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When the people at "60 Minutes" wanted to do the story of Barry Minkow, the 15-year-old,
"boy wonder," "*** kid carpet cleaner" they came to me for help. I had done this story
for KCBS television. It won me the L.A. Press Club Award for Best News Writing --- probably
because it was such a complicated story to tell.
Channel 2 News has learned that a federal grand jury is expected to deliver indictments
in the Z-Best Carpet Cleaning scandal, perhaps within the next couple of weeks. The charges
could include bank fraud, embezzlement and securities fraud. The company's 21-year-old
founder, Barry Minkow says expects to be indicted. Channel Two investigations unit headed up
by Ross Becker has an exclusive report tonight --- an interview with Barry Minkow and the
inside look at a fraud scheme. Tritia, a former associate of Barry Minkow
admitted to us he broke the law, and he showed us how he did it. Barry Minkow? Well, he told
me he is ready for a fight, and now he has the Lord in his corner.
Nice jab. Come on! When he was 15, Barry Minkow started a carpet
cleaning company that would, one day, be worth millions. He worked out of his parents' garage.
Today, he's working out in the garage of his half-million-dollar home --- a home he'll
soon be turning over to creditors. This comes more than six months after allegations of
fraud and drug-money laundering yanked the carpet out from under Barry Minkow and his
seemingly thriving Z-Best Company. Remember this commercial?
And it's time you called up. I'm Barry Minkow, president of Z-Best Carpet Cleaning.
The pace has slowed for Barry Minkow. He spends much of his time preparing his defense in
the numerous lawsuits filed against him, and he says he's developing a spiritual life he
hopes will come in handy if he's indicted. "People ask me, they say 'Aren't you worried
about going to jail?' And I say, 'The Lord is my defense and my deliverance, and I'll
take it as it goes. One day at a time.'" But even Minkow admits that he'll need more
than a prayer if he ends up here in U.S. District Court. Especially since some of his former
associates say that he masterminded an unbelievable scheme to trick banks into giving him loans
for insurance restoration jobs --- jobs that just didn't exist.
"Everybody points the finger at me, and everybody is willing to believe that I did it. No question
of a doubt." Two men pointing fingers are Mark Morse, who
once headed the entire restoration division of Z-Best, and Tom Padgett, owner of an insurance
appraisal firm he claims Minkow employed and financed to make fake restoration jobs appear
legitimate. Both men have described to authorities and
to us what they call "an astonishing sting" they say they executed under orders from Barry
Minkow. Tom Padgett went with us to San Diego to show
the trickery needed to convince Z-Best's own accounting firm that Z-Best actually had a
big contract to restore a fire-damaged building in San Diego. In reality, there was no restoration
job because there was no burned building to restore. Again, it was all a hoax to make
Z-Best look more profitable on paper. "Why did this have to be San Diego? Tell me
that story" "Well, nothing could be L.A. because then
people could check it a lot easier, do you know what I'm saying? In fact, Barry took
this to the extreme by going --- by picking out sites on the map like Arroyo Grande, Fremont,
National City --- places that could not substantiate this kind of a --- this size of a building.
But it was Barry's attitude that, if we would get something out of town and make sure these
big jobs were out of town, no one could check on them."
But late in 1986, Z-Best's accounting firm, Ernst and Whinney, wanted to actually see
job sites before they would certify the company's audits. Padgett says the accountants wouldn't
take "No" for an answer. "By January, they said, 'Well, before we certify
the next audit, we want to see one of his jobs in progress.'"
Now, Padgett says he and his associates had to somehow find a structure that could pass
for the building he says Minkow dreamed up on paper. Padgett eventually found this one
in downtown San Diego. He says it matched the paperwork perfectly --- six unfinished
floors and two that were occupied. And then, for added measure, Padgett and an associate
rented this nearby warehouse and office. They furnished the office and filled the warehouse
with inexpensive carpet. "But it was just a facade, I mean this was
really not a warehouse for any job." "No."
"This was all theater, right?" "Right."
The main stage, though was the office building. Padgett says he convinced the real estate
agent that he was interested in leasing an office. He was convincing enough that he was
given a key to the building's main door. No strings attached. So, in February, Mark Morse
says he came down and he drove the accountant first to the warehouse and then to the building
--- which was temporarily adorned with Z-Best signs. He did it on a weekend when no one
would be around to ruin the illusion that Z-Best was actually restoring the building.
"Everything was great. The accounting firm put their stamp of approval on what they had
seen. They had seen what they were told the would see --- a building in the process of
construction. We were hoping that we would never have to see this building again."
But Padgett says the real nightmare came three months later when the accountants decided
they wanted to inspect the building that, by now, should have been restored. In fact,
six floors of the building were still empty shells like this. Now, Padgett says, they
were in so deep there was no turning back. They had to come up with another scheme. To
create the illusion, Padgett says they had to actually lease most of the building and
then make it look like it had been restored --- all in only eleven days.
"Now wait a minute. Wait a minute. You're going to spend money. You're going to buy
or lease a building for a year. . .?" "Right. Well, hopefully for a year. We wound
up doing it for seven years --- at the cost of over two million dollars. But we were hoping
to do it for a year." But Padgett says two million was nothing compared
to what was at stake. If the accountants discovered that it was a fake job, they could pull the
plug on a pending 80-million-dollar deal --- in fact, the whole Z-Best operation.
"Now the scenario for here was, 'Hey, the walls were damaged so bad that we just decided
we'd put in an entire, new interior, so you can see that we've got it cleaned up, we've
got it dried out and and here's the stage where we're at.' And so now with most of the
building looking like this on May first --- and with the inspection on May eleventh, you can
appreciate the magnitude of the problem we had facing up --- to have this whole building
looking not like this by May eleventh." Padgett says Minkow paid another two million
dollars to have legitimate contractors complete the job just in time for the accountant to
walk through. "It was one of the biggest miracles, I think,
in --- one of the biggest construction miracles in the history of this country."
In less than two weeks, though, a newspaper story about earlier, less significant problems
with Z-Best would catch the eyes of accountants and investors and police investigators, and
hasten the fall of Barry Minkow's empire. "When you have something built up on the house
of sand that Z-Best was built on --- if there's one tiny *** in the armor, they whole thing
can come apart. "Did you know about that restoration contract?
Did you know that it was phoney?" "No. Clearly no. Not that one or others."
"He says he didn't know anything about these phoney contracts."
"Well that's what he says. I mean, I'm past the point . . . To me, that's just humorous,
because, once this gets into court, the federal investigators know the paper trail. There
are just too many little things that Barry can't possibly cover."
Arthur Barens is Barry Minkow's attorney. "The obvious thing to do is to point the finger
at Barry Minkow and say, 'Well, I may have broken the laws but I only did so because
he told me to.'" If the argument gets to federal court, Minkow
admits the odds are against him. But he says he beat the odds once before and went on to
become known as "the *** kid of carpeting." "I have heard other people from CBS mention
Barry Minkow as *** kid, boy genius, boy wonder. I think all those statements are greatly
over-exaggerating who Barry Minkow was and is."
"I don't ever want to hurt anybody again ever --- unintentionally. And I'm not ready for
that right now. I'm not mature enough to handle a company with 14-hundred people. And I wasn't
then and at least I have the ability without the ego and the pride to admit it now."
Our sources tell us the anticipated federal indictments will not include charges of drug
money laundering. Now, the grand jury seems to be focusing on the issue of fraud.
And a congressional subcommittee is meeting this month in Washington, DC --- a direct
result of the Z-Best case. The question to be answered is how so many bankers and lawyers
and accountants could have been tricked --- and could it happen again.