Barry Minkow

2480 Words May 11th, 2012 10 Pages
Barry Minkow – Misrepresentation and Ponzi in 1987
Establishment of ZZZZ Best Company
When he was a sophomore in high school, Barry Minkow founded a carpet cleaning company - ZZZZ Best Company in his parents’ garage. At that time, the carpet cleaning industry has few entry barriers and all Minkow needed was a small amount of start-up capital. However, he soon found out that his firm was actually tough to survive in the industry as the ease of entry means fierce competition. The young man encountered a series of trouble: bad checks, complaints from customers, urge for payment from suppliers and finally the shortage of working capital. Not surprisingly, the bank refused to loan money to his low profit margin company.
Minkow would like to try
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Minkow became a billionaire and an American success story. By February 1987, on paper, the company — which Minkow claimed had about 1,300 employees in some two dozen offices — was worth nearly 300 million dollars. Minkow's personal worth reportedly topped $100 million. He began to live a luxury life including driving a red Ferrari with a "ZZZZ BEST" license plate and appearing on Oprah.
Minkow's business had been clearly a Ponzi scheme. He promised investors highly returns on the insurance restorations business, but in reality, investors were being repaid with money from new investors. Some of the loans were negotiated at outrageous rates of interest so that they were obtained fast enough to pay off earlier loans. ZZZZ Best did operate its carpet-cleaning business which differed itself from a typical Ponzi and the carpet-cleaning division won high marks for its quality.iii However, its insurance restoration division was totally a phony department and little real business existed.
Fooling the auditors
As the company went public, ZZZZ Best was subjected to the audit of its financial statement. George Greenspan, the performer of the audit, reviewed the copies of the insurance restoration jobs and then confirmed its existence in the report to SEC. He also calculated various kinds of ratios of the company and concluded that they were in line with the industry averages. However,