Wednesday, Nov. 25, 2009 | In the mid-1980s, Barry Minkow defined the term “whiz kid.”
He created a carpet-cleaning company as a teenager in the San Fernando Valley and raked in tens of millions in investments. By the time he reached his 20s, the skinny kid-turned-bodybuilder had appeared on “Oprah” and been featured in glowing media profiles.
His company, named ZZZZ Best Carpet Cleaning in order to be listed last in the phone book, was a huge success, or so the public assumed. Then his $300 million empire collapsed.
It was a Ponzi scheme, taking from new investors to pay off old ones. Next came seven years in prison.
Now, Minkow runs the San Diego-based Fraud Discovery Institute, which tracks down scam artists, and serves as senior pastor of an evangelical Christian church with 1,200 members. He has a family. And he’s starring as himself in an inspirational movie about his life, featuring actors James Caan and Ving Rhames, that’s scheduled to be released next year.
Not everyone believes Minkow’s conversion from crook to role model, which attracted “60 Minutes” in 2005. And his post-prison career recently prompted an L.A. Times writer to ponder the plight of the “Redeemed Sinner” in our culture, someone who “inspires the suspicion that his transformation is never quite complete.”
In an interview in his church office, filled with religious books and bodybuilding supplements, Minkow took questions about the art of fraud, the ethics of making money off scam artists and his favorite takedown.
What kind of kid were you 25 years ago when this started?
I was a typical kid who was longing to be accepted and included. I felt like whatever it took to be accepted and included was what I was going to do. If you weren’t the star football quarterback, and you weren’t the rich guy or the best-looking guy — and I was 0 for 3 there — there had to be some reason that the cool kids would include you.
How did you think this scheme would help you become more popular?
I’d get a new car.
Judging from your scam, It sounds like you had a mind for numbers.
The whole accounting fraud happened very inductively. Everybody asks me, how did you learn to make phony financial statements? I didn’t. I couldn’t meet payroll, and I had to make financial statements to survive, to borrow money. It was all out of need that I learned how to commit the fraud, out of necessity that I learned to do the things I ought to not have done.
When you put your feet on the path of compromise, it’s not an issue of luck, the ability to control outcomes or how you were raised. It’s an issue of geography: you drive on the 5 north long enough, you’ll hit L.A. If you set your feet on the path of compromise, that has one destination: prison and death.
I don’t care how smart you are, no matter how many MBAs you have. Many people think, “I can control outcomes. Everybody gets caught but I’ll be different. I can pay them back. I’ve got the right reason to do it.” But the path ends in the same place: doom.
Was there a point where you made a decision to go from legit to not-legit?
I had to take money from a loan shark, so I failed and was done when I started.
How does your experience with fraud inform you as you try to sniff out scams?
When you uncover fraud, you look for things that could blow up that you can’t control. You’re not so easily led to believe what others rely upon to invest: I don’t care about investor references, that you have 10 people who have been paid on time.
Are you less likely to be charmed?
You’re less likely to believe that the charm verifies the business deal. We live in a world where people spend more time in the supermarket differentiating between a ripe banana and a non-ripe banana than understanding the investment that they’re putting their life savings in.
What do you think prison did for you? Some people say prison is the best thing that ever happened to them.
I went between 21 and 29 years old. I never had trouble with it, because I knew I deserved it. I wasn’t one of those guys who was always saying he was an innocent babe in the woods. And I knew I’d get a second chance.
How did you get into the fraud detection business?
A buddy of mine came to me and said, “Hey, you’re doing all this teaching to the FBI and so forth on how to detect fraud. I want you to check out this investment opportunity that I have.”
“No, I don’t want to.”
“Well, so let’s see, you’ll teach the FBI how to undercover fraud but you won’t uncover it yourself? Check it out for me.”
It’s a $250,000 investment. MX Factors. Sure enough, man, it was a fraud. I looked at it, and they were offering 12 percent returns every 90 days.
As soon as we uncovered the fraud, and it made the newspapers, others called, and it just evolved.
What fraud case are you proudest of working on?
Don Scott, a 79-year-old guy. He came to us because he was defrauded out of his life savings. He presented us with a fraud but also wanted to get his money back, which is usually very difficult and almost impossible.
We got his money back, his $200,000. We did a reverse sting on the perpetrator.
Here’s what we did. I said Don, tell the guy who’s got your money that you have a guy who wants to invest, but he’s not going to invest your money until you get your $200,000 back.
So he introduces me, and I come in as a guy with big money, give him a bank statement saying I’ve got money. And I said, “My daddy said never invest in a deal until you see if it works for someone else.”
So the guy paid Don back his $200,000. The FBI arrested him (the alleged scam artist) three weeks later.
That’s my favorite case because we were able to get the money back. I admit I don’t know where that money came from.
(During the sting), the FBI says “Barry, where do you think they’re going to get the money for the $200,000? From some other victim.” And I said, “You know what, unless you’ve shut them down, I’m going to do it, and you can’t stop me.”
You short-sell the companies that you investigate: you make a profit if you successfully bet that they’ll crumble as a result of your investigative work. How does that work?
When you investigate public companies that commit fraud, who pays you? We have to offset the cost because we have expenses.
You need lawyers, accountants; you need to pay for research and experts. How do you do that? Short-selling.
If what you have on a company isn’t substantial, then it’s not going to do anything to a stock. The only way we’re successful is if we’re right. You go broke if you’re not right.
This is a model that’s been around long before me. It’s perfectly legal as long as you disclose it.
You star as yourself in a new movie. What do you think its message is?
You can come back.