ZZZZ Best to File for Chapter 11; Sues Minkow : Claims Founder Took Millions of Dollars in Firm’s Funds for Own Use

ZZZZ Best, the Reseda carpet-cleaning firm that Barry Minkow built from a business in his parents’ garage into a hot-growth stock, will file for Chapter 11 bankruptcy protection, the company said Monday.

The company’s board of directors said it has discovered facts that “appear to substantiate allegations of fraud associated with the company’s restoration business.”

Also Monday, ZZZZ Best filed suit in Los Angeles Superior Court against Minkow and several others for $25 million in damages, alleging breach of fiduciary duty, theft and fraud of “many millions from ZZZZ Best’s checking account for Minkow’s personal use and the personal use of co-defendents.”

The suit names Interstate Appraisal Services, a Culver City firm; its president, Thomas Padgett; Marbil Management, an Agoura firm, and a Marbil employee, Mark Morze, as co-defendents.

$3 Million Withdrawal

Both Interstate Appraisal Services and Marbil Management have been involved in ZZZZ Best’s insurance restoration business, repairing water and fire damage to buildings. According to documents previously filed with the Securities and Exchange Commission, the restoration business accounted for 89% of ZZZZ Best’s $33.3 million in revenue for the first nine months of the fiscal year ended April 30.

The suit filed Monday by ZZZZ Best alleges that the restoration business was “a complex elaborate scheme . . . to divert ZZZZ Best’s corporate funds” for the personal use of the defendants.

Between June 1 and June 30, the suit alleges, Minkow, without proper authorization, withdrew by cashier’s checks or checks made out to cash, more than $3 million from ZZZZ Best’s checking account, claiming that it was needed for insurance restoration expenses.

The suit further alleges that Minkow had a $5-million personal line of credit from Prudential-Bache Finance Ltd., secured by his ZZZZ Best stock. On June 26, Prudential-Bache issued Minkow a check for $2 million. In exchange, Minkow, without company authorization, gave Prudential-Bache a $2-million check postdated for July 10 that was drawn on ZZZZ Best’s corporate account, the suit said.

Another $18 million, the suit says, was paid out to Marbil Management for labor and supplies for the restoration work, but no labor or materials were provided.

It was also alleged in court papers, that Minkow wrote two checks totaling $70,000 to Charles B. Arrington III, ZZZZ Best’s chief operating officer, for Arrington’s personal use.

Minkow’s attorney, Arthur H. Barens, said: “I deny that Barry Minkow was engaged in any wrongdoing.”

It was also learned Monday that the Securities and Exchange Commission is investigating possible money laundering, falsified financial records and securities fraud involving ZZZZ Best. The SEC reportedly plans to use its subpoena power to review ZZZZ Best’s records and to subpoena company officials.

Minkow, 21, resigned as chief executive of ZZZZ Best last week, citing “severe medical problems.”

Bruce T. Andersen, ZZZZ Best’s chief financial officer was named interim president. He did not return a reporter’s phone calls Monday.

Minkow’s attorney said Minkow was at his home in Woodland Hills. But his home phone number has been disconnected. Minkow owns a home in a gated community in Woodland Hills that he bought for $698,000 in November, 1985. The home is part of the collateral on a $600,000 line of credit issued last year to ZZZZ Best by Bank Leumi’s Encino office.

Trading Halted

Trading in ZZZZ Best’s stock was halted in over-the-counter trading early Monday but was later resumed. The stock closed at 75 cents a share, down $2.75 as 5.3 million shares changed hands.

ZZZZ Best’s stock price has been falling since The Times reported in May that ZZZZ Best had rung up $72,000 in false credit card charges in 1984 and 1985. The article also reported that a Canoga Park flower shop, then owned by Arrington, also rang up $91,000 in false charges in 1986.

In the past month there have been several class-action suits filed by shareholders against ZZZZ Best and Minkow, charging that the company made false or misleading statements in its December stock prospectus.

Stuart Wechsler, an attorney with Goodkind, Wechsler, Labaton & Rudoff in New York, who filed one of the class-action suits, said that once ZZZZ Best files for Chapter 11, class-action suits against the company are automatically stayed.

But Wechsler said it is likely that the suits will be broadened to cover ZZZZ Best officials besides Minkow. “We’ll be looking for others responsible for this disastrous fraud,” he said. “The company has a board of directors. I wonder what the board of directors was doing.”

Wechsler said he understands that ZZZZ Best does not have liability insurance for its directors. In the company’s stock prospectus last year, 10 directors were listed.

Four of them are outside directors. They are Neal Dem, who owns a Chatsworth stationery firm; Harold Lipman, who has been associate superintendent of the Simi Valley Unified School District; Hal Berman, who runs an auto wholesaler, and Daniel Krowpman, who owns a tool equipment firm.

Neither Dem nor Lipman returned a reporter’s phone calls Monday. Krowpman did not answer the phone and Berman could not be located.

Minkow started his carpet cleaning firm when he was only 15, working out of his parents’ garage in Reseda. As the company grew, Minkow was a tireless promoter, appearing on television programs, including the “Oprah Winfrey Show,” appearing in television ads and winning a commendation from Mayor Tom Bradley.

Minkow also appeared in anti-drug commercials and spoke at schools on entrepreneurship. He wrote a book about his life called “Making It in America.” The cover shows him leaning on a Rolls Royce.

Earlier this year when ZZZZ Best’s stock hit a high of $18.375 per share, Minkow’s 52% of ZZZZ Best’s stock had a paper value of more than $100 million.

Minkow lived well. Besides owning an expensive home, he drove a BMW, gave his girlfriend a Porsche, was generous with donations to various organizations, including the YMCA in Reseda, a girls’ softball league. He helped pay for a public service ad for Mothers Against Drunk Driving (MADD).

“He struck me as a very nice young man, interested in substance abuse,” said Marcy DeJesus, an administrator with MADD.

Despite Minkow’s early reputation as a latter-day Horatio Alger, two years ago he did some business with Jack M. Catain Jr., a reputed Los Angeles area organized crime figure. In 1985, according to court documents, Catain arranged for loans to Minkow at interest rates of between 2% and 5% a week. Catain, who later sued Minkow, died earlier this year.

In May, Minkow attempted to calm investors by announcing preliminary, unaudited results for ZZZZ Best’s fiscal year ended April 30 of a record $50 million in revenue and $5 million in profit. “ZZZZ Best has never done better,” he said at the time.

But new signs of trouble soon appeared. First, the firm of Drexel Burnham quit as ZZZZ Best’s investment banker in a $25-million proposed acquisition of KeyServ Group, a Pennsylvania carpet-cleaning firm.

Then, in early June, Ernst & Whinney resigned as ZZZZ Best’s independent auditor. Price Waterhouse succeeded Ernst & Whinney.

Times staff writer Roxane Arnold in Los Angeles contributed to this story.