EC2 comeback story ends with criminal comedown

Update Barry Minkow

We featured his story as no. 100 in "Extraordinary Comebacks 2" as follows:

100. Minkow, Barry
A precocious sixteen, Barry Minkow started ZZZZ Best Carpet
Cleaning. Next, he sold franchises, and then sold shares to the
public. By twenty, he was a Ferrari-driving CEO of a $300 million
company, lionized on Wall Street, hailed on Oprah.

But turns out it was all fake: false accounting statements, fake
contracts, fake. It all came crashing down, and investors lost
millions. Minkow, twenty-two, was convicted of 57 counts of
fraud. He traded his executive suite for a federal prison cell.
During one particularly bleak Thanksgiving behind bars at
Terminal Island, Los Angeles, he had what the Zen crowd calls a
“satori” – an enlightenment. He realized that if society took such
pains to lock him up, he was the problem. He took responsibility
for his business dealings, his crimes, his life. He decided to
change.

After seven years and four months in the slammer he got out and
earned master’s degrees in religion and divinity. He became a
preacher, leading some 1,400 members of a community Bible
church in San Diego.

And, in his mid-thirties, as energetically as he worked to commit
fraud in the past, now he worked just as hard to expose and end it.
It started with a friend’s request: what did he think of a certain
investment opportunity? Minkow went to work and found it to be
a $35 million fraud. He contacted the federal government, and
they took action.

More cases followed, the largest being against Financial Advisory
Consultants; as a result of Minkow’s work they were charged with
scamming some $300 million in retirement funds. Another was
something called the Nehemiah Fund, backed by Genesis Capital
Management and Genesis Alliance. This investment company
claimed to generate 100 percent returns to churches who deposit
more than $500,000 with them.

From these activities, Minkow founded the Fraud Discovery
Institute; he writes and speaks to various law enforcement agencies
on the subject. His work earned him an early release from
probation.

Minkow wrote about his experiences in Cleaning Up: One Man’s
Redemptive Journey Through the Seductive World of Corporate
Crime (2005). His agent is trying to gin up a film deal from it.
Minkow’s motivation? Fueled by his conviction and personal
experience that people can change, he says he wants everyone who
ever failed to know they can make a comeback.


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Now, he might be as widely known for letting people know they are always prone to a comedown as well, in his case, a rather public and spectacular one.

This, from the Tuesday, April 05, 2011 Wall Street Journal:

By ROBBIE WHELAN

MIAMI—Barry Minkow, a stock-fraud investigator who spent 10 years uncovering corporate misdeeds, on Wednesday entered a federal courthouse here and pleaded guilty to conspiracy to commit stock fraud, a charge that could put him in prison for five years.

It was an ignominious turn for Mr. Minkow, 45 years old, who became a stock-fraud investigator only after serving seven years in prison on a 1988 stock-fraud conviction for bilking investors out of tens of millions of dollars through a phony carpet-cleaning company called ZZZZ Best.

Mr. Minkow emerged from prison as a Christian pastor and launched his new career, arguing that it takes a fraudster to know one. He worked closely with the Federal Bureau of Investigation and the Securities and Exchange Commission to expose corporate misdeeds, including successfully unmasking that an executive at weight-loss company Herbalife Ltd. had lied about earning a business degree. The executive resigned.

Now Mr. Minkow is charged with the very crime he tried to expose. In court on Wednesday, he conceded that the information he published in 2009 about Miami home builder Lennar Corp. was "false and fabricated."

The guilty plea comes amid a broader push by regulators and prosecutors to investigate stock-market manipulation. The trial of hedge-fund manager Raj Rajaratnam, the biggest alleged insider-trading trial in a decade, is well under way.

Mr. Minkow has declined repeated requests for comment, but his lawyer says he crossed the line and acted recklessly out of zeal for a client's cause against Lennar.

"Sometimes you begin to believe your own press, that you're a genius and you can do no wrong," said Alvin Entin, Mr. Minkow's attorney.

Lennar viewed Mr. Minkow as a short seller who was trying to extort money from the company. The court agreed and found that the report he produced, which along with several follow-up reports caused the company's stock to lose more than $583 million in market value in just three trading days, was clearly false.

An aggressive adversary, Lennar hired famed Los Angeles defense attorney Daniel Petrocelli, a partner at O'Melveny & Myers. Stuart Miller, Lennar's chief executive, said he was particularly offended by the report, which compared Lennar to Bernard Madoff's Ponzi scheme. The company, founded in 1954, was headed for four decades by Mr. Miller's father.

"All individuals responsible for this illegal conduct must be brought to justice," Mr. Petrocelli said, speaking for Lennar.

Mr. Minkow's tangle with Lennar began in late 2008 when he met San Diego-based real-estate developer Nicolas Marsch III.

Lennar CEO Stuart Miller said he was offended by Barry Minkow's report, which compared Lennar to Bernard Madoff's Ponzi scheme.

In Wednesday's ruling in Miami, the court found that an individual described as Conspirator A—who has been identified by Mr. Minkow's attorneys as Mr. Marsch—had "decided to employ extortionate means to induce Lennar Corp. to pay the demanded sum of money."

Mr. Marsch hasn't been charged with a crime, and his attorneys said he hasn't been contacted by federal investigators.

In two lawsuits, Mr. Marsch had accused Lennar of cutting him out of a real-estate partnership and separately misappropriating more than $200 million from a joint venture they had formed to build a high-end residential community, the Bridges at Rancho Santa Fe. He would eventually lose the first case, which is being appealed; the other awaits legal action in California state court.

But by mid-2008, Mr. Marsch said in an interview, he was becoming desperate. Facing steep legal bills, he sent a letter to Lennar's board of directors, accusing the company of "disgraceful" conduct and warning that he was prepared to air "dirty little secrets" about Lennar executives, Mr. Marsch says. Lennar sued Mr. Marsch for defamation.

"By that time I was so frustrated I'd do just about anything to get these guys to stop calling me names," Mr. Marsch said in an interview last week, referring to his ongoing legal battle with Lennar which he said frustrated him. "I eventually just blew up and wrote a letter. But it wasn't to extort."

But in late 2008, after failing to settle with Lennar, Mr. Marsch hired Mr. Minkow to investigate the company. In a Nov. 30, 2008, email to his client, Mr. Minkow laid out a plan to compile damaging information about Lennar that would have "a devastating impact on their stock price." The goal, Mr. Minkow wrote, was to "rightfully villainize Lennar" to push Lennar into a lucrative settlement with Mr. Marsch.

The report, titled "Top Ten Red Flags for Fraud at Lennar Corporation," was released on the Internet on Jan. 9, 2009. In it, Mr. Minkow wrote that Lennar steals money from its joint-venture partners and misrepresents its true financial condition. The company has refuted each of the 10 claims, and judges have found the contents of the report to be false.

According to email messages between Mr. Marsch, Mr. Minkow, and attorneys for both sides, reviewed by The Wall Street Journal, Mr. Marsch's lawyers repeatedly offered to meet with Lennar's lawyers to settle. One message, dated Jan. 18, 2009, from Mr. Marsch's lawyer to Mr. Petrocelli, offered to reverse the damage done by Mr. Minkow's report, noting that positive statements Mr. Minkow made about companies he formerly criticized have resulted in "substantial recoveries." His former lawyer, who wrote the message, declined to comment.

Mr. Marsch said that he still believes that the allegations in Mr. Minkow's report are true; he disputes that he hired Mr. Minkow to pressure Lennar into a settlement.

"I'm not in the extortion business," Mr. Marsch said. "I'm in the real-estate-development business."