Los Angeles entrepreneur Barry Minkow, unable to obtain bank loans to expand his ZZZZ Best carpet cleaning firm, turned to organized crime figures for financing and together they perpetrated the massive “sting” that defrauded investors and banks out of more than $70 million, federal and Los Angeles investigators told a congressional panel Wednesday.
ZZZZ Best also became involved in laundering money from cocaine sales that originated with a “very familiar” East Coast organized crime figure, Los Angeles Police Department Detective Mike Brambles disclosed to reporters later.
The investigators’ accounts provided the most extensive details to date of the suspected organized crime connections of Minkow and ZZZZ Best, the one-time fast-growing commercial empire that went into bankruptcy last summer and became the center of broad investigations into extortion, fraud and racketeering.
Also testifying was U.S. Atty. Robert C. Bonner of Los Angeles, who said that Ernst & Whinney, a large accounting firm that handled the ZZZZ Best account, had “some information” about suspected fraud last spring but delayed reporting it to authorities for months.
The House Energy and Commerce Committee’s subcommittee on oversight and investigations, which received the testimony, is examining why checks and balances in the securities system failed to detect Minkow’s maneuverings to inflate the assets of his firm and then reap huge sums on the stock market.
“ZZZZ Best is bankrupt, but so is the system for detecting financial irregularities,” said Rep. Ron Wyden (D-Ore.), a member of the panel, which completes its hearings on the case next week.
Brambles, who heads a seven-member LAPD team probing ZZZZ Best, gave the committee a rough chronology of the firm’s ties to reputed organized crime figures--allegations that go beyond those in a 54-count federal indictment recently returned against Minkow and 10 associates.
Brambles said that after Minkow was rebuffed by loan officers in early attempts to expand his fledgling firm, which he started at age 15 in his parents’ garage, he turned to “unconventional means of financing” through joint ventures with reputed crime figures.
Crime Figures Named
His business associates, the detective told the committee, included Robert Viggiano, also known as Robert Victor, a reputed member of New York’s Colombo crime family; the late Jack Catain, “tied to organized crime in Chicago and Las Vegas;” Richard Schulman, allegedly associated with the Genovese family, and Maurice Rind, a reputed member of organized crime in New York.
Minkow “learned from each of these individuals how to perpetuate such a fraud . . . and (he) knew clearly how to put it together,” Brambles said.
The allegations of organized crime ties to ZZZZ Best first surfaced in July, when LAPD Chief Daryl F. Gates told a news conference that the ZZZZ Best firm was part of one of the Los Angeles “fronts” used to launder “large organized crime profits from narcotic trafficking.” Thus far, however, no charges based on these allegations have been filed by the Los Angeles County district attorney’s office.
Although investigator Brambles reiterated the allegation that drug profits went into the Los Angeles company, he did not elaborate on police knowledge of that connection.
Brambles told the committee that Minkow, who was already becoming known as a “teen-age Horatio Alger” in building his carpet-cleaning firm, apparently met Catain in 1983 and that Catain initiated “a series of suspicious loans” for the firm. Catain also put Minkow in contact with Schulman and Rind, who is associated with “all five organized crime families in New York,” Brambles said.
(Rind, an Encino resident who was twice convicted of stock fraud in the 1970s, has maintained he did not “do anything illegal,” and has challenged authorities to bring a case against him.)
In what Bonner described as a “classic sting,” Minkow’s new partners began to invest in the firm, set up a network of related companies and opened up small lines of credit with local banks. The investments surpassed $4 million by 1985, Brambles said.
In 1985, Brambles and Bonner said, Minkow and his associates created an “insurance restoration business” that purported to restore fire-damaged buildings with insurance proceeds. However, Bonner said, it was “almost entirely bogus,” with ZZZZ Best fabricating multimillion-dollar jobs in California and Texas to inflate the value of the firm.
In 1986, after buying a shell company in Utah, ZZZZ Best became a public company and was able to raise $12.3 million in a public stock offering. One year later, Brambles said, Minkow, Rind, Schulman and Viggiano cashed in at $4 to $5 a share their one million units in the firm, netting a total of $4.5 million in profits.
Alerts for Fraud
Bonner suggested to committee members several methods that could improve the system for detecting such securities frauds.
He said accounting firms should be required to promptly notify authorities when they detect signs of fraud in their corporate audits.
By the time Ernst & Whinney reported its suspicions about ZZZZ Best to authorities, Bonner said, the “bubble had burst” for the carpet-cleaning company and “the proverbial horse was already out of the barn,” too late for investors to recover.
Nevertheless, Bonner conceded later that “I have serious doubt that any regulatory scheme” could entirely overcome “elaborate efforts to deceive and mislead” by clever criminals.
The managing partner for Ernst & Whinney’s Los Angeles operations, Sam Bell, said his firm is looking “forward to the opportunity” to tell Congress its side of the story when the hearing continues Monday.
Minkow is being held in lieu of $1.5 million bail at the federal prison at Terminal Island.