Barry Minkow and Zzzz Best Scandal Essay

Submitted By claf17
Words: 7019
Pages: 29

ZZZZ BEST COMPANY, INC.
Source: Contemporary Auditing: Issues & Cases - Michael Knapp

On May 19, 1987, a short article in The Wall Street Journal reported that ZZZZ Best Company, Inc., of Reseda, California, had signed a contract for a $13.8 million in¬surance restoration project. This project was just the most recent of a series of large restoration jobs obtained by ZZZZ Best (pronounced “zee best”) Company. Located in the San Fernando Valley of southern California, ZZZZ Best had begun operations in the fall of 1982 as a small, door-to-door carpet cleaning operation. Under the direction of Barry Minkow, the ambitious sixteen-year-old who founded the company and initially operated it out of his parents’ garage, ZZZZ Best experienced explosive growth in both revenues and profits during the first several years of its existence. In the three-year period from 1984 to 1987, the com¬pany’s net income surged from less than $200,000 to more than $5 million on reve¬nues of $50 million.
When ZZZZ Best went public in 1986, Minkow and several of his close associ¬ates became multimillionaires overnight. By the late spring of 1987, Minkow’s stock in the company had a market value exceeding $100 million, and the total market value of ZZZZ Best surpassed $200 million. The youngest chief executive officer in the nation enjoyed the “good life,” which included an elaborate home in an exclusive suburb of Los Angeles and a fire-engine red Ferrari. Minkow’s charm and entrepreneurial genius made him a sought-after commodity on the television talk show circuit and caused the print and visual media to tout him as an example of what America’s youth could attain if they would only apply them¬selves. During an appearance on The Oprah Winfrey Show in April 1987, Minkow exhorted his peers with evangelistic zeal to “Think big, be big” and encouraged them to adopt his personal motto, “The sky is the limit.”
Less than two years after his appearance on The Oprah Winfrey Show, Barry Minkow began serving a twenty-five-year prison sentence. Tried and convicted on fifty-seven counts of securities fraud, Minkow had been exposed as a fast¬talking con artist who bilked his closest friends and Wall Street out of millions of dollars. Federal prosecutors estimate that, at a minimum, Minkow cost investors and creditors $100 million. The company that Minkow founded was, in fact, an elaborate Ponzi scheme. The reported profits of the firm were nonexistent and the huge restoration contracts, imaginary. As one journalist reported, rather than building a corporation, Minkow constructed a hologram of a corporation. In July 1987, just three months after the company’s stock had reached a market value of $220 million, an auction of its assets netted only $62,000.
Unlike most financial frauds, the ZZZZ Best scam was perpetrated under the watchful eye of the Securities and Exchange Commission (SEC). The scrutiny of the SEC, one of the largest Wall Street brokerage houses, a large and reputable West Coast law firm that served as the company’s general counsel, and an inter¬national public accounting firm had failed to uncover Minkow’s daring scheme. Ultimately, the persistence of an indignant homemaker who had been bilked out of a few hundred dollars by ZZZZ Best resulted in Minkow being exposed as a fraud.
How a teenage flimflam artist could make a mockery of the complex regula¬tory structure that oversees the U.S. securities markets was the central question posed by a congressional subcommittee that investigated the ZZZZ Best debacle. Representative John D. Dingell, chairman of the U.S. House Committee on Energy and Commerce, pointed out, “The ZZZZ Best prospectus told the public that revenues and earnings from insurance restoration contracts were skyrocket¬ing but did not reveal that the contracts were completely fictitious. Where were the independent auditors and the others that are paid to alert the public to fraud and deceit?” [1] Like many other daring financial…