There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.

Caleb Newquist: The auditors were standing in what looked like a massive insurance restoration job. Equipment everywhere, workers milling around, paperwork ready and in order. It looked like a thriving construction site. Except it wasn't real. The workers were hired actors. The paperwork was faked. The project didn't even exist, and the company behind it was [00:00:30] worth hundreds of millions of dollars on paper.

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Caleb Newquist: This is Oh My Fraud, a true crime podcast where criminals make it by [00:01:00] faking it and taking it until a G-Man comes along and breaks it. I'm Caleb Newquist. How's it going? Welcome or welcome back. How's. How's the commute? How's the laundry? Is the train crowded? Did you get a seat? How's the gym? Lift with your legs. Okay. God damn it! Lift with your legs. You are going to regret it if you don't. I'm not speaking from personal experience. I just have heard. Anyway, what's going on? Uh, did you [00:01:30] watch the Super Bowl? I did not. I have no real good excuse other than I was busy doing other stuff. I don't know, I just don't care that much. Um, I'm also kind of souring on the commercials. I just don't. I used to get excited about the commercials, and now I just don't. And, I mean, I still like a funny commercial as much as the next guy, but lately, I'm just kind of reminded that Super Bowl commercials are kind of just capitalism and hyperdrive, and I have mixed feelings about that. Say what you want. [00:02:00] Judge me all you want. But it is. It's just capitalism in hyperdrive. Okay? I don't want to buy your shit. Stop trying to sell me your shit with nostalgia. Especially the nostalgia. Right? You know, you don't need to put Rachel Green or Whitley Gilbert in a commercial just to get me to buy Dunkin Donuts coffee.

Caleb Newquist: Okay, I'm gonna buy the Dunkin. I like Dunkin. I'll get Dunkin. There's just not that many. Dunkin's where I live. But when I go buy one, [00:02:30] I always buy it. Like I can't drive by a Dunkin without pulling in and getting the coffee. It's like. It's like, uh, it's Pavlovian. Is that the is. I think that's the word. Anyway, also, I, I don't watch the halftime shows. I never have really watched the halftime shows. But, you know, I have to say, I do enjoy how bent out of shape people get. Certain people how bent out of shape certain people get over the half time show every [00:03:00] single year. Every single year. I do get a kick out of that. All right. I've got one email to share. This comes from Kenneth, and the subject line is a tale as old as time and no commentary in the email in the body of the email. Just a link to the story with the title Ventura County man sentenced to prison for embezzling more than $3.2 million. And this guy's name [00:03:30] is, uh, Jason Randall. I'll 40 of Thousand Oaks, and he pleaded guilty on December 30th, 2025. And he was a full time controller for a small, family owned textile business from 2011 to 2024. Okay, so pretty long tenure. Uh, except the problem was this quote from 2016 to 2024. He stole on average between [00:04:00] 20,000 and 30,000 per month from the company.

Caleb Newquist: Court documents said he set up a fraudulent business for himself under a name that was similar to the business's name. He then opened two bank accounts using fake names, and over the years diverted more than $3 million in payments from the company's customers into those accounts. So nothing fancy here, folks, just a fake business, couple of bank accounts and [00:04:30] diverting 20 to 30 grand a month. Eight years. He kept that going. Now, none of the stories really say, you know how he was caught, but, you know, maybe he took a vacation or, you know, the other thing I was thinking about is, like, maybe he was just done, you know, is this how fraudsters retire? You know, I'm tired of frauding. I don't have any priors. So let's just take it easy in a minimum security prison for a bit. Or maybe, you know, if you didn't save enough loot, they figure [00:05:00] the prison time is kind of like part of the retirement plan. Well, I can chill out here. I got room and board, three meals a day, plenty of books, enough exercise, enough exercise. Probably not. You know, you probably do more, but, you know, you're limited. Other activities, you know, maybe you work in the library. I don't know. Anyway, so thanks for sending that in, Kenneth. Uh, we do like we do like, uh, you know, even the small frauds and three million's not nothing, but, [00:05:30] yeah, the small little local frauds.

Caleb Newquist: I like a local fraud. Kind of a brief story. Not not a whole lot to work with in terms of a greater, you know, broader, longer episode. But, you know, for a little intro, little aperitif. It's just. Right. All right, that's enough business time for some more fraud. Barry J. Minkow [00:06:00] was born on March 22nd, 1966, in Inglewood, California, and grew up in Reseda in the San Fernando Valley, and by most accounts, it was a middle class upbringing not deprived, not privileged, just good old fashioned Southern California suburbia. You know, it's as American as it gets in the 20th century. But [00:06:30] Barry wanted to stand out and socially, you know, high school wasn't great for him. He was not an athlete. He wasn't particularly popular. And he drove an old Buick that his classmates nicknamed the bomb, which, as you may have guessed, didn't really elevate his status. So he needed another way to stand out, and business seemed like a way to do [00:07:00] that. So at 15 years old, Barry starts this carpet cleaning company out of his parents garage and he calls it Z best. So for Z's best. And yeah, it's a strange name, and the explanation was that he, uh, this this represented the number of kids he wanted. Someday, though, it's also conveniently [00:07:30] put the company at the end of the listings in the phone book. It's 86, right? So phone books are still getting dropped off on your doorstep.

Caleb Newquist: So this is not what you would call a marketing masterstroke, but, you know, he's 15. What did he know? Sometimes it's better to be lucky than good. But Barry actually did know something about the industry. His mom worked at a carpet cleaning company, and he'd [00:08:00] done telemarketing there as a kid. He understood how to pitch services, how the pricing worked, what the customer is expected. That kind of early exposure, you know, gave him a head start. And Barry was a hustler. He used local ads, aggressive sales calls, long hours. You know, the company built this kind of modest reputation for reliability. [00:08:30] They showed up when they were scheduled. They charged what they quoted you, and they'd work late to finish the job. And if you've ever had cable installation done, you know that almost none of those things happen. It's not carpet cleaning, but, you know, same idea. Somebody showing up to your house anyway. Compared with competitors known for bait and switch tactics, Z best sometimes actually looks like the most honest option. Now [00:09:00] running a business as a teenager, which maybe some of you have done, but running a business as a teenager, uh, has some very kind of practical problems. And Barry ran into some of those. For starters, he couldn't sign. He couldn't sign contracts. No, he had both his arms. What the deal was California law at that time did not allow for minors to enter into binding financial [00:09:30] agreements, so banks would sometimes shut down accounts once they realize how old he was.

Caleb Newquist: This happened more than once. Also, he couldn't he wasn't old enough to drive at first. So imagine running a service business where you have to, you know, physically show up and you literally would need rides from friends to meet customers. And then there [00:10:00] was cash flow. That's where all kinds of small service businesses struggle, even under the most normal or ideal circumstances. You have a bunch of upfront costs, equipment, supplies, advertising, payroll. And then, you know, revenue comes later. You have to do the job, right. You don't, you know, if you're 15, you don't probably have a ton of savings. Uh, probably no credit at all. If if you do, it's very little. And so [00:10:30] even a relatively healthy business can kind of be on the brink of failure at any given time. So if you're a teenager working out of a garage with limited credit, legal constraints, just, you know, all that stuff is amplified. And so, you know, that's when he started making some shortcuts and they kind of seem small at first. Moving money between bank accounts to cover expenses, aka check [00:11:00] kiting. We've talked about check kiting a lot, uh, over the course of this podcast anyway. It's it's common. Happens a lot. There's also overcharging customer credit cards and refunding only if someone complained, and then staging burglaries at his own office, and then collecting insurance payouts and even selling his grandmother's jewelry to raise cash.

Caleb Newquist: Now, [00:11:30] none of that is exactly harmless. In fact, I'm pretty sure all of that stuff could get you in a lot of trouble. Um, maybe even put you in jail for a bit. But at this stage, it didn't. It wasn't a massive corporate fraud. This was just a young business owner scrambling to keep something afloat. Except once you start solving cash flow problems [00:12:00] with fraud, you're really fixing the problem. You're just kind of postponing it. And then, you know, adding some new ones along the way. And by the time Barry was finishing high school, Z best existed in this kind of strange mutant state, let's say part legitimate carpet cleaning business, okay, part ongoing financial [00:12:30] improvization and slowly and incrementally drifting toward something much bigger. Which brings us to the moment when the company pivots into insurance restoration. And that's where things really started to take off. Okay, the carpet cleaning business was real. It had customers, employees, equipment revenue. But it wasn't wildly profitable, and it definitely [00:13:00] wasn't generating the kind of money Barry was starting to project publicly. Which meant he needed something bigger. Something that explained rapid growth and would put some big numbers on paper. So that's where the insurance restoration business came in. On the surface, it made sense. Carpet cleaning and disaster restoration overlap, smoke damage, water damage, that kind of stuff.

Caleb Newquist: It's [00:13:30] in the same general industry neighborhood. But the real appeal of the restoration was scale. Residential carpet cleaning might bring in a few hundred dollars per job. Commercial restoration contracts, on the other hand, could run hundreds of thousands, sometimes millions of dollars. A small number of large contracts could make a company look like it was growing incredibly quickly. And restoration [00:14:00] work has another important benefit it's complexity. There are multiple parties involved insurers, adjusters, contractors, property owners. Work is sometimes spread across multiple locations. Payments happening in stages. Lots of documentation. From the outside, it can be hard to tell what's actually happening on any given job. So around this time, Barry connected with [00:14:30] a guy by the name of Tom Padgett. They had met at a San Fernando Valley gym, and Padgett was an insurance claims adjuster older than Barry, already well established in the industry. Someone who understood exactly how restoration claims were documented and approved. That gave him a level of credibility, very simply didn't have. Yet, according to reporting, the two began creating restoration [00:15:00] projects that largely existed on paper. That paper included contracts showing large commercial cleanup jobs, work orders and invoices is the kind of supporting documentation you'd expect if major restoration work was actually happening. And to reinforce that image of credibility, they created another company, Interstate Appraisal Services. Again, on paper, [00:15:30] it looked like an independent firm verifying restoration projects for insurers, a neutral third party just verifying that the work in fact existed.

Caleb Newquist: But in reality. They were just tied to the exact same scheme. So from the outside, lenders and investors saw a fast growing restoration division. Independent verification from an appraiser. Increasing reported revenue so quickly. [00:16:00] Z best was reporting tens of millions in annual revenue, with most of it coming from restoration work. The carpet cleaning business still existed, but it was a much smaller piece of the story compared to what the restoration numbers were showing. Operationally, there were signs of growth. Office space. Trucks. Equipment. Employees. Some of it legit, some of it exaggerated. And [00:16:30] occasionally some of it staged when additional reassurance was needed. And with those restoration contracts on paper, Barry began factoring receivables. What's factoring, you might be wondering. So the the relevant dictionary definition is to sell a debt or debts to an agent. The factor to collect [00:17:00] in Barry's case, it meant that he was selling his accounts receivable, i.e. money that customers owed to Sbest. He sold those to a bank at a discount. In return, Sbest got cash. So instead of waiting months to get paid, you get most of the money. Remember, he's selling these at a bit of a discount. You get most of the money and the bank is [00:17:30] on the hook for collecting the full amount later on. There was a small problem, though, if the invoices aren't tied to real projects.

Caleb Newquist: There's nothing for the bank to collect. So new contracts had to appear to cover old obligations. Right? More documentation, more projects. Numbers get bigger. So it wasn't a classic investor Ponzi scheme. But [00:18:00] mechanically, it worked a lot like one. But the the people being recruited weren't investors. They were just banks. And by the time Sbest was attracting serious market attention, the restoration business, largely bogus restoration business, accounted for most of the company's reported growth. Which is how a carpet cleaning company [00:18:30] started by a teenager in the San Fernando Valley began to look on paper like a rapidly expanding national restoration firm. And once that perception took hold, the next step kind of felt inevitable. We're taking this company public. By the mid 1980s, CBS was telling a pretty compelling story a young [00:19:00] entrepreneur building a rapidly expanding restoration company, tens of million dollars in reported revenue, national ambitions, media attention, starting to build and taking the company public would solve a lot of Barry's problems at once. He would get access to capital, he would get legitimacy, more visibility, the kind of validation that makes lenders, investors and partners just more comfortable. [00:19:30] But there was one small obstacle on the road to going public, and that was auditors. Now, before a company can go public. As you may or may not know. Independent auditors have to review the financial statements of the company. They have to verify its revenue. They have to confirm that contracts exist.

Caleb Newquist: In general, the [00:20:00] numbers on those financial statements, they have to reflect reality, okay. They have to be meaningfully accurate. I'm not using the exact language here, but there's a whole like, you know, precision with the words. But anyway, numbers have to be good. Now it's a very big problem. If a significant portion, which is an [00:20:30] obvious problem, make sure the numbers reflect reality, which is an obvious problem if a significant portion of your revenue is just bullshit. So it was at this time CBS hired Ernst and Whinney, one of the then big eight accounting firms. Serious firm, serious reputation. Exactly the kind of name you'd want attached if you were a business trying to build its credibility. [00:21:00] And Ernst and Whinney, they did what auditors do. They asked questions, they requested documentation, and eventually they wanted to observe some of the restoration projects in person. And that meant paperwork alone wasn't going to be enough. So the fraud evolved, and instead of just bogus documents, there were bogus job sites, buildings [00:21:30] that weren't sbest projects were temporarily staged to look like they were the best projects. They brought in equipment, they added signage, they had human workers show up. A bunch of paperwork was prepared in advance. There was enough activity to create the impression of a functioning restoration job, enough to convince the auditors anyway. Which is not to say that auditors were dumb. You know, just take [00:22:00] a minute to put yourself in their shoes.

Caleb Newquist: You're visiting this site for a very brief period of time. It's probably the first time you've ever seen it, and management, or whoever your contact is, is guiding you through the whole thing. So from the auditor's perspective, everything lined up the site visit verified what they were being told. Independent appraisal confirmations existed. According to later reporting from the Los Angeles Times, the sham appraisal setup helped convince an [00:22:30] army of bankers, accountants and lawyers that the jobs were genuine. By 1986, the company was reporting roughly $50 million in annual revenue. Most of it attributed to the restoration work. And if you are comfortable with those restoration contracts, the numbers help support a valuation that made an IPO plausible. Ernst and Whinney ultimately issued an unqualified audit opinion. In other words, [00:23:00] they believe that the financial statements fairly reflected the company's finances. A major hurdle had been cleared. The best went public in January 1986 through a reverse merger. So instead of a traditional IPO, they merged with a shell company that was already publicly traded but was essentially dormant. This is a faster route [00:23:30] to the stock market, and historically one that can involve a little less upfront scrutiny. The stock began trading on the Nasdaq at around $4 a share, and many investors love the story. The teenage founder. The rapid growth. The restoration contracts. The potential for national expansion. Within months, the share price climbed significantly and Barry Minkow, barely out of his teens, was suddenly the CEO [00:24:00] of a publicly traded company worth hundreds of millions of dollars.

Caleb Newquist: For a while, it did look like everything was working. Media coverage was largely positive. Barry was doing interviews, speaking publicly, leaning into the young entrepreneur success story. But behind the scenes of all that public momentum, there was some pressure. Some lenders were asking more detailed questions about the restoration contracts. A few industry [00:24:30] people quietly wondered how a company that young had landed so many large commercial jobs so quickly. Nothing explosive yet, just the kind of background skepticism fast growth tends to attract. And then something happened that at first didn't seem connected to the restoration business at all. It involved flowers. Flowers. Barry owned a small side business called Floral Fantasies. Not a major part of Sbest. [00:25:00] Just, you know, another little entrepreneurial venture. One customer, a Los Angeles secretary named Robin Swanson, was overcharged on a credit card purchase, about $600. She complained, and she tried to get a refund. She kept calling and she didn't get anywhere. Now, most people eventually let something like that go. Not Robin. She [00:25:30] started asking questions, talking to other customers, comparing experiences and what she found. Suggested a pattern, not just a billing mistake, but repeated questionable charges. Tied to Barry's businesses. So she documented it. Names, dates, amounts. And eventually she took all that information to the Los Angeles Times when reporters started digging into it.

Caleb Newquist: They weren't initially [00:26:00] investigating the restoration business. They were looking at credit card complaints, billing irregularities, consumer level stuff. But when journalists pull at one thread, they tend to find others. Questions about floral fantasies led to more questions about Barry's business practices, which eventually led to questions about Z best, which led eventually to scrutiny of those large restoration contracts [00:26:30] that had fueled the company's growth story. And once reporters tried to verify some of those projects independently, things got weird. Buildings that were supposed to have undergone major restoration work weren't always easy to confirm. There was documentation, but direct confirmation didn't always line up cleanly. The story started to look less airtight than it had before. At first, the market reaction was cautious [00:27:00] rather than panicked. Public companies get negative press all the time. Executives deny allegations. Clarifications get issued. Business carries on. Very publicly dismissed. The concerns just framed them as misunderstandings. These were isolated issues. Nothing systemic. And as reporters, lenders and eventually auditors started asking more pointed questions, the carefully constructed image of Z. Best as a booming Restoration [00:27:30] powerhouse began to wobble. Not a collapse, but definitely a wobble. The article hit on May 22nd, 1987. The title ran behind Whiz Kid is a trail of false credit card billings. At first, it didn't look catastrophic. It focused largely on questionable credit card billing practices tied to Barry's businesses, the kind of thing companies occasionally survive with [00:28:00] apologies, refunds, maybe, you know, a promise to overhaul compliance.

Caleb Newquist: But in the case of Sbest, it accelerated the scrutiny that was already building. And once that scrutiny intensified the restoration story, the contracts, the revenue, the rapid growth started to come apart faster than anyone expected. Then Ernst and Whinney, the company's auditors, started taking another look. And in early June 1987, [00:28:30] Ernst and Whinney abruptly resigned as Zebus auditor. They cited unresolved questions about certain restoration contracts and related financial documentation. Now, for a public company, when your auditors suddenly quits, that's about as reassuring as a smoke alarm going off in the middle of the night. So investors started waking up. The stock price, which had traded as high as about $18 earlier [00:29:00] that year, started sliding, then falling, then dropping like a rock. Confidence evaporated once the idea took hold that the restoration revenue, the bulk of the company's story might not be real. And markets are funny that way. They'll tolerate a lot of aggressive optimism. I might call it hype, but whatever you call it, markets kind of love it. And they will give it a long leash. They're [00:29:30] much less tolerant of. So this project may not actually exist at the same time. The proposed acquisition of key serve a legitimate carpet cleaning company Barry had hoped would stabilize everything stalled. The buyers wanted clarity. So the due diligence intensified, and the more people looked, the less comfortable they became.

Caleb Newquist: And the deal died. Without [00:30:00] that acquisition, without new financing, and with lenders increasingly nervous. Sbest suddenly faced the one thing the fraud had been designed to avoid a liquidity crunch it couldn't paper over. Turns out fake revenue doesn't generate real cash, mostly generates paperwork, and eventually paperwork stops paying the bills. By July 1987, Barry resigned as CEO, officially citing health reasons. [00:30:30] That explanation didn't convince many, and shortly afterward, Z best filed for bankruptcy. When the assets were finally sorted out, the reality became painfully clear the company that had once carried a market value approaching $300 million turned out to have remarkably little underneath it some equipment, few vehicles, the legitimate carpet cleaning business, which had always been pretty small investor losses, topped $100 million. Lenders [00:31:00] absorbed additional hits. The restoration empire, the contracts, the revenue. The rapid expansion had largely existed as a story investors wanted to believe, and they believed it for a surprisingly long time until they didn't. Once the best collapsed, the investigations moved quickly. Federal prosecutors, regulators, lenders, basically anyone who had money or credibility [00:31:30] tied up in the company started digging in. At the same time, bankruptcy tends to have that effect. Records open up, people talk, and the gap between the public story and the financial reality gets harder to ignore. In January 1988, a federal grand jury indicted Barry Minkow, along with several associates connected to the restoration side of the business. The charges covered securities fraud, mail fraud, racketeering, bank fraud, tax violations, conspiracy.

Caleb Newquist: A pretty [00:32:00] comprehensive list. Prosecutors argued that the Restoration Division, the part of the business responsible for most of the company's reported growth, was largely fabricated. Non-existent contracts, verification companies with conflicts of interests staged job sites for inspections, financing obtained using projects that turned out not to be real. And when the story started getting reported publicly. The framing wasn't complicated. The LA times summarized it like this, [00:32:30] saying that banks and investors had been swindled by a scheme to make it look like a thriving company through phony jobs, repairing fire and flood damage to office buildings. It's about as clear as it gets. The trial stretched over several months. Jurors heard testimony from employees, bankers, accountants, investigators and people involved in setting up or verifying those restoration projects. There was evidence about staged site visits, fabricated documentation and loans [00:33:00] supported by work that couldn't be substantiated. The defense tried to frame the situation as a fast growing young business that spiraled out of control. Prosecutors framed it as a sustained organized fraud built around phony revenue. After several days of deliberation, the jury convicted Barry on dozens of counts. In March 1989, US District Judge Dickran Tevrizian sentenced Barry Minkow to 25 years in federal prison and ordered him to pay tens of millions in [00:33:30] restitution. Tom Padgett, the insurance adjuster who helped create those fake restoration projects and ran the Interstate Appraisal Services Verification Scheme.

Caleb Newquist: He was also charged after the company collapsed. He pleaded guilty to securities fraud, bank fraud and mail fraud, and in 1988 was sentenced to eight years. Prosecutors made it clear that they viewed Padgett as central to the scheme, someone who helped make fictional restoration jobs convincing enough to attract millions in loans and investment. [00:34:00] And for most fraud stories, that's where things end. Company collapses founder convicted, prison sentence. Case closed. But Barry Minkow story doesn't follow that script. While serving his sentence at Federal Correctional Institute in Englewood, Colorado. Barry Minkow went through what he later described as a religious conversion. He'd been raised Jewish, [00:34:30] but during his time in prison he became a born again Christian. He got involved in ministry programs, studied theology, began talking about accountability, restitution, and rebuilding his life. He was released in 1995 after serving about seven and a half years, and almost immediately he started building a second career prison ministry. Sometimes changes people, sometimes it's just a new audience. Barry [00:35:00] enrolled at Liberty University, the evangelical Christian school founded by Jerry Falwell, eventually earning a master's degree in divinity. By the late 1990s, he was pastor of the San Diego Community Bible Church. So that's a career pivot. At the same time, he leaned into something else. Fraud investigation. In 2001, he founded the Fraud Discovery Institute. Fdi, a [00:35:30] firm focused on corporate fraud detection, consulting and education. The idea was simple enough someone who had orchestrated a major fraud might recognize the warning signs faster than most, and there's a market for that.

Caleb Newquist: He spoke at churches, universities, accounting conferences, business events. He wrote books about ethics, redemption, and financial crime. Media profiles framed him as a cautionary tale turned expert, someone [00:36:00] who had made catastrophic mistakes. Paid his debt to society and was now helping others avoid the same path. It's a story people generally like. Just like, catch me if you can. Steven Spielberg made a movie out of it. Yeah. Same idea. Second chances. Redemption. Hard earned expertise, and that reputation opened doors. Speaking engagements, consulting opportunities, more media exposure, and [00:36:30] through his role as a pastor. Access to a community that trusted him deeply. It was a genuine new chapter. By the late 2000, Barry Minkow had rebuilt a surprising amount of credibility. And then came Lennar. Lennar Corporation is one of the largest homebuilders in the United States. In 2009, right after the housing market collapsed, the company, like much of the construction industry, [00:37:00] was under significant pressure. Falling property values stalled developments, tightening credit markets. It wasn't an easy time for anyone in homebuilding into that environment. Minkow released a report through the FBI accusing Lennar of accounting misconduct. To the report alleged financial irregularities, questionable accounting practices and potential fraud at the executive level. He filed complaints with regulators, spoke publicly about [00:37:30] the allegations and positioned himself as someone uncovering problems investors should know about. Markets reacted quickly.

Caleb Newquist: Lennar's stock price dropped sharply after the allegations surfaced from about $11.50 a share to the mid $6 range within a couple of weeks. Media coverage amplified the claims. Analysts started asking questions. Regulators began taking a closer look. At first glance, it looked consistent [00:38:00] with the reputation he'd built. Former fraudster now identifying potential misconduct. But there were complications. One of them was financial. Before releasing the allegations publicly, Minkow had taken short positions against Lennar stock. So if negative information about Lennar came out, that news could trigger a drop in the stock price. And Barry stood to profit financially. Now [00:38:30] if you just heard all that and have no idea what I'm talking about, let's take a quick time out here to explain in detail. The most common way people try to make money in investing is to buy a stock, in the hopes that the price will go up. A short position or selling a stock short is essentially betting that the company's share price will go down. In other words, it's a way to make money in investing by doing the opposite of what most people are doing again, which [00:39:00] is buying a stock in the hopes that the price will go up. Now, in order to make money selling a stock short is how it works. You borrow the shares from someone, usually a broker or a bank or some organization that holds a lot of shares with the promise to repay them at a later date after borrowing the shares, you sell them at the current price with the expectation that the price will go down.

Caleb Newquist: So now you have all this money from selling the shares, right? And now, assuming the share price does [00:39:30] go down, at some point you can buy the shares at that cheaper price with the money that you've got. You then repay the shares to whom you borrowed them from, and you keep the extra money that you got when you sold it at the higher price. Got it. Okay. So that's what Barry was doing to Lennar. And around the same time, a San Diego developer named Nicholas Marsh, the third very aristocratic Nicholas [00:40:00] Marsh, the third, who was already in litigation with Lennar over a failed real estate deal. He had retained Minkow to investigate Lennar. In other words, the fraud allegations weren't coming from a neutral analyst. They were coming from someone already working for a party in a legal fight with the company. Now, none of that automatically proves wrongdoing. Short sellers uncover legitimate problems all the time. And outside consultants aren't [00:40:30] unusual in corporate disputes. But investigators began to look more closely at how the allegations had developed, what evidence supported them, and how the financial trades lined up with the public accusations. Over time, the picture that emerged was not favorable to Barry. Authorities concluded that key elements of the fraud claims against Lennar weren't supported by the evidence.

Caleb Newquist: There were allegations of misrepresented documents, exaggerated claims [00:41:00] and misleading statements tied to the investigation. Federal prosecutors eventually charged Barry with conspiracy to manipulate Lennar's stock through false fraud allegations tied to his undisclosed short position. He pleaded guilty in 2011. On July 21st, 2011, Judge Patricia Seitz sentenced Minkow to five years in federal prison. She also ordered him to pay $583 million [00:41:30] in restitution, essentially the amount that Lennar's market value dropped after his report triggered the sell off. And in explaining the sentence, she didn't mince words. She said Minkow had no moral compass that says stop, which is not exactly the kind of character reference you want when you're asking for leniency. And just like that, the fraud investigator, the redemption story. The pastor turned watchdog was headed back [00:42:00] to federal prison. While the Lennar situation was unfolding. Investigations, lawsuits, charges. Something else was developing much closer to home, because during much of the time he was serving as pastor of the San Diego Community Bible Church. Prosecutors later said Barry Minkow was also diverting money from the church itself. According to the US Attorney's office, he embezzled more than $3 million from the church [00:42:30] and its members through unauthorized accounts, forged checks and diverted donations. Some of the victims were individual congregants. People who knew Barry personally trusted him spiritually, and in some cases were making donations tied to personal tragedies or charitable causes. One widely reported example involved a widower who believed he was funding a humanitarian hospital project overseas.

Caleb Newquist: Investigators later concluded the project didn't exist [00:43:00] at all and the money had been redirected. Which, if you're keeping score, is a pretty uncomfortable overlap. Pastor, fraud investigator and person controlling church finances all at the same time. We have covered this issue numerous times. Churches tend to run on trust, which also sometimes means financial oversight just assumes good faith more than verification. And that didn't help [00:43:30] here. In January 2014, Minkow pleaded guilty to conspiracy to commit bank fraud, wire fraud, mail fraud and to defraud the federal government related to the church schemes. In one filing, federal prosecutors described Barry as, quote, a professional con man expertly plying his craft, a predator from the pulpit. The judge called it a, quote, despicable, inexcusable crime, and he imposed the maximum sentence allowed under the plea agreement. Another [00:44:00] five years in federal prison on top of the sentence, which means that across three very different chapters of his life entrepreneur. Fraud investigator. Pastor. The through line wasn't redemption, it was repeat offenses. Minkow was released from federal prison in June 2019. He's since participated in a documentary about his crimes and reportedly works in addiction counseling. He owes $612 [00:44:30] million in restitution across his various convictions, money that he'll be paying back for the rest of his life. So did we learn anything? Yes, a few things. And, you know, we've seen this in other cases, but one is just how fraud can escalate.

Caleb Newquist: The best didn't begin as a big public [00:45:00] company scandal. It was small time stuff. Check kiting, insurance claims, overcharging credit cards. But once fraud becomes a tool. It rarely stays small. Bigger holes require bigger explanations. Bigger explanations require more paperwork, and eventually the fraud stops supporting the business and just becomes the business. So much work. It [00:45:30] seems like way more work to run a fraud than to run an actual business. I don't know, it's just it's so much work. God. Exhausting. Another takeaway we've covered a few times. Journalism matters. This case didn't start with regulators. It started with a consumer complaint that the Los Angeles Times decided was worth digging into. And once reporters began asking questions, the story around Sbest [00:46:00] started to fall apart. A lot of fraud stories actually break this way, not from audits or enforcement, but from. Someone persistent enough to ask questions and keep asking questions. And speaking of audits. I don't know what people think auditors do, but they don't find fraud. Now there's some question [00:46:30] about whether or not they should or have that responsibility. There's some debate about that. You know, the firms say, no, it's not their responsibility. There's plenty of litigators, lawyers, plaintiff lawyers that say that they do. So we're not going to get into that here. But the point is, we've mentioned auditors a lot throughout this show, and they almost never find fraud, only [00:47:00] in like 3% of cases, according to the ACF.

Caleb Newquist: One last thing past fraud history should probably trigger more caution, not less. This is at least our third story covered where the perpetrator committed multiple frauds. Now don't misunderstand. People absolutely can change. It happens. But just [00:47:30] for the sake of argument from a controls perspective, prior fraud should be a risk factor because it is. It just is. If someone has a documented history of financial misconduct, that doesn't mean you just blacklist them forever, not give them a job. But greater oversight is probably warranted. You know, a clear separation of duties, background checks, and maybe, [00:48:00] maybe don't put them in sole control of bank accounts or Donations. Yeah, because trust is great, but controls are better. Okay, that's it for this episode. And remember, if you meet your business partner lifting weights at the gym, there's always a chance you'll keep lifting together in prison. If you have questions, comments, or ideas for stories, drop [00:48:30] me a line at Oh My Fraud at CPE. Com. This episode was written by Zach Frank and myself. Oh my Fraud is created, written, produced and hosted by me, Caleb Newquist Zach Frank is my co-producer, audio engineer, and music supervisor. Laura Hobbs designed our logo rate review and subscribe to the show. Wherever you listen to podcasts, you listen on your mark. You can get the CPE there. Join us next time for more Ava swindlers and scams from stories that will make you say oh my fraud!