Barry Minkow was the famed entrepreneur who started ZZZZ Best in the 1980’s, only to have it collapse in 1987 under the weight of a discovered Ponzi scheme. Minkow was convicted of fraud, among other charges, and sentenced to 25 years in prison, but only served 7 years. Minkow now is head of the Fraud Discovery Institute, a company which searches for fraudulent corporate activities and highlights the allegations through its website. Minkow and his firm, the Fraud Discovery Institute, are currently the subject of a probe by the U.S. Securities and Exchange Commission. The subpoenas ask, among other things, for all communications regarding six companies FDI has criticized: InterOil Corp. (IOC), Lennar Corp. (LEN, LENB), Pre-Paid Legal Services Inc. (PPD), Medifast Inc. (MED), Herbalife Ltd. (HLF) and Usana Health Sciences Inc. (USNA). In addition, the subpoenas want information about Minkow’s involvement with Whitney Tilson, who runs a $135-million New York hedge fund. It also appears that the SEC is focused on the fact that Minkow acknowledges that he takes short positions in some of the companies he criticizes. The SEC states the “investigation is a non-public, fact-finding inquiry,” intended “to determine whether there have been any violations of the federal securities laws,” according to copies of three of the subpoenas and related materials reviewed by Dow Jones Newswires. Minkow, however, believes the probe is politically motivated.
1. What is a short position?
2. What can you find out about Pre-Paid-Legal Services, Inc? Are there any “red flags” noted in the video or your research that would raise your level of skepticism about a suspected fraud?
3. Research the other companies that the SEC named in the FDI subpoenas. Based on your research, is there anything to raise your level of skepticism about these firms and financial fraud?
Murphy, M. (2010) SEC Probe Into Barry Minkow’s Fraud Discovery Institute Continues. Wall Street Journal, June 11 (Retrievable online at http://online.wsj.com/article/BT-CO-20100611-709043.html or
Video. (2008). Former US Attorney unveils the fraud of Pre-paid Legal, Fraud Discovery Institute (Retrievable online at http://www.youtube.com/watch?v=-g6exqWj0rs)