Minkow was fond of saying that he would build ZZZZ Best into "the General Motors of carpet cleaning." Indeed, according to the ledger books, his company was earning about 17 cents for every $1 in sales. The real General Motors does well to earn 5 cents on the dollar.
But Rooney, Pace said that to make the stock sale work, it wanted a larger accounting firm's name on the books, so ZZZZ Best hired Ernst & Whinney. The Big Eight firm was not asked to do a complete audit on the fabulous July, 1986, results. Instead, it did "an interim financial review," which does not involve independent verification of the company's numbers.
On the surface, everything seemed fine.
Beneath the surface, however, things were frantic at ZZZZ Best, according to Morze. The company was juggling debts to several local banks and private investors, and the stock offering--which would bring an infusion of cash--was taking longer than expected.
The idea behind the insurance charade, Morze said, was to keep up appearances at least until the stock sale, then pump the money into the small, but legitimate, carpet-cleaning business to help it grow.
To build the illusion of a thriving business, when ZZZZ Best got its hands on funds from a bank or private investor, "the money would go in a loop," Morze said. "It would go into the company or take a circuitous route so it would look like income."
He said the loop began with Padgett's Interstate Appraisal Services--named by Gates as one of the "front" companies under investigation--which supposedly handed the insurance jobs to ZZZZ Best.
ZZZZ Best then supposedly hired a subcontractor--often Morze's own Agoura bookkeeping firm, Marbil Management--to supply labor and materials for the repair work.
In the 18 months before ZZZZ Best collapsed it paid Marbil $18 million but never received any services, according to the lawsuit filed by ZZZZ Best's directors against Minkow, Morze and Padgett.
In fact, Morze said, the money stayed in Marbil's bank account "for 20 seconds" before beginning the loop again.
Minkow refused to comment on Morze's portrayal, but his attorney branded the allegations of fraud "incredible" and suggested that Morze may have been acting on his own.
In any case, the professionals missed the ruse, although they did make a series of inquiries about ZZZZ Best and Minkow. The stock underwriters discovered the Catain lawsuit and insisted--against Minkow's wishes, they said--that it be mentioned in the stock prospectus. The prospectus even reported that Catain was under investigation by a grand jury.
Rooney, Pace also checked out ZZZZ Best contracts for $200,000 in repair work for Crawford & Co., an Atlanta insurance adjusting firm with nationwide offices. It was legitimate work.
In late fall, however, Rooney, Pace said there would be no stock offering unless somebody outside ZZZZ Best went to Sacramento to examine the biggest insurance project. Actually eyeballing a project--as opposed to making some phone calls to check--was unusual for them, the underwriters said. But then, 86% of ZZZZ Best's business now was coming from the one type of work.
Another ZZZZ Best associate found a new office building that could be used for the inspection tour, Morze said. "It was in the process of being leased out," he recalled. "There were a few floors not finished."
The associate told the building's rental agent "we might want to lease some space," Morze said, and asked if a group could inspect the building on their own over the weekend.
On Nov. 23, Morze escorted the accountant and attorney to Sacramento. The law firm's spokeswoman said they saw photographs and blueprints of the project, then the building.
There Were Clues
Even if they were tricked into thinking the Sacramento building was part of a ZZZZ Best project, members of the underwriting team might have been tipped off by the elephantine $7-million price tag.
By contrast, Blackmon, Mooring Steamatic, a Fort Worth firm that has been in the insurance-restoration business for 40 years, was paid $2.1 million for its work after the Las Vegas Hilton fire a few years ago, company President Kurt Blackmon said.
Commenting on a later ZZZZ Best claim that it had won a $13.8-million contract to repair two buildings in Dallas, Blackmon said, "A $14-million contract in fire restoration would be the biggest contract ever to be let."
After the stock sale, the public began to hear more about this remarkable young salesman named Minkow. He appeared on TV shows, pumping iron for the camera and showing off his $698,000 Woodland Hills home and his Ferrari. The television show "Eye on L.A." called him "the Rocky of rug cleaning."
Minkow joined other successful young entrepreneurs on "The Oprah Winfrey Show." When another executive mentioned the difficulty of selling seasonal products like frozen yogurt or soft drinks, Minkow boasted, "I could sell frozen yogurt in a blizzard."