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.
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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.
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