Web outlet is sold short

Barry Minkow and Bill Lobdell said they would pay for their work sniffing out financial fraud by betting against the stocks of the companies they reported on. If they proved improprieties, they would profit by holding short positions in the companies — allowing them to make money when stock prices declined.

But the short-sell-to-success model collapsed just a few months after their website, iBusinessReporting.com, started last February. The unlikely duo has not posted a new story since May. And the website quietly closed down in recent weeks, although the partners pledge to keep their work going in another form.

Now Minkow, senior pastor at a San Diego church, has an even bigger fight on his hands — struggling to preserve an image he has built over more than a decade as the con man redeemed by rooting out his own kind. A libel case in a Florida court and a blistering L.A. Weekly profile earlier this month have raised doubts about his credibility and about some of the allegations he has made against several companies.

In a February column, after iBusinessReporting launched, I wondered how the founders would avoid the appearance, or reality, of a conflict of interest as they melded journalism with a profit motive.

We live in a time of experimentation and reinvention in journalism, and there’s reason to admire anyone looking for new ways to pay for investigative journalism. Yet some of those innovators, including Minkow and Lobdell, have been too ready to throw out the best habits, such as business conflict restrictions, of the “old” journalism. The iBizReporting boys disagreed with that notion, saying they were truer to the audience because they were more transparent about their motivations. They contrasted that to reporters who they said kept too many secrets, particularly about their political beliefs.

Tackling that subject would take more space than we have here, but suffice it to say that business entanglements can be the most corrupting for a reason. An ideological bias might be suppressed (I’ve seen many reporters trash candidates of their own political party), but a profit motive is forever. That’s why Times Business reporters are not allowed to invest in stocks of companies they cover.

Minkow and Lobdell told me this week that the disappearance of iBusinessReporting is not the end. They said that they will continue to investigate companies they suspect through Minkow’s Fraud Discovery Institute “as a public service” but no longer will bet against the stocks, which Lobdell admitted had turned out to be an “incredibly tricky” way to make money.

Former Times reporter Lobdell said that in addition to the Minkow partnership he has taken on freelance writing assignments. He recently began writing a weekly column for the Daily Pilot in Newport Beach, where he lives.

Most people would not have guessed at a Minkow-Lobdell partnership in the first place, at least based on their résumés.

Minkow sprang to national attention in the 1980s as the wunderkind founder of the ZZZZ Best carpet cleaning company. Oprah Winfrey and others touted him as a whiz, but authorities soon exposed his business as a Ponzi scheme. He did seven years in prison for defrauding investors out of more than $26 million.

Lobdell spent his career in the news business and gained acclaim at The Times for reporting on crooked ministers and sexual abuse in the Catholic Church.

The ex-con became pastor at San Diego Community Bible Church. Lobdell said Minkow “wowed” him when the two met while the journalist was covering religion. Lobdell decided not to write about him, however, because he wanted to avoid a conflict — thinking they one day might work together.

Operating on the “To Catch a Thief” model, Minkow helped the FBI and other authorities to expose scam artists. His Fraud Discovery Institute publicized his work. The plan called for Lobdell to join his team and provide the operation with a higher profile. The duo argued there should be no fear that they would be motivated to trash stocks for financial gain because their stock ownership positions and motivations would be crystal clear to the public.

“It’s one and done for me,” Minkow liked to say, meaning that his criminal past gave him no latitude to mislead the public again. Besides, he told me this week: “You don’t impact markets unless you have the real information.”

But in the L.A. Weekly report by Beth Barrett, that notion is challenged by some of the companies Minkow targeted. The lengthy piece centered on the onetime con man’s fight with Lennar Corp., one of the nation’s largest home builders.

In January 2009, Minkow accused Lennar and its employees of multiple acts of malfeasance, from a supposedly hinky home mortgage for one of its executives to mistreatment of its development partners. The report, published on the Fraud Discovery Institute website, drove the company’s stock down 20%.

Lennar fired back with a libel and extortion lawsuit. That case, in Miami, has not been going well for Minkow. His medical excuse for missing a hearing looked suspect under cross-examination. And he had to acknowledge that he had made a short-sale of Lennar stock, something he had not disclosed previously and initially denied.

At one point in the pretrial proceedings, Judge Gill Freeman declared: “My main issue is that Mr. Minkow acts as judge and jury and decides what we should and shouldn’t know, and he will lie, plain and simple.”

When I asked Minkow about that statement this week, he said: “You know, based on what she has seen of me, I don’t begrudge that.” But he added that he has not yet had a chance to present his case and that he expects to win over the judge and prevail in the case.

I don’t pretend to have come anywhere close to the bottom of Minkow’s dispute with the various companies, including the homebuilder. But his chance of prevailing looked shakier last month when businessman Nicolas Marsch III, who was Minkow’s star witness against Lennar, had his own case against the homebuilder thrown out. The California judge in that case doubted Marsch’s credibility.

Minkow said he had to shut down the iBusinessReporting site “because we cannot afford a business model where we have to go up against well-funded, deep-pocketed public companies that will sue you for reporting on them.” (They won’t be the first, or last, small online startup sorry it can’t afford the kind of legal help that traditional news organizations enjoy.)

Minkow said the new controversies should not take away from the cases in which authorities praised his work. As one example, he cited the Securities and Exchange Commission’s indictment last year of an alleged Ponzi scheme operator named Dean Gross. Minkow posed as a potential investor and wore a wire to help make that case.

Lobdell e-mailed me that he thought that it remained a “valid, though not ideal, model” for paying for business reporting. He also said that the public should still trust business advice coming from Barry Minkow.

Dropping the short-selling is a start. But investors who are tempted to heed the ex-con’s advice should watch for the outcome of the Lennar libel case and do their own homework. This redemption story doesn’t yet have an ending.

james.rainey@latimes.com