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Barry Minkow to help U.S. investigators as part of plea deal

Barry Minkow acknowledges participating in a fraud and will help federal prosecutors investigate a developer who allegedly hired him to spread lies about home builder Lennar Corp.

March 30, 2011|By E. Scott Reckard, Los Angeles Times
  • Barry Minkow will plead guilty to conspiracy to commit securities fraud. He faces a possible maximum sentence of five years in prison.
Barry Minkow will plead guilty to conspiracy to commit securities fraud.… (Sandy Huffaker, Bloomberg…)

In a plea bargain, former carpet-cleaning tycoon Barry Minkow has agreed to help federal prosecutors investigate a developer who allegedly hired him to spread lies about giant home builder Lennar Corp. with negative stories on the Internet and a YouTube video.

In the plea agreement, obtained by The Times, Minkow acknowledges participating in a fraud with losses so huge that he could have been sentenced to more than 30 years in prison had he been convicted of the crime.

Instead, he is to plead guilty in a Miami federal courthouse Wednesday to a single count of conspiracy to commit securities fraud, a crime with a maximum penalty of five years in prison.

In addition to testifying truthfully at grand jury and court proceedings, Minkow is required to assist federal investigations by going undercover if asked, the plea agreement says.

"Apparently, the government values his assistance in other cases," said John Coffee, a securities law expert at Columbia University. "Only time will tell if he can make any bigger case for the government."

Minkow, 45, was hailed by Oprah Winfrey and others as a teenage business genius in the 1980s when he turned his ZZZZ Best carpet-cleaning outfit in the San Fernando Valley into a publicly traded company. But the company turned out to be a shell operation that did little actual work. He was convicted of 57 fraud counts and served seven years in prison. After his release, Minkow — who grew up in a Jewish family — became a Protestant minister and self-styled fraud buster in San Diego.

Minkow's Fraud Discovery Institute exposed alleged Ponzi schemes and corporate wrongdoing pro bono, and he became an informant for the FBI and other federal agencies, according to filings in the Lennar case.

More recently, he began taking short positions in the companies he attacked — generating profits if their stock prices fell.

In taking on Lennar, Minkow accused the home builder of deceptive accounting practices and its senior executives of personal corruption — triggering a libel and extortion lawsuit from the Miami company. Federal prosecutors followed with criminal charges last week.

The plea agreement requires Minkow to cooperate in the federal probe of a person named in court papers as "conspirator A," who has been identified by attorneys in the case as San Diego developer Nicolas Marsch III.

Marsch, who denied wrongdoing, had teamed up 50-50 with Lennar in 1997 to develop a luxury resort community called the Bridges at Rancho Santa Fe, which won accolades for its housing and Robert Trent Jones golf course but was unprofitable.

Marsch, who says he invested $37 million in the project, blamed Lennar for the project's losses and contended that the home builder improperly cut him out of a related development and stopped paying certain fees to his companies. But while seeking hundreds of millions of dollars in damages, he has been the loser in several lawsuits against the company. One suit remains pending in California and another in Florida.

Minkow's plea deal says that when Marsch couldn't prevail in court, and when Lennar would not meet his "extortionate" demands to pay him or have "dirty little secrets" revealed, Marsch hired Minkow to issue negative reports about Lennar.

Minkow used a website, emails, news releases and a YouTube video to disseminate Marsch's "numerous false and misleading statements" about Lennar and its executives, the plea deal says. It also says Minkow drafted a report alleging fraud at Lennar and sent it to several federal agencies, with "reckless disregard" for the truth, to trigger a federal investigation of Lennar.

In a statement released by his attorney, Marsch said he believed all his statements about Lennar were true when he made them and was protected by his right to free speech.

"Mr. Minkow, a noted fraud examiner, was engaged by my company to discover the identity of an apparent Lennar employee 'whistleblower' who had communicated anonymously several instances of Lennar misconduct very much similar to my experiences with Lennar," Marsch said. "As those accusations were investigated, others came to light."

He sought to distance himself from a government allegation that Minkow tried to make money when Lennar's stock declined, saying he never traded the company's securities.

"If Mr. Minkow has engaged in trading of Lennar stock for any reason whatsoever, he has done so without my knowledge, consent or ratification," he said. "As a litigant seeking to recover hundreds of millions of dollars in damage claims against Lennar, it would make little sense, and would be completely contrary to my self interest to seek to destroy the value of Lennar stock."

Marsch's attorney, Richard Van Dyke of La Jolla, said his client would decline further comment.

The Minkow plea deal says that once Minkow's allegations started driving down Lennar's stock, Marsch's "representatives" offered to have Minkow retract his damaging fraud allegations in return for a payment of cash and Lennar's stock, which presumably then would have appreciated.

The false revelations caused the value of Lennar's stock and other assets to decline by more than $583 million, according to Minkow's plea agreement.

Minkow's attorney, Alvin Entin of Fort Lauderdale, Fla., declined to comment.

scott.reckard@latimes.com

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