in history

Great frauds in history: Reed Slatkin’s Investment Club

Reed Slatkin studied with Scientology's founder L. Ron Hubbard and became an ordained minister in the cult 1975. He used his position to set up an unl…
13 Jan 2020
Visit/519832/great-frauds-in-history-john-rigas-and-adelphia
Great frauds in history

Great frauds in history: John Rigas and Adelphia

John Rigas and his family embezzled at least $1bn from their company, Adelphia, wiping out shareholders.
20 Dec 2019
Visit/519573/great-frauds-in-history-joel-steinger-and-the-mutual-benefits-corporation
Great frauds in history

Great frauds in history: Joel Steinger and the Mutual Benefits Corporation

Joel Steinger and the Mutual Benefits Corporation specialised in selling viaticals, shares in the life-insurance policies of the terminally ill.
16 Dec 2019
Visit/519277/great-frauds-in-historytakafumi-horie-and-livedoor
Great frauds in history

Great frauds in history: Takafumi Horie and Livedoor

Takafumi Horie used Enron-style dummy partnerships to inflate the revenue and operating profits of his company Livedoor.
11 Dec 2019

Most Popular

Visit/investments/commodities/gold/600686/gold-and-silver-bull-market-2020
Gold

Want to make money in 2020? Gold and silver are looking like a good bet

If you want to make money from investing, says Dominic Frisby, it’s simple: find a bull market and go long. And in 2020 gold and silver are in a bull …
22 Jan 2020
Visit/economy/600667/money-minute-wednesday-22-january-uk-public-borrowing
Economy

Money Minute Wednesday 22 January: UK public borrowing

Today's Money Minute looks ahead to the latest on of the UK's public finances, with the Office for Budget Responsibility’s forecasts for borrowing thi…
22 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600653/indias-small-and-mid-cap-stocks-are-set-for-big
Share tips

India’s small and mid-cap stocks are set for big gains – here are three to buy now

Each week, a professional investor tells us where he’d put his money. This week: David Cornell of the India Capital Growth Fund highlights three favou…
20 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600636/class-acts-going-cheap-buy-into-europes-best
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020