Ex-Con Now Walks a Financial Tightrope

Cary Spivak – Milwaukee Journal Sentinel

The latest business plan at the lofty-sounding Fraud Discovery Institute seems invincible: Gather negative information about a company, place a bet that the price will decline by selling its stock short, and then publish the negative information online.

When the stock price plummets, you cash in.

Implemented by Barry Minkow, a former con man who pulled off one of the best-known stock market scams of the 1980s, the plan appears to be working wonderfully – Minkow says he’s turning six-figure profits on his trades. And while the strategy makes ethicists gasp and infuriates the companies that are its target, it appears to be legal. Minkow offers no apologies. One federal lawsuit brought by a company his group investigated was dropped when he agreed to stop investigating and trading in the company. And he notes that the investigations his institute does are factual, and that his trading is legal. He also says that others – most notably Mark Cuban, billionaire owner of the Dallas Mavericks – were doing it first.

“Everybody’s in it for money,” Minkow said in a telephone interview. “You’re paid. Everybody’s got a profit motive. It’s just that short sellers are the only ones one blamed for it.”

At age 22, Minkow went from whiz kid to convict in 1988 for running a multimillion-dollar Ponzi scheme through his ZZZZ Best carpet cleaning company in California. Convicted on 57 counts of fraud in a swindle that prosecutors said cost victims more than $100 million, he served seven years in federal prison and was ordered to pay $26 million restitution.

Minkow said his profit motive today is righteous because he uses the money to find more fraud by funding the institute, which often hires experts and private investigators.

“I think people look at this and say, ‘Wow, your past is your past,’?” said Minkow. “You were in bed with the mob. ?.?.?.?You were in jail, you came out, you redeemed yourself, you uncover fraud.”

Today, the California-based Minkow has linked up with Tracy Coenen, an often-quoted Milwaukee accountant who specializes in fraud investigations. And this year he hired William Lobdell, a former Los Angeles Times investigative reporter.

Milwaukee attorney Mark Cameli, a former state and federal prosecutor, and other securities experts agreed that it appears Minkow is breaking no laws.

“It may not pass the sniff test, but that’s an intuitive response,” Cameli said. “Unfortunately the laws are not always intuitive.”

Coenen said she knew three years ago when she linked up with Minkow that she was putting her reputation, and that of her one-person company, Sequence Inc., at risk. She is one of the targets of a $270 million lawsuit filed in February against Minkow, Lobdell and others by Medifast Inc., which the institute investigated.

“There’s certainly going to be a public perception about me doing business with an ex-con,” said Coenen, 37. “My deal was I’m not going to do anything dishonest or unethical.”

To the cleaners

Minkow burst onto the financial scene more than 20 years ago when, as a teenager, he started ZZZZ Best carpet cleaning in his parents’ garage. He took the company public about three years later, and at one point his holdings were worth $100 million.

But he jumped from the business page to the front page when investigators learned that millions in revenue the company claimed to be bringing in through huge insurance jobs didn’t exist. ZZZZ Best went as far as paying off security guards in an office building so they could show auditors work the company had allegedly done in the building – when, in fact, it had no contract and did no work at the site.

At his sentencing, Minkow apologized to investors and expressed remorse, though U.S. District Judge Dickran Tevrizian didn’t buy it.

“You’re dangerous because you have this charisma, this gift of gab, this ability to communicate, but you have no conscience,” the judge said.

Today, the 44-year-old Minkow is a minister at a San Diego church. He says his reformation began while he was doing time. In addition to becoming a minister after his 1995 release, Minkow also became a self-proclaimed fraud-buster, frequently tipping off federal investigators and media outlets about Ponzi schemes and fraudulent financial claims by public or private companies.

According to Coenen, investigations by the institute have uncovered about $1.8 billion in fraud. Minkow showed a reporter letters written by the Los Angeles office of the FBI and by National Football League security thanking him for help in busting various fraud schemes. The Journal Sentinel confirmed the authenticity of both letters.

In a 2005 “60 Minutes” story about Minkow, Tevrizian was quoted praised Minkow. “He has done some good things,” the judge said. “He’s uncovered several hundred of million dollars’ worth of frauds.”

At that time, Minkow investigated only private companies and investment scams. In 2007, he expanded to public companies, and he began shorting the stocks of some of some of the firms he investigated.
Coenen joins up

That’s when a consultant introduced Coenen to Minkow.

“I’ve done more projects with him than any other client I’ve had,” said Coenen, who said she is paid between $500 and $2,500 per assignment.

She said she reviews regulatory filings and financial statements of companies being investigated by Minkow, helps him put together reports and frequently posts positive information about Minkow and negative information about the companies the institute investigates on her Web site, the FraudFiles blog.

Coenen admits she feels a little queasy about Minkow’s stock market activities.

“It tends to raise questions about our work,” Coenen said.

She said she personally does not short the stocks of companies she investigates for Minkow, though he has invited her to do so.

“I just told him I’d rather not,” Coenen said. “I’d rather maintain more of an appearance of independence.”

To short a stock, an investor borrows stock and then sells it; if the price declines during the period of the loan, the investor buys it at the lower price, returns the borrowed shares and pockets the difference. If the stock price rises, however, the investor must buy the shares at the higher price – and loses money.

Lobdell, the former L.A. Times reporter hired by Minkow, edits the fraud institute’s iBusinessReporting. Lobdell notes on that Web site’s home page that his site is funded by the institute, which gets its money “in part, by short selling the stock of companies that it thoroughly investigates and deems fraudulent and/or lacking a sustainable business model.”

Lobdell said he personally shorted the stock of InterOil Corp., a Houston company that iBusinessReporting has examined. InterOil said in a statement that Lobdell’s reports, including one about a bankruptcy case involving a company controlled by Inter-Oil’s CEO, “was timed to benefit recent short selling activities.”

Lobdell said he shorted the stock in part because of the criticism he’s received since going to work for Minkow. “I’m getting hammered anyway,” Lobdell said. “I don’t think it makes any difference ?.?.?.?whether it’s Barry shorting the stock and paying me or me just doing it myself.”

Bob Steele, an expert on media ethics now at DePauw University in Indiana, was stunned that an editor on a reporting Web site would not see the ethical issue.

Lobdell is a “person with a financial stake in the company, so it raises real questions about fairness,” Steele said. “I’m astonished that he would not see it as a problem.”

Minkow argues it is unfair to criticize him or Lobdell, since executives at companies that post fraudulent numbers are “longing” the stock – that is they hope to enrich themselves by seeing the value of their holdings and options increase.

“The only difference between the scenarios is what we are doing is true (our information is accurate) while the information provided by a company official is not true despite them profiting on the way up,” he said in an e-mail.

Profiting from knowledge of news that hasn’t yet been published recalls the case of R. Foster Winans, the former Wall Street Journal reporter who was convicted on securities fraud and insider trading charges in 1985. Winans was sentenced to 18 months for leaking information about articles that were to appear in his “Heard on the Street” column to a group of stock traders.

The difference between the two, according to former prosecutor Cameli and others, is that Winans took information that belonged to the Wall Street Journal, while Minkow owns the institute and the information he posts.

But there is still a common thread, Cameli said.

“In both cases, their conduct is having an effect on the value of the stocks,” Cameli said. “They’re both moving the numbers.”

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