A man once hailed as a business prodigy went from success to disgrace before finally putting his life in order. In Los Angeles, Mike O'Sullivan spoke with Barry Minkow, who uses his experience as a former thief and con man to detect business fraud.
He was riding high in the 1980s, celebrated by The Los Angeles Times and magazines like Newsweek and Forbes. He appeared on national television and lectured at business schools. At age 16, Barry Minkow founded a company called ZZZZ Best Carpet Cleaning. He took the company public when he was only 20, raising $280 million on Wall Street.
The court later determined that he cheated his investors out of $26 million as he tried to keep a house of cards from collapsing. He needed constant income to pay 1,400 employees and make payments on his Ferrari and his mansion. But his financial statements were based on fraudulent figures.
He says, at first, he did not intend to cheat anyone, but this is how it happened.
"You get presented with economic pressure: I've got to meet payroll, earnings are down," he recalls. "White-collar crime, unlike say bank robbery, is different in that if I rob a bank, there's a high likelihood that I'm going to get caught right afterward. In white-collar crime, the consequences don't immediately follow the action, and it reinforces the behavior. We use similar rationalizations: nobody's going to get hurt, we're going to pay it back anyway, and the rest is history."
For Mr. Minkow, that history includes 7.5 years in a federal prison at Terminal Island, near the port of Los Angeles. At times, he was confined to his tiny concrete cell, getting food through a trap door. His only company was his roommate, a convicted bank robber.
Mr. Minkow says his time in that environment changed him for the better. "It's all cement. There are no windows for you to look out," he says. "They had this wire mesh covering the window. It's filled with dust and rust. I'm sitting in this cell, looking at a window I can't look out of, looking at a hole in the door, looking at a toilet, looking at a man next to me, and I thought to myself, you know what, maybe it's me. Maybe it's not my upbringing, maybe it's nobody else's fault. Maybe I'm in this predicament because there's something wrong with Barry Minkow, and that's when life began to change."
He became an active Christian, and later studied for the ministry, becoming a pastor in San Diego.
"We have a huge, as you can imagine, prison outreach," he said. "We try to do a lot of work in our community, and just really love it. Now the good thing about that is, I don't handle the money at the church, so everything's going real well over there."
He also lectures law enforcement officers on business fraud. He conducts his own fraud probes through a San Diego consulting firm called the Fraud Discovery Institute. Several probes have led to investigations by law enforcement.
Recent corporate scandals have shaken the business community, and Mr. Minkow is in demand as an investigator and speaker. He teaches accounting firms how to detect fraudulent statements. He says hard-to-believe claims about corporate earnings are one clue. He also looks for inadequate oversight of the chief executive.
"I look for a guy who's accountable to no one, who's a one man show," he says. "I look for someone's who doesn't have a good audit committee, or who doesn't have a good board of directors. He can bypass internal controls that are instituted in the company without any problem at all. That's the guy I fear the most, is that person that isn't accountable to anybody."
Mr. Minkow is also working on behalf of insurance firms, that may be liable for losses caused by corporate fraud. He lectures executives on behalf of their insurers, usually dressed in an orange prison jump suit.
"They're like, Barry, here's what we want you to do," he says. "Go to the CFO and CEO of this company that we're about to insure and scare the hell out of them so they don't commit fraud. Tell them the real consequences of spending eight Super Bowls in prison. Increase their perception of prosecution."
The former con man says cheating and lying may seem to work, but eventually, things unravel. For Mr. Minkow, it started to come apart when investigators noted his links to the Genovese mafia family, which had helped him with loans to build his business empire. Investigators uncovered a string of phantom accounts, and discovered more money juggling than carpet cleaning.
The former convict warns that those who embark on white-collar crime choose a destination, and under strict new U.S. laws on corporate practices, it is usually federal prison.