You Can't Cheat an Honest Man - James Walsh [134]
The accountants’ unwillingness to do basic, “shoe leather” investigation allowed Minkow and Morze to move a few million dollars through dozens of accounts and make the company look like it was worth hundreds of millions of dollars. By learning a little accounting jargon and focusing on winning CPAs over “as friends,” Minkow and Morze were able to win professional support in the due diligence process that was required before the stock offering. “We tried to befriend the auditors, to get them to look at us as people, and not just credits and debits,” Minkow said.
He also made sure ZZZZ Best paid its lawyers and accountants well...and on time.
Basically, Minkow said ZZZZ Best’s auditors—a predecessor of the accounting firm Ernst & Young—never took the time to learn the details of the business. If the auditors had known anything about insurance restoration work, they would have caught the fraud easily.
The ride didn’t last long after the offering. By the middle of 1987, the ZZZZ Best empire collapsed under the weight of its financial fraud. After the deluge, more than a dozen people were indicted. Everyone except Minkow reached plea bargains with the prosecutors; the boy wonder decided to take his chances with a jury.
The jury found Minkow guilty of 57 counts of stock fraud, bank fraud, mail fraud and tax evasion. In March 1989, Minkow was sentenced to 25 years in prison and ordered to pay burned ZZZZ Best investors $26 million in restitution from future earnings. “You’re dangerous, because you have this gift of gab, this ability to communicate,” the judge said, as he sentenced Minkow. “You don’t have a conscience.”
Case Study: J. David & Company
One of southern California’s biggest Ponzi schemes—and that’s saying something—was resolved fairly well for burned investors because of a law firm that was held liable for its bad advice.
In the late 1970s, Jerry Dominelli was a stockbroker working at conservative Bache and Company in San Diego, California. In 1980, Dominelli left Bache with Nancy Hoover, a co-worker with whom he was having an extramarital affair. The two formed J. David and Company, the centerpiece of several related investment vehicles. They set up offices in the ritzy La Jolla area to sell tax shelters, manage investors’ money and trade foreign currency.
The people who bought into the scheme were told that their money was going to be used to trade foreign currencies through a far-off tax haven, the Caribbean island Montserrat.
Hoover used political connections that she had in the San Diego area to lend an atmosphere of legitimacy to the operation. “I just didn’t believe Nancy Hoover could be involved in a scam,” one investor said. “I made an error in judgment.” Indeed he did. The entire J. David business was a fraud. Donimelli didn’t trade foreign currency; he just paid off old investors with money from new ones.
And many of J. David’s investors were on the shady side from the beginning. “These people all suspected Domenelli was laundering money...or something,” says one lawyer familiar with the scheme. “His story never made sense. Really, all he was doing was promising big, tax-free profits. And winking the whole time. Anyone could see this was too good to be true.”
Many of the investors figured they’d keep their money in for a short time—a few months or so—and then pull out. This was a textbook example of the greater fool theory. And, for a short time, there were enough greater fools that some San Diego high-rollers came away from J. David with fat profits. Word of these early wins attracted money from people with more greed than brains.
At the height of J. David’s success in the early 1980s, the scheme was attracting hundreds of thousands of dollars a week. Dominelli and Hoover divorced their spouses, moved in together and vied for prominence among San Diego’s financial and political elite.
By early 1984, Dominelli’s business empire was heading toward trouble. The buzz in the moneyed circles of La Jolla and Del Mar had changed from hushed awe