Federal prosecutors Friday unsealed a 54-count racketeering and fraud indictment accusing millionaire whiz kid Barry Minkow of staging an elaborate securities hoax to prop up his carpet-cleaning company while bleeding it nearly dry of money, some of it laundered through Las Vegas casinos.
Minkow, who earned national fame by turning the company he founded in a Reseda garage at the age of 15 into a $200-million Wall Street commodity, surrendered to authorities late Thursday on the indictment, which also names 10 of his former business partners and associates at ZZZZ Best Co. Inc.
U.S. Magistrate Venetta Tassopulos set bail at $2 million, in part based on prosecutors' allegations that Minkow, 21, removed as much as $816,000 from the company treasury in the waning days of his crumbling empire and may have stashed millions more in overseas bank accounts.
The indictment also alleges that Minkow offered a businessman who learned of the securities scheme a $25,000 bribe to recant his allegations to ZZZZ Best's outside accountants that the company engaged in massive fraud.
In announcing the criminal charges, federal prosecutors portrayed the young San Fernando Valley entrepreneur as the brains behind a sophisticated operation that set up sham companies and drafted phony invoices to dupe banks and brokerage houses into accepting ZZZZ Best's revenue figures, which were inflated by tens of millions of dollars.
U.S. Atty. Robert C. Bonner estimated that up to 90% of the activities from which ZZZZ Best claimed most of its revenue--insurance projects restoring buildings damaged by flood or fire--were "made of whole cloth . . . totally bogus."
"It was a bold, brazen scheme which nobody involved in, according to the interviews we've conducted, believed would work, and yet he was able to carry it off," said Assistant U.S. Atty. James R. Asperger, who described the operation as "a classic sting . . . of the Robert Redford, Paul Newman style and vintage." (Redford and Newman were the stars of "The Sting," a movie about an elaborate con game.)
Bonner said losses to investors and banks are believed to exceed $50 million.
"This case is the most massive and elaborate securities fraud perpetrated on the West Coast in over a decade," Bonner said.
To dupe the firm's accountant and lawyer into signing off a multimillion-dollar stock offering, for instance, Minkow and his partners allegedly staged a visit to a high-rise building in Sacramento where they pretended to be repairing water damage. One of them posed as a building manager, using a rented office nearby and, to complete the ruse, they displayed blueprints and photographs of the project site, according to the indictment.
Minkow's attorney, Arthur Barens, said the youthful businessman, who lives in Woodland Hills, relied on his older, more sophisticated business partners and was unaware of any illegal activities.
"Who are the witnesses in this case? Indicted defendants, savvy businessmen who are trying to exercise some damage control in their future by pointing the finger at some 19-year-old," Barens told the magistrate Friday.
"If there were hordes of millions of dollars offshore, I doubt very much that Mr. Minkow would be sitting around Reseda preparing his defense," Barens added. "And what has he been doing (during the investigation)? Cleaning carpets. He's out on a daily basis on his hands and knees cleaning carpets."
Minkow appeared for his bail hearing Friday in what friends say has always been his favorite attire: a loose-fitting warm-up suit and athletic shoes. Flanked by his attorneys, Minkow quietly volunteered suggestions for his defense from the counsel table and joked with spectators during courtroom breaks.
Though Los Angeles police announced last summer that they were investigating allegations that Minkow's company laundered drug profits for East Coast organized crime families, the federal indictment does not allege any organized crime ties or narcotics money laundering.
Capt. Stuart Finck, head of LAPD's Organized Crime Intelligence Division, said authorities are continuing that part of the investigation.
'Money Was Laundered'
"We have specific information that drug money was laundered. The extent, we're investigating," Finck said. "We're hopeful that if any charges are to be sought, they'll be filed in the next few months."
Three of the defendants are accused with Minkow of conducting a racketeering enterprise to make it appear that ZZZZ Best was an extremely profitable business by concocting the insurance restoration projects. They are: Thomas Padgett, 37, of Westchester; Mark L. Morze, 37, of Whittier; and Mark Roddy, 36, who is already in custody on other federal charges.
Charged with participating in and aiding and abetting the various schemes are Brian Morze, 41, of Encino, Mark's brother; Daniel B. Krowpman, 42, of Woodland Hills, a former ZZZZ Best director; Charles B. Arrington III, 27, of Woodland Hills, ZZZZ Best's chief operations officer; accountant Norman Rothberg, 52, of Marina del Rey, who allegedly was offered the bribe by Minkow, and Edward M. Krivda, 30, of Palmdale.
Brothers Jack N. Polevoi, 40, of Woodland Hills, and Jerry N. Polevoi, 40, of Simi Valley, are accused of helping Minkow steal an estimated $500,000 in ZZZZ Best funds by cashing checks at a variety of Las Vegas casinos to disguise the transactions. Eugene Lasko, 56, of Reseda, is accused in a separate criminal complaint on similar charges.
Minkow, who is accused of securities fraud, bank fraud, mail fraud, tax evasion and money laundering, faces a maximum of 350 years in prison and a $13.5-million fine if convicted on all counts. Other defendants face sentences of from 10 to 182 years in prison.
The indictment is the latest chapter in the dramatic ZZZZ Best saga. A teen-age Minkow started the company in his parents' garage, took it public three years later and transformed it into a company with 1,030 employees, 21 offices in three states--and into a hot Wall Street stock--before its demise last summer.
Its rapid rise created paper fortunes for many, including its founder. Minkow's holdings alone were valued at more than $100 million at one point. He bought a Spanish-style mansion and a red Ferrari and donated tens of thousands of dollars to anti-drug programs and other charities; he even had posters printed showing him with the slogan: "My act is clean. How's yours?"
But the company collapsed after The Times disclosed last May that it had overbilled customers by $72,000 by inflating their credit card charges in late 1984 and early 1985.
Minkow resigned, ZZZZ Best entered Chapter 11 bankruptcy proceedings July 8 and the firm's board sued Minkow and some of his associates for $25 million, alleging fraud and theft.
The indictment alleges that Minkow created an elaborate network of largely fictitious businesses to inflate the value of the company by tens of millions of dollars.
$15 Million Raised
Visits to phony job sites, fictitious invoices and fraudulent financial reports helped the company to raise over $15 million in a public offering of ZZZZ Best securities in late 1986 and early 1987, according to the indictment.
At the same time, Minkow and the other defendants obtained $11 million from banks.
Herb Wolas, the bankruptcy trustee assigned to help process creditors' claims, said in an interview this week that there still is "between $23 million and $30 million not accounted for."
Wolas said $1.8 million was traced from Switzerland, then through an American bank, and was delivered by armored car in cash to ZZZZ Best last April.
In addition, Asperger said Friday that federal investigators have traced $8 million of ZZZZ Best funds to a Swiss bank account, but that the money may have been part of a legitimate investment.
The federal prosecutor said there is also evidence that Minkow developed "a close personal relationship" with a woman employed at a leading financial institution. The woman, he said, subsequently processed a post-dated check for Minkow, giving him traveler's checks and cashier's checks, which then were cashed in Las Vegas.
"He told her he loved her, that he would give her a post-dated check . . . and ZZZZ Best would cover it," the prosecutor said.
Prosecutors apparently have gained the cooperation of some former ZZZZ Best insiders.
Asperger said a former board member, Michael L. Malamut, has told authorities that Minkow admitted during a July 12 meeting that the insurance restoration business was a fraud.
"The whole restoration business was phony from day one. . . . We just inflated the figures to show bigger earnings," Malamut quoted Minkow as saying, according to Asperger.
In the same meeting, Minkow purportedly told Malamut that he secretly owned at least two other companies, including restaurant and pest control businesses, and added: "I have money in other countries. Somebody brings it in for me. I have plenty of money. I can handle it."
Mark Morze, an accountant who ran the insurance restoration business, told The Times last summer that he also was cooperating with investigators. Morze admitted that the enterprise was a charade.
In its reports and statements to the public, ZZZZ Best claimed enormous profitability, largely due to its rapidly growing business repairing buildings damaged by fire or water. Company reports alleged that this work accounted for up to 86% of revenues, which were said to exceed $50 million for the fiscal year ending April 30, 1987.
But "with the exception of a few relatively small projects," the indictment alleges, the insurance restoration work was entirely fictitious.
In the sham corporate network, according to the indictment, Padgett handed out the restoration jobs to ZZZZ Best, initially when he worked for the Travelers Insurance Co. and later when he set up a fraudulent business called Interstate Appraisal Service.
Interstate "purportedly acted as a material damage appraiser that represented various insurance companies that financed the restoration work," the indictment says. Roddy worked at Interstate and allegedly later created another company, Assured Property Management, that verified phony restoration projects to attorneys, accountants and others.
Equipment Leased to ZZZZ Best
The indictment says Krowpman signed fraudulent contracts to make it appear that his company, Cornwell Quality Tools and Equipment, sold large amounts of equipment that supposedly was used by ZZZZ Best for insurance restoration jobs.
Much of the deception described by the indictment involves efforts to make the paper network look real to investors, lawyers and accountants.
In November, 1986, shortly before ZZZZ Best's second public stock offering, Minkow, Padgett, Mark Morze and Roddy arranged for the firm's accountant and attorney to be taken on a tour of an 18-story office building in Sacramento where ZZZZ Best allegedly had a $7-million restoration job. The company "in fact was not performing any work in this building," the indictment alleges.
As a condition of the visit, and in an apparent effort to keep them from learning the truth, Minkow and his associates required the attorney and accountant to "promise, among other things, not to disclose the location of the building and not to make any follow-up phone calls to any contractors, insurance companies, the building owner or other individuals involved in the project," the indictment says.
Minkow and the others reportedly claimed this was necessary "because of the need for confidentiality in the insurance restoration business."
"I couldn't believe it would work," Mark Morze said in an interview, recalling the incident. "I was expecting catastrophe," he said, figuring "these are smart guys. They'll catch on."
Staged Telephone Call
During another inspection by the accountant at a purported restoration project in Dallas, Morze arranged for a staged telephone call announcing yet additional phony jobs, the indictment says.
The indictment comes six months after Los Angeles Police Chief Daryl F. Gates disclosed at a press conference that nine people, including Minkow, were being investigated for laundering "large organized crime profits from narcotic trafficking."
It was later learned that state and local agencies were investigating the money-laundering allegations, while federal authorities in Los Angeles probed the possible stock fraud that ultimately led to the federal indictment.
At his July 8 press conference, Gates said police had just concluded a search of the homes and offices of more than a dozen businesses and individuals, five of whom he identified as "organized crime subjects or associates of organized crime subjects." Minkow was not among those five.
Among the businesses named by Gates as being used in the money laundering were Splash, a trendy restaurant in Malibu; a Los Angeles art sales company called Art World Industries, and its subsidiary, Art Auctions Inc., and ZZZZ Best.
Times staff writer Tom Furlong also contributed to this story.