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.
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
House prices are falling in London but how does it compare to the rest of the UK?Advice The capital remains the most expensive part of the UK to buy a property, but it isn’t being as badly hit by the housing market slump. Where are London house prices heading?
-
Will a Santa Rally provide festive cheer for investors this year?
News Equities often get a seasonal boost during December - will there be a Santa Rally in 2023?
-
Christopher Columbus Wilson: the spiv who cashed in on new-fangled radios
Profiles Christopher Columbus Wilson gave radios away to drum up business in his United Wireless Telegraph Company. The company went bankrupt and Wilson was convicted of fraud.
-
Great frauds in history: Philip Arnold’s big diamond hoax
Profiles Philip Arnold and his cousin John Slack lured investors into their mining company by claiming to have discovered large deposit of diamonds. There were no diamonds.
-
Great frauds in history: John MacGregor’s dodgy loans
Profiles When the Royal British Bank fell on hard times, founder John MacGregor started falsifying the accounts and paying dividends out of capital. The bank finally collapsed with liabilities of £539,131
-
Great frauds in history: the Independent West Middlesex Fire and Life Assurance Company's early Ponzi scheme
Profiles The Independent West Middlesex Fire and Life Assurance Company (IWM) offered annuities and life insurance policies at rates that proved too good to be true – thousands of policyholders who had handed over large sums were left with nothing.
-
Great frauds in history: Alan Bond’s debt-fuelled empire
Profiles Alan Bond built an empire that encompassed brewing, mining, television on unsustainable amounts of debt, which led to his downfall and imprisonment.
-
Great frauds in history: Martin Grass’s debt binge
Profiles AS CEO of pharmacy chain Rite Aid. Martin Grass borrowed heavily to fund a string of acquisitions, then cooked the books to manage the debt, inflating profits by $1.6bn.
-
Great frauds in history: Tino De Angelis’ salad-oil scam
Profiles Anthony “Tino” De Angelis decided to corner the market in soybean oil and borrowed large amounts of money secured against the salad oil in his company’s storage tanks. Salad oil that turned out to be water.
-
Great frauds in history: Gerard Lee Bevan’s dangerous debts
Profiles Gerard Lee Bevan bankrupted a stockbroker and an insurer, wiping out shareholders and partners alike.
