ZZZZ Best was a carpet-cleaning company started by 15-year-old Barry Minkow in 1982. He was introduced to the carpet-cleaning industry at the age of 12 by his mother, who helped make ends meet by working as a telephone solicitor for a small carpet-cleaning firm. Although the great majority of companies in the carpet-cleaning industry are legitimate, the nature of the business attracts a disproportionate number of seedy characters. There are essentially no barriers to entry: no licensing requirements, no apprenticeships to be served, and only a minimal amount of start-up capital is needed. A 16-year-old youth with a new driver’s license could easily become what industry insiders refer to as a "rug sucker" which is what exactly Minkow did after he founded his home-based ZZZZ Best Carpet-Cleaning Company in Reseda, San Fernando Valley, California. Minkow opererated the ZZZZ Best business out of his parents' garage. From these humble beginnings, a small carpet-cleaning establishment with only a few employees, which grew rapidly in the next five years. Minkow quickly recognized that carpet-cleaning was a difficult way to earn a livelihood. The ease of entry into the field meant that cutthroat competition was going to be prevalent within the industry. Customer complaints, bad checks, and nagging vendors demanding payment complicated the young entrepreneur’s life. Within months of striking out on his own, Minkow faced the ultimate nemesis of the small businessperson: a shortage of working capital. Because of his age and the table fact that ZZZZ Best was only marginally profitable, local banks refused to loan him money. Ever resourceful, the brassy teenager came up with his own innovative ways to finance his business: check kiting, credit card forgeries, and the staging of thefts to fleece his insurance company. Minkow’s young age and personal charm thus allowed him to escape relatively unscathed from his early brushes with the law that resulted from his creative financing methods. The ease with which the system could be beaten encouraged him to exploit it on a broader scale. ZZZZ Best had begun operations in the fall of 1982 as a small, door-to-door carpet-cleaning operation. Under the direction of Minkow, the ambitious teenager 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 company’s net income surged from less than $200,000 to more than $5 million on revenues of $50 million. In its first four years, the company grew from a home carpet-cleaning service with a few employees into a company with 1,400 employees that specialized in "insurance restoration" cleaning. One of the first contracts ZZZZ Best received was from the Genovan Mafia family. His frequent television commercials in the Los Angeles market during 1986-1987 featured Minkow in a sharp business suit, confidently selling the superiority of ZZZZ Best. Minkow worked hard to form dozens of business contacts. His most important contact was Tom Padgett of Interstate Appraisal Services, an insurance claims adjuster who could get large restoration contracts. Behind the scenes, Minkow's company was little more than a front to attract investment for a Ponzi scheme. ZZZZ Best did not clean anywhere near as many carpets as it claimed. It generated fraudulent paper trails to fool potential investors. Interstate Appraisal Services was formed as a separate company to support this fraud. Minkow raised money by factoring his accounts received for work under contract, and hired reputable accountants and lawyers to help boost his image. Along the way, he fabricated contracts, falsified sales and earnings, and took financing from organized crime. Auditors for a major accounting firm signed off on ZZZZ Best's books. Through such means as forgery and theft, Minkow appeared to be building a multi-million dollar corporation. ZZZZ Best went public on the stock market in December 1986, eventually reaching a market capitalization of over $200 million U.S. dollars. When some accountants wanted to inspect ZZZZ Best's operations, Minkow borrowed fake offices for a tour of "Interstate Appraisal Services" and used an incomplete building to present a fake restoration job. He used $2 million to complete the building in twenty days. There were signs of problems, but investors chose to ignore them. The company's Chief Financial Officer also owned a florist business, and that company was accused of having stolen over $92,000 by charging flowers to customers' credit cards without authorization. Minkow decided to ignore these allegations, and short-sellers including the Feshbach Brothers took positions betting that ZZZZ Best's stock would fall. Magazines and TV shows did not bother to check his background. Investigations by the U.S. Securities and Exchange Commission, the FBI, two accounting firms and various individual investigators found nothing. Minkow bribed a security guard to give him access to a newly constructed building in Sacramento, California, so that he could present it to his auditors as a wreck that ZZZZ Best had recently finished restoring. ZZZZ Best was about to buy rival carpet cleaning company KeyServe when their stock suddenly plunged. Members of the press had been researching the company, and communicating with short-sellers who had done their own research. These investigations indicated that the company's contracts had been largely false. The story ran in the Los Angeles Times and the FBI investigated Minkow's links to organized crime.
In early 1987, Barry Minkow, CEO of ZZZZ Best Carpet Cleaning, was raising $40 million in a public offering (after raising approximately $13 million in a December 1986 public offering). But, 86 percent of ZZZZ Best's $50 million of revenue was fake, and no one caught it - not auditors, not lawyers, not underwriters. The result was that, as a public company, ZZZZ Best had a market value of over $250 million in the spring of 1987. ZZZZ Best's stock rose to $18 a share on Wall Street, valuing the company at more than $280 million dollars. 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." Minkow’s "The sky is the limit." philosophy drove him to be even more innovative. The charming young entrepreneur began using his phony financial statements to entice wealthy individuals in his ever-expanding social network to invest in ZZZZ Best. Eventually, Minkow recognized that the ultimate scam would be to take his company public, a move that would allow him to tap the bank accounts of investors nationwide. In May 1987, a newspaper article charged Minkow with certain wrongdoings. The stock, however, continued to be actively traded on the NASDAQ exchange. 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 insurance restoration project. This project was just the most recent of a series of large restoration jobs obtained by ZZZZ Best Company. When ZZZZ Best went public in 1986, Minkow and several of his close associates became multi-millionaires 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 themselves. 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 international 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 regulatory structure that oversees the U.S. securities markets was the central question posed as a congressional subcommittee 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 skyrocketing but did not reveal the contracts were completely falsified. Where were the independent auditors and the others that are paid to alert the public to fraud and deceit? Like many other daring financial frauds, the ZZZZ Best scandal caused Congress
to re-examine and modify the maze of rules that regulate financial reporting and serve as the foundation of the U.S. system of corporate oversight. However, Dan Akst, a reporter for The Wall Street Journal who played a large role in exposing Minkow, suggests that another ZZZZ Best is inevitable: "Changing the accounting rules and securities laws will help, but every now and then a Barry Minkow will come along, and ZZZZ Best will happen again. Such frauds are in the natural order of things, as old and enduring as human needs."
In July 1987, three months after the company’s stock had reached a market value of $220 million, all the assets were sold at an auction for only $62,000. Minkow was arrested and indicted in 1987. Minkow and other ZZZZ Best officers were subsequently charged with various crimes, for which they were convicted of fraud in 1989. The court's estimate of the extent of fraud was $26 million. 11 of ZZZZ Best's insiders were all convicted of fraud alongside Minkow, who was sentenced to 25 years in prison. He only served just over 7 years.
Categories: California Businesses - Carpet-Cleaning Companies - Companies Established in 1982 - Companies Terminated in 1987 - Fraudulent Companies - Sold-Off Businesses -
