ZZZZ Best Probers Still Digging : Possible Securities Violations, Cash-Laundering Cases Pending

Now that a federal court jury has convicted Barry Minkow, law enforcement officials are shifting into what they call “Phase 2” of the prosecutions stemming from the collapse of Minkow’s ZZZZ Best carpet cleaning company.

Still pending are the results of an investigation by the Securities and Exchange Commission, a possible second look at the evidence by a federal grand jury and the long-promised culmination of an investigation by the Los Angeles Police Department.

This phase of the case comes 17 months after Los Angeles Police Chief Daryl F. Gates told a news conference that ZZZZ Best was one of several local firms linked to money laundering and drug trafficking by East Coast crime families. Gates listed nine individuals as suspects and described five of them as “organized crime subjects or associates of organized crime subjects.”

Only one person named by the police chief has thus far been charged: the 22-year-old Minkow, who was convicted Wednesday on 57 fraud counts in a case brought by federal authorities.

Ten other former ZZZZ Best associates have pleaded guilty to federal charges, but absent from the list of defendants were the alleged mob figures cited by Gates. These included two men portrayed in police documents as profiting most from the fraud at the carpet cleaning company: Encino financiers Maurice Rind and Richard Schulman, longtime friends who both have criminal records.

Minkow’s three-month trial produced no evidence that ZZZZ Best was a conduit for laundering Mafia profits from drug trafficking. Instead, the testimony focused on how banks and other investors were swindled by a scheme to make ZZZZ Best look like a thriving company through phony jobs repairing fire and flood damage to office buildings.

Time Gap

The time gap since Gates’ accusations has led some defense attorneys to accuse the police chief of speaking out before doing his homework.

“The LAPD was entirely misdirected by their informants,” said James E. Blatt, an attorney for Rind.

During the trial, Minkow’s attorney, David Kenner, tried to persuade the jury that the defrauding of investors was orchestrated by men with Mafia connections who intimidated young Minkow into a life of crime. These men, and not Minkow, should have been prosecuted first, Kenner said.

Prosecutors did not dispute the significant role of others but portrayed Minkow as a willing participant in the fraud. Whereas Minkow claimed that he was afraid of the stocky, 54-year-old Schulman--who has a long arrest record, ranging from felony assault with a gun to bookmaking--a prosecution witness testified that the young entrepreneur enjoyed sitting around in his underwear with Schulman, smoking cigars.

Federal prosecutors have indicated, in addition, that their work on the case is not over. They have described Minkow as the logical person to pursue first, with Phase 2 involving the more complex securities fraud side of the case, exploring such issues as whether insider information was illegally used to profit from trading in ZZZZ Best stock.

The rest of the case, “in terms of timing, is comparable to Boesky,” one investigator said. He was referring to Ivan F. Boesky, the stock speculator who last year received a three-year term for violating securities laws. It took authorities more than a year to put the Boesky case together.

An unknown factor is the role of Minkow as a potential witness. He was plea bargaining with prosecutors even as the jury returned its verdict and might win some concessions if he agrees to provide information before his scheduled February sentencing.

The SEC’s Los Angeles office has been investigating ZZZZ Best for 18 months.

Documents submitted by Los Angeles police to a congressional committee early this year indicate that it was the 50-year-old Rind--twice convicted of securities fraud in the 1970s and permanently barred from working as a stockbroker--who arranged for ZZZZ Best to become a public company in January, 1986, through a merger with a shell corporation in Utah.

The Police Department documents allege that Rind and Schulman, his partner in Richman Financial Services of Encino, later cleared more than $1 million each on one 1987 stock sale, as did a third reputed organized crime figure who has not been charged in the case, Robert Victor, 52, of Woodland Hills.

The SEC is examining in part whether securities laws were violated in ZZZZ Best’s public reports about the company’s financial condition, which hid “knowledge that the company was a sham and the bubble was about to burst,” according to one government source.

The Internal Revenue Service also is helping prosecutors go through records from about 70 banks, as well as other documents subpoenaed in the case, to trace the estimated $65 million to $70 million pumped into ZZZZ Best from bank loans, stock sales and other activities over a two-year period. Part of the difficulty has been the fact that so much cash was passed around ZZZZ Best and affiliated companies, prosecutors said.

“Given the clever way in which the use of money was disguised, it may very well be impossible to ever know if there is a large stash of money hidden away someplace,” Assistant U.S. Atty. James R. Asperger said.

Findings of the separate Los Angeles police investigation, meanwhile, are now in the hands of Deputy Dist. Atty. David Conn, who said he will decide what--if any--charges are warranted.

More Difficult

One factor making part of the case more difficult, one investigator said, was the acquittal in August of 21 reputed members of the Lucchese crime family in Newark, N.J. The prosecution was supposed to lay some of the groundwork for Gates’ drug trafficking allegations.

Already under way, however, is one official proceeding involving a business that was named by Gates as an organized crime front. Hearings began last month on the state Department of Alcoholic Beverage Control’s efforts to revoke the liquor license of Splash, a Malibu restaurant.

Much as Gates did last year, the ABC alleges that the restaurant has hidden owners with criminal records, including Rind and Schulman.

The restaurant was mentioned briefly at Minkow’s trial when a woman who worked as a financial officer in New York testified that Minkow took her there for a romantic dinner while seeking a $2-million loan.

Schulman has not been available for comment.

As for Rind, his attorney said his client has cooperated with investigators. “We have been honest and forthright,” Blatt said.

Rind, however, declined to testify at Minkow’s trial, citing his constitutional right against self-incrimination. He was subpoenaed by Minkow’s attorney, who was trying to show that Minkow took orders from others.

Rind’s attorney kept a close eye on the trial and noted near the end that the testimony had not substantiated many of Gates’ allegations.

“There never has been any money laundering or drug trafficking in the ZZZZ Best case,” Blatt said, adding that Gates’ investigators “made some disastrous mistakes.”

Shortly after Gates’ press conference, Rind predicted that he would never be convicted.

“They can investigate us now until the world comes to an end, and they wouldn’t come up with nothing,” he said.

Asked recently if Gates stands by his 17-month-old allegations, a spokesman, Cmdr. William Booth, said the statements are “still valid and the investigation is continuing.”

“No one said someone’s going to be arrested the next day,” he said. “(Gates) didn’t go out on a limb.”

KEY DATES IN THE ZZZZ BEST CASE:

July 6, 1987--After the resignation of company President Barry Minkow amid allegations of fraud, ZZZZ Best officials announce they will file for protection under Chapter 11 of Federal Bankruptcy Code.

July 8, 1987--Los Angeles Police Chief Daryl F. Gates announces that ZZZZ Best was part of a nationwide money-laundering operation with ties to organization crime and lists nine individuals as suspects in his department’s investigation.

Jan. 15, 1988--Federal prosecutors unseal the racketeering and fraud indictment of Minkow and 10 others. Minkow is the only one from Gates’ list charged in the federal case.

Jan. 27, 1988--LAPD organized crime detectives testify before a House of Representatives subcommittee, expanding on Gates’ allegations by saying that several organized crime figures made millions of dollars off ZZZZ Best.

Dec. 14, 1988--After a 3-month trial, a federal court jury convicts Minkow on 57 counts, which could lead to maximum prison sentence of 403 years. The results of the Los Angeles police investigation have been turned over to the district attorney’s office for possible prosecution.