Since then, news has included the indictment of Mark Cuban for insider trading in a case that is somewhat reminiscent of Martha Stewart's case. According to the SEC, the billionaire entrepreneur asked his broker to sell all his shares of Mamma.com after the company's CEO confidentially told him of an impending stock offering that would dilute the value of all existing shares. By selling before the information became public, Cuban is said to have sidestepped losses of more than $750,000. Cuban insists, though, that no agreement existed to keep the information confidential.
And then there was the indictment in Texas of Vice President Dick Cheney, along with former U.S. Attorney General Alberto Gonzales and others. There seems to be a conflict of interest between the vice president's influence on the federal agency that oversees federal immigration detention centers and his substantial holdings in Vanguard Group, which invests in private prison companies. But does the lame-duck county district attorney, who was a no-show in court, have the authority to bring charges against federal officials with regard to federally run institutions?
This post is part of a feature in which he wonder whatever happened to some notorious financial felons. See all 17.
Barry Minkow was one of the youngest people to ever take a company public in the United States. He is remembered not for that feat, but for the massive financial fraud he committed via his company ZZZZ Best Co., Inc. The stock of the carpet cleaning company once had a value of $300 million, but it all came crashing down in the late 1980s.
Minkow and a few associates successfully fooled financial statement auditors into believing the company had millions of dollars of revenue each year. In reality, the revenues were 86% below what they were reported to be. Barry took over $20 million in loans from 15 banks and several individuals in furtherance of his fraud.
He was sentenced to 25 years in prison while still in his early twenties, and ultimately spent more than seven years in prison, all of it in maximum or medium security prisons. Minkow's sentence also included $26 million in restitution. While in prison, Minkow became a Christian and devoted his life to ministry.
If you're interested in learning about the psychology and methodology of fraud -- and every investor should be -- there are two excellent videos now available on YouTube. I don't know the date on them, or what they were made for, but they're definitely worth watching.
The first is an interview with Barry Minkow, who was in federal prison at the time for the Zzzz Best fraud. The second features former Crazy Eddie CFO, Sam E. Antar.
When I listen to these former crooks explain what they did, it all sounds so easy. While their crimes occurred back in the 1980s, I wonder how much has changed.
Shares of USANA Health Sciences (NASDAQ: USNA) rose more than 7% on Monday and is up again today after the company announced that it had settled its lawsuit against Barry Minkow and his Fraud Discovery Institute, which had accused them of making false allegations about the company and working in concert with others to manipulate its stock and profit from downward movement.
In the press release, the company announced that "USANA has agreed to withdraw its lawsuit and Mr. Minkow and the FDI have agreed that they will not trade in USANA's stock in the future, will remove information regarding USANA within their control from the internet, and will not publish any further statements about USANA."
Here's what's so messed up about this: USANA had accused Minkow of defamation but, in March, U.S. District Judge Tena Campbell tossed four claims against him, leaving only the allegation of a conspiracy to drive down the stock.
In other words, USANA was unable to demonstrate in court that any of Minkow's allegations were untrue -- and never really rebutted any of them in its PR effort to tar and feather him. But now Minkow will stop telling the public what he believes about USANA. The real loser here is anyone looking to hear another side to the USANA story: potential investors and potential distributors in the company's multi-level marketing business.
Usana Health Sciences (NASDAQ: USNA) announced yesterday (subscription required) that the Special Committee of its Board of Directors had unanimously determined that founder, chairman, and CEO Myron Wentz's offer to take the company private at $26 per share undervalued the company, and recommended that shareholders reject it. Mr. Wentz declined to sweeten the offer, and so the deal appears to be dead in the water.
Here's where it gets kind of interesting: back in 2002, Wentz made an offer to take Usana private but then rescinded it, saying that "To allow our shareholders to benefit from any increased value, I have decided to terminate my current effort to acquire Usana's operating assets on the terms previously announced."
A cynic could suggest that Wentz made this latest buyout offer anticipating that it would be rejected as inadequate, given that it was for just over half the stock's 52-week high. Some analysts predicted when the offer was made that it was likely to be rejected. So what did Usana get out of the offer? Since ex-con turned short-selling gumshoe Barry Minkow began accusing the company of fraud last year, the company's stock has fallen precipitously and short interest has soared to more than 50% of the float. The announcement of Wentz's offer ran the stock up by about 20%, probably shaking out a good number of short sellers -- the offer may have helped precipitate a short squeeze, even if that wasn't the intent.
In the mid-1980s, Barry Minkow was the toast of Wall Street. His Zzzz Best Carpet Cleaning company, which he started in his garage at age 16, was an overnight success and, by 19, he was a millionaire. Investors flocked to buy stock in the fast-growing company that was earning millions from lucrative restoration projects.
There was just one problem: the restoration projects weren't real, the company was little more than an elaborate Ponzi scheme, and Minkow wasn't making his money cleaning carpets. He was laundering money for the mob. After a Los Angeles Times reporter broke the story on Minkow's fraud, the scheme unraveled and Zzzz Best filed for bankruptcy. Minkow was charged with pretty much every white-collar crime known to man, and he spent seven and a half years in federal prison.
But that's only the beginning of the Barry Minkow story: Minkow attended college from his cell, was paroled early at the urging of the judge who sentenced him, and became a pastor in San Diego -- not far from the scene of his crimes. Using the skills he learned committing fraud, Minkow set about uncovering it and, to date, has helped the FBI and other government agencies bust up more than $1 billion in fraudulent investment schemes: an amount far larger than the crime Minkow perpetrated.
Most recently, Minkow has gained notoriety for his accusations of fraud at leading multilevel marketing companies Herbalife (NYSE: HLF) and Usana Health Sciences (NASDAQ: USNA).
Let us know in the comments what you remember about Zzzz Best. And be sure to check out other Companies That Have Vanished.
Ex-con turned fraud fighter Barry Minkow has released a press release raising questions about Herbalife (NYSE: HLF). Calling the company a "financial crime in progress," he wrote about the "Top Ten Red Flags of Fraud at Herbalife."
Herbalife describes itself as "a global network marketing company that sells weight-management, nutrition, and personal care products intended to support a healthy lifestyle," but Minkow believes the company is a fraud.
Minkow writes about a large amount of insider selling combined with aggressive debt-financed share repurchases and indications that the company's business model is not sustainable. Minkow argues that the company has saturated many of its existing markets and that the stringent multi-level marketing laws in China will make expansion there difficult. In the report, he writes that "Herbalife's expansion has reached more than 80 percent of the world's population as the entire continent of Africa, for the most part, is not in the market for weight loss products," but the reality is that Africa is actually facing an extremely serious obesity epidemic. Whether Herbalife's premium-priced products are a viable solution there is a separate question.
The New York Times headline blares "French Trader Is Remembered as Mr. Average," and goes on to describe a mid-level employee with nothing in his background to suggest that he would become possibly the biggest rogue trader in the history of the world. The Times reported that:
He failed in a bid for town council in his 20s; he never rose higher than a green belt, a mid-level rank, after years of judo training -- because of his bad knees; and he attended an average college where he earned respectable but unremarkable grades.
It's anticlimactic in a way. We expect crooks and fraudsters to fit a certain image: brash, arrogant, reckless, charismatic. But few people know fraud better than Barry Minkow; in his teens and early 20s he perpetrated the infamous Zzzz Best fraud, spent seven and a half years in prison, and has since helped regulators uncover over a billion in fraud -- and he wouldn't be surprised.
With the housing market in turmoil and numerous attorney generals taking a hard look at the sales tactics and unethical conduct of numerous mortgage salesman, it's probably a good time to look at one of the greatest real estate movies of all time: Glengarry GlenRoss.
With a cast including Al Pacino, Jack Lemmon, Kevin Spacey, Alec Baldwin, and a script by renowned playwright David Mamet, it's hard to go wrong. Glengarry GlenRoss focuses on the lives of four down-on-their-luck real estate salesmen whose lives are transformed when a slick motivator from downtown proposes a sales contest: The one with the most sales at the end of the week will receive a brand new Cadillac. The number two man will receive a set of knives, and the rest will be fired immediately.
What ensues is, of course, chaos: The fierce competition and desperation lead to moral compromise. I can't help but wonder how different the atmosphere at Glengarry was from those of the subprime mortgage shops that hired poorly trained salesman to sell toxic mortgages on commission. We are currently living through the consequences of the rampant greed -- and frequently, fraud -- that ensued.
In 2003, ex-con turned fraud buster Barry Minkow delivered a report to regulators suggesting that MX Factors LLC was engaging in a $39 million fraud. Later that year, MX Factors collapsed when the California Department of Corporations shut it down on the ground that it was operating an illegal Ponzi scheme -- paying off earlier investors with money acquired from later investors.
According (subscription required) to The Wall Street Journal, Mr. Minkow more recently helped law enforcement find mastermind Richard Harkliss, who had fled to Mexico. He was arrested in Arizona while visiting relatives.
The report Minkow prepared on MX Factors is not unlike the one he put together on Usana Health Sciences (NASDAQ: USNA), the multi-level marketing company he has accused of operating an illicit pyramid scheme.
Here's an interesting quote from a recent Forbes piece on Usana: "Why would anybody take this guy seriously?" Usana spokesman Joseph Poulos said Tuesday. "What is he an expert on? He isn't a forensic accountant. He just committed one very large crime once."
MX Factors is the latest in a string of more than $1 billion in fraud uncovered by Minkow, and that doesn't even include Usana Health Sciences (although you could make a strong case it should).
Rather than rebuking claims made in Minkow's report, Usana has chosen to go the ad hominem route -- focusing on Minkow's criminal past. One can only hope that they will have the fairness to also remind investors of Minkow's stellar track record as a fraud investigator. I somehow doubt they will.
In addition to numerous misrepresentations about its own company, the management at Usana Health Sciences (NASDAQ: USNA) has also taken to slandering its chief critic, con-man turned gumshoe Barry Minkow. Now Minkow is fighting back.
In a letter to Usana President David Wentz and CFO Gil Fuller also posted on his Fraud Discovery Institute's website, Minkow writes:
I have struggled over the last several weeks to remain silent in response to the multiple slanderous accusations made by your company in both your SEC filings and public statements. You and your paid supporters have made one false accusation after another, including your company's statement in the recent Forbes article: "We believe everything he [Barry Minkow] says to be false," Usana spokesman Joseph Poulos told Forbes.com. "He's a liar; he's a criminal -- he can't be trusted." Now Mr. Poulos said this on the record to a national magazine knowing it not to be true because even he believes that everything I have said is not a lie or he would have prevented (just to give one example but be assured these examples could be readily multiplied) Mr. Waitley from resigning from the board of directors as our reporting of the non existence of his Masters degree from the Naval Academy was dead on (again just to provide one example).
Of course, anyone following the Usana story knows that Mr. Poulos is, at best, completely out of touch with reality. I recently did a post comparing him to Baghdad Bob. Minkow also shows the first real evidence of accounting fraud at the Salt Lake City multilevel marketing company. Read the letter to see that.
Those of you who have been reading BloggingStocks regularly know that I'm a frequent critic of USANA Health Sciences Inc. (NASDAQ: USNA), the multi-level marketing company that has been under attack by critics led by ex-con turned fraud investigator Barry Minkow.
Now Forbes has joined the chorus of critics. With a story that has sent the stock down more than 7% today, Forbes raises questions about the viability and legality of Usana's business model. The author, Evelyn Rusli, reiterates New Zealand's National Business Review'sreport that the company is being investigated by the FBI.
Nothing much seems to have changed. Usana still has no idea why their auditor left but CFO Gil Fuller has become philosophical: "Life is too short to dwell too much on it."
In addition, the piece states that Usana may be in breach of the covenants on its credit facilities as a result of its extremely aggressive share buyback program.
Despite the fact that virtually all of Minkow's allegations have turned out to be true -- and the fact that Usana hasn't really rebuked a single one specifically -- the company keeps up the personal attacks and diversions: "We believe everything he says to be false," Usana spokesman Joseph Poulos told Forbes.com. "He's a liar; he's a criminal -- he can't be trusted."
Funny. I was just thinking the same thing about Usana.
Remember Baghdad Bob the Iraqi Information Minister who insisted the US was nowhere near Baghdad, even as the media blared images of the invasion?
I'm not sure what happened to Muhammad Saeed al-Sahhaf (AKA Baghdad Bob) after the fall of Saddam Hussein's regime, but a recent AP article gives me an idea: Maybe he's signed on with USANA Health Sciences (NASDAQ: USNA) as a company spokesman.
Yesterday, USANA's auditing firm resigned, but the company basically insisted that it did so for no reason. Until recently, USANA has said relatively little regarding private investigator Barry Minkow's allegations of wrongdoing at the company, but that's been changing lately. Spokesman Joseph Poulos (Salt Lake Sam?) has stood up to defend his employer. The results have been, well... He seems about as disconnected from reality as Baghdad Bob was. Take a look at some of his most memorable quotes from the past few days:
"Why would anybody take this guy seriously? What is he an expert on? He isn't a forensic accountant. He just committed one very large crime once."
After the close of the market yesterday, San Diego class-action lawyer Alexander M. Schack said he filed a lawsuit in California state court on behalf of hundreds of low-level distributors in the state. The suit is also seeking an injunction preventing the multi-level marketing company from recruiting in the state.
Needless to say, California is a huge market for USANA and, at the very least, the publicity could hurt the company's recruiting efforts there.
According to Robert FitzPatrick of Pyramid Scheme Alert, "The essence of the Usana scheme is the chain letter. Participants pay up to $1,000 to participate in the "binary compensation" plan. They buy the bogus "business centers" (pyramid positions). They then must continue to buy over $100 of goods (priced in some cases 20 times more than comparable products sold in retail stores) every month. Of each dollar that the participant pays in, 40% goes to the upline recruiters. Of that amount, 70% goes to the top 3% of the pyramid chain. Virtually no one retails the products at retail price. The prime consumers of Usana are just the "Associates" (pyramid participants.) Thus $28 of each hundred spent by the new recruits goes directly to schemers at the top of the pyramid. The bottom 97% are a continuously churning group. 2/3rds of them quit within a year. None makes a profit unless they can climb into the 3% by recruiting other victims."
USANA responded by saying that the suit was without merit and "relies on false claims made by a stock fraud felon who stands to profit from a decline in USANA's stock price."
If USANA wants to stop the bleeding, it will need to come up with a better defense. Barry Minkow, who the company's statement refers to, has earned a strong reputation for uncovering fraud and deception and was mentioned in Newsday a few days ago for his work in shutting down a $16 million ponzi scheme in New York.
Authorities have commended Minkow because he has a track record of providing facts that can be used to shut down financial crimes in progress. If USANA wants people to believe it is something other than that, it will need to provide a rebuttal to the allegations, something that is hasn't done so far.
In just the past few months, Usana Health Sciences (NASDAQ: USNA) has had more scandals surrounding biographical errors than any company or organization that I can think of. Take a look:
Denis Waitley, a director at the company, decided not to stand for re-election after investigator Barry Minkow uncovered that the PhD listed in his biography came from a long-defunct diploma mill. He also does not possess a Master's degree, although one was reported in numerous SEC filings.
Dr. Timothy Wood, Vice President of Research and Development at the company, claimed to have a PhD in biology, but it's actually in forestry, which seems less relevant at a company that makes nutritional supplements.
Myron Wentz, the company's founder and Chairman, renounced his U.S. citizenship to "move" to the tax haven of Lichtenstein.
And now, according to the Wall Street Journal, (subscription required), Dr. Ladd McNamara has left the company's medical advisory board after it was discovered that he no longer has a medical license. A Usana spokesman said that McNamara surrendered his license in Georgia in 2004 in response to allegations that he improperly prescribed medication to a family member. He also agreed to a lifetime ban from practicing medicine in Ohio.
We recently presented a look at some of the most notorious financial felons of contemporary times.
Shares of 
This post is part of a series on some of the most memorable 
Ex-con turned fraud fighter Barry Minkow has released a 
With the housing market in turmoil and numerous attorney generals taking a hard look at the sales tactics and unethical conduct of numerous mortgage salesman, it's probably a good time to look at one of the greatest real estate movies of all time: 
Remember Baghdad Bob the Iraqi Information Minister who insisted the US was nowhere near Baghdad, even as the media blared images of the invasion?
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