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By BARRY MINKOW
NELSON CURRENTCopyright © 2007 Barry Minkow
All right reserved.
Chapter OneONE AND DONE
Eight hundred million dollars is a lot of money. And twenty years is a long time. There is no way that this deal is a Ponzi scheme," Fred Kirshner challenged as he sat across from me sipping his steaming coffee. "No mutual fund on Wall Street has outperformed the Financial Advisory Consultant Funds' income and growth funds. I know one investor who has one hundred million dollars in the fund and has been in it for fifteen years." He paused and raised one eyebrow. "And Mr. James P. Lewis, the manager of the fund, is a business genius!" he declared. I stared back without blinking.
It was far from an idyllic Orange County Saturday afternoon. I glanced out the window of Starbucks at the smoky skies, black from the ash of fires blazing across Southern California. I quickly checked my watch: 1:00 p.m. I had to leave no later than 2:30 if I wanted to be back to the church in San Diego in time to preach the 5:15 p.m. service. The dual life of pastor and fraud investigator may seem ill matched-and it's certainly no easy task attempting to tend a flock of parishioners while warning a nation of unwitting investors.
I flipped through the pages of the prospectus and listened with one ear to Kirshner while nodding periodically. My mind raced through several scenarios until my eyes rested on graphs and charts comparing growth rates, which averaged 38.8% annual returns. I hit a mental speed bump.
So the guy is a good money manager, I thought. These type of consistent high returns may be unlikely but not impossible. I knew that fraud is never found on the back-end, the "returns" offered to the investor. Fraud is found in the front-end, by how the person offering the high returns claims to be earning them.
Accountants and other professionals call this "sources and uses of cash." I call it the "if-then" test. If this mutual fund claims to be earning 38.8% annual returns for twenty years, then what can I find to independently prove that profitability? This fund's longevity worked in its logistical favor. To survive for twenty years, it was highly unlikely there was anything wrong, or it would have already shown up.
"How many people are invested in the Financial Advisory Consultant Funds?" I inquired.
"About five thousand people across the country."
"And how much do you currently have invested in this fund?"
"Between me and my father we have about two hundred fifty thousand dollars."
"What kind of due diligence did you and your father perform before you invested the first two hundred fifty thousand dollars?" I posed. It was like putting a quarter in the jukebox and hitting play.
"We called ten people who had been in the Financial Advisory Consultant Fund five or more years to make sure they had received their 38.8% returns," he proudly exclaimed. Kirshner was sharp and extremely likeable. He was a manicured mortgage broker and not naïve to the world of finance. He and his father were looking to more than double their two-hundred-fifty-thousand-dollar investment in the fund. But before they did, they wanted me to check it out and make sure it was legit.
"This is our life savings, Barry. We really need to know and be sure before we bump up our investment," Kirshner said. We both paused for a moment of agreeable silence.
His comment reminded me of why I first became involved with the Fraud Discovery Institute. Twenty years earlier people invested in my company and lost their life savings because I was a crook. In a strange way I felt that I owed Kirshner, and others like him. However, I disliked being put in the position of the last fence between him and his father, and their life savings.
After all, if I gave the deal a green light and ended up being wrong, they lost all of their money and I would be worse than a criminal. My slogan for that is "One and Done." As a fraud expert you can be wrong one time. Your reputation is damaged, but you can recover. However, if you are Barry Minkow, current fraud investigator and former perpetrator, and you are wrong one time, people lose money because you missed something. Then it's over. Period. I was experiencing a new kind of pressure even though I would have shrugged it off decades ago.
"How much are you going to charge me?" Kirshner asked.
"Promise you won't tell anyone?" I responded.
Not quite sure where I was heading, Kirshner looked at me and decided to play along. "Okay, I promise," he said hesitantly.
"Nothing," I whispered as I rose and grabbed the paperwork relating to the fund, "but you can never tell anyone."
* * *
"Hi, Barb. Any calls?" I asked as I drove south on the 5 South. (In California highways are graced with titles like "The 5" versus "I-5" elsewhere in the country.)
"Just one. Where are you? You do realize that you are preaching tonight?" she asked. Saturday night service-my secretary has a keen grasp of the obvious.
"Yes, I do realize that. I'm driving as fast as I can. I'm in Orange County headed back to the church." I searched diligently for a pen in the front seat cluttered with the usual empty water bottles, open CD cases, and cassette tapes of my favorite pastors. "Okay, go ahead."
"Carol called and wanted to let you know that her cancer is in remission. She appreciated your visit last night. Why were you in Orange County?"
"I'm scouring other churches trying to find a job with a secretary who will appreciate me."
"Good luck," she said flatly. Barbara Brown and I had begun working together seven years before when Community Bible Church had about a hundred and thirty adults. Now with over one thousand regular attendees, the staff had grown significantly and so had our mutual fondness and respect. "Are you on another fraud case?" said Barb.
"Looks that way."
"Does this involve a lot of money?"
"Well, that depends on whether you believe eight hundred million dollars is a lot of money." There was silence on the other end.
"I think you need to be careful, Barry." Barb was like a second mother to me, and I could here that matronly concern shift into high gear. "People kill for that kind of money."
"Come on, Barb. I survived seven and a half years in prison. I'll be just fine. Call Carol and tell her I'll stop by to see her some time next week. And I'll see you soon."
The rest of the drive home was uneventful except for the two thoughts I could not get out of my mind. First, I kept dwelling on Fred Kirshner's answer to the question about due diligence: we called ten people who had been in the Financial Advisory Consultant Fund five or more years to make sure they had received their 38.8% returns.
As a perpetrator of fraud, I remember always using "satisfied investors" as primary evidence of the investment's authenticity. Consider the alternative. If people were unsatisfied and not receiving "high returns," then they would complain to the authorities, the media, and just about anyone else who would listen. Perpetrators are keenly aware of that fact and uphold one fundamental duty: keep investors happy. We strive to attain advertisers, not adversaries. After all, if investors are happy, they do not grumble to law enforcement or other protest outlets. Even more importantly, these backers become key advocates for the investment. Satisfied investors are used to pacify other prospective investors, telling them how great the deal is, how timely the payments are, and so on.
Consequently, whenever I hear that the primary attraction to the investment is other current investors I get alarmed. But this deal has been around for twenty years, I said to myself. No fraud could persist that long. And besides, eight hundred million dollars is a lot of money. Not to mention the five thousand people involved in the fund.
The second item to contemplate was the obvious question that everyone thinks but is afraid to ask, the one inescapable question that every fraud perpetrator offering high returns to lure investors fears the most ... Why would anybody who earns 38.8% annually need investors?
I glanced at my watch again, located the phone next to a mountainous stack of papers, and made the next logical call.
"Don, it's Barry."
"Let me guess. You need something by yesterday and you're on a new fraud case," he quipped. I could practically see him smiling on the other end of the line.
"Everybody's a comedian. Listen, I need you to do a workup for me."
"Okay, let me grab a pen-and talk slow because I'm driving."
"Hurry up. I have to go preach in a few minutes."
Don Ray is the greatest public records researcher in the western hemisphere. I learned this firsthand back in 1987 when I was indicted. Don worked as a news producer for the local CBS television affiliate that covered the ZZZZ Best fraud. To my continued regret, he always was able to uncover facts about the case that I didn't want disclosed. Nevertheless, I respected him for his praiseworthy skills at searching public records. When I was convicted and sentenced to prison, we kept in touch from time to time. Later, when I began doing proactive work at the Fraud Discovery Institute, we became closer. Any fraud investigator will tell you that it helps to have a public records expert as a close friend.
"All right," said Don, "go ahead."
"The guy's name is James P. Lewis, and the company is Financial Advisory Consultants located in Lake Forest, California. He claims to be a mutual fund manager and has been in business twenty years. He has about five thousand investors nationwide," I declared.
"Twenty years is a long time. You're not thinking this guy is a fraud, are you, Barry?" Don asked with disbelief. Back to the length of time issue again, I thought.
"I don't know what to think until I see the research," I said. "Let's check him for licenses, Series 7, Series 66: check with NASD and the California Department of Corporations. Let's also verify if he has any tax liens or lawsuits. Oh, and include corporate records. I want to know who the officers and directors of Financial Advisory Consultants are-"
"I know the drill. We have done this before," Don interjected, "and you need this by ...?"
"I need this by the time I finish preaching," I said.
"Good, that gives me at least twelve hours."
"Very funny. Just e-mail me a preliminary report in the morning."
"Another all-nighter for Barry Minkow," he said. "You know my wife is becoming jealous of us."
"Tell her I owe her dinner at the restaurant of her choice. Now go to work."
"Yeah, yeah, yeah.... I'll have it for you, Barry. Count on me."
"Thanks, Don." I already knew I could count on him.
I swiped my Bible and the sermon outline off my desk and darted into the sanctuary. As I sat in the back and watched people filter in, I realized that the people I saw were uninterested in Barry Minkow, the fraud investigator. They were coming to church to hear about God, not Barry. Fraud was the furthest topic from their minds. This meant my preliminary concerns about Financial Advisory Consultants had to be set aside in favor of a sermon from the Gospel of Mark on the crippled man being lowered through the roof and healed by Jesus. These lightning transitions from one profession to the other were becoming increasingly difficult.
I hurried home that night after church and studied the materials from Financial Advisory Consultants. Kirshner had turned over the standard prospectus that was given to potential investors and about two years of onepage monthly newsletters. Lewis provided updates on the fund's activity in each faithfully distributed newsletter to all current investors.
The Growth Fund averaged returns of 38.8% annually while the Income Fund averaged 18% annually. Admittedly, I was no expert in the mutual fund business and therefore was unable to render an opinion as to whether these high returns were unusual. However, I did know how poorly my mutual funds had performed the last few years-nowhere near those kinds of returns. In fact I had lost money! I made a mental note to contact an expert in the mutual fund industry who could tell me if such returns are consistent or even possible with the mutual fund industry.
Something else leapt out at me from the newsletters. Lewis claimed that the Financial Advisory Consultants' mutual funds cumulatively invested in three primary areas: buying and reselling businesses (corporate takeovers, leverage buy outs, etc.), insurance premium financing, and equipment leasing. These three fields of business were the front end of the high returns he was earning for investors.
But his newsletters never mentioned a proper noun, perhaps an insignificant detail to the average investor. With ambiguous language like, "In May of 2002 we bought a large laundry company and sold it for a 2.9% profit for the month," the name of the laundry company was never provided, making it impossible to confirm the transaction. That struck me as odd, so I scanned the other newsletters. In every case there was never a proper noun included!
Other months of the newsletter revealed much of the same: "We purchased a manufacturing company and resold it for a 3.9% monthly profit and have three other deals in escrow." Although I could not yet be sure, this ambiguity was particularly disconcerting because it was something I used at ZZZZ Best to fool investors. For example, we claimed to be doing fifty million dollars in carpet restoration jobs on buildings that had been damaged by fire, smoke, or water. But when the auditors or investors wanted addresses for these job sites, we could never provide them because these jobs did not exist! I always made up a standard lie that went something like this: "We cannot allow unauthorized people on the job site at anytime because of liability issues. Therefore no addresses of the job sites can be given." It was a wall that we erected between good due diligence and our fraud. And it worked ... for a while. I eventually got busted. But this guy-he'd been going strong for decades.
Maybe the accountants for the fund have this information, I thought.
* * *
Sunday morning at the church went smoothly. Preaching three services got my mind off of Financial Advisory Consultants temporarily. But as soon as I got home I knew what I had to do: make calls-lots of them. I had to contact current investors in the Financial Advisory Consultant Fund to get answers to questions that only they could provide. Investor calls were always long and tedious but yielded the most information. Although I didn't feel like talking after preaching three sermons, I needed specifics. I had the name of only one other group of investors that the client, Fred Kirshner, knew from Oregon. He was a retired pastor named Dale Japp, who along with his father and brother Jeff supposedly had millions invested in the fund. My job would be to get Japp not only to tell me all about the Financial Advisory Consultant Fund, but also to provide me with names of other people he knew who were in the fund.
"Mr. Japp? This is Pastor Barry Minkow with Community Bible Church in San Diego. I am calling about the Financial Advisory Consultant Fund." I drew a long breath and waited for a response.
Technically I was not lying. I am the senior pastor of Community Bible Church in San Diego, California. And I used my real name and even disclosed my past criminal behavior. However, I had learned that when performing due diligence calls about investment opportunities, Pastor Barry Minkow is a lot less intimidating than Barry Minkow, co-founder of the Fraud Discovery Institute. Okay, so on my best days I'm a little sketchy.
"Yes, Pastor Barry, how can I help you?"
"Mr. Japp, I have a friend who is considering investing in the Financial Advisory Consultants income and growth funds and your name was given as a reference for the fund. Are you a satisfied investor?"
"Oh yes, Pastor! I am very satisfied. Our family has been investing in the fund for almost two decades. Never had a problem, and whenever we needed a withdrawal, our money was sent to us immediately."
"That's great, Mr. Japp. Do you have any financial statements on the company that have been prepared by a CPA?" I continued.
"No, we get a monthly newsletter and a statement showing our principle investment along with the returns we made for that month. This is a private fund, Pastor Barry. Mr. Lewis does not need audited financial statements like Fidelity or Janus."
"Right, right, Mr. Japp." Now wasn't the time to correct him. "I guess you have a point there. Hey, am I correct in assuming that you have been averaging 38.8% in the growth fund annually?"
"Yes, I have, and so have my father and brother."
"How does Mr. Lewis generate these large returns?" I asked, trying to suppress any shred of suspicion in my voice.
"He buys and resells businesses at a profit and then keeps a small ownership interest in those businesses for the fund. He also does large equipment leasing for medical doctors and insurance premium financing. That's how he is able to generate such large returns," he said, as if he had repeated the same scenario to others who have inquired; his statement sounded well rehearsed.
Excerpted from CLEANING UP by BARRY MINKOW Copyright © 2007 by Barry Minkow. Excerpted by permission.
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