President has called for
longer prison terms for
executives guilty of fraud
LOS ANGELES — More than seven years behind bars with murderers, rapists and other violent criminals taught Barry Minkow a few things about the failures of corporate America.
The former entrepreneur and executive insists political and regulatory efforts under way to rein in business corruption won’t have any meaningful effect unless wrongdoers face tough prison sentences.
“The criminal justice system isn’t sending a message to white collar criminals. It never has — with the exception of my case,” said Minkow, who was 22 when he received a 25-year sentence in 1989 for defrauding investors in his ZZZZ Best carpet cleaning company.
He started the company as a teenager in the garage of his family’s San Fernando Valley home.
A judge convicted Minkow of 57 counts of securities, credit card and mail fraud after prosecutors said his schemes cost victims more than $100 million. Others involved in the scandal received shorter sentences.
His sentence remains one of the stiffest ever given a white collar criminal. Although he served only 7 1/2 years, he spent most of that time in maximum and medium security prisons, at one time sharing a cell with a convicted murder.
Two of the most notorious white collar convictions of recent years involved bond trader Michael Milken and financier Ivan Boesky in the late 1980s. Milken served nearly two years after pleading guilty to six felony security violations. Boesky also served nearly two years after pleading guilty to one criminal count involving insider trading.
On Tuesday, after a wave of scandals that has cost investors in Enron, Global Crossing, WorldCom and other companies billions of dollars, President Bush called for longer prison terms for corporate executives guilty of fraud. He also announced a new task force for the pursuit and prosecution of corporate criminals.
Minkow, 36, remains on probation and likely will spend the rest of his life paying back $26 million in court-ordered restitution. Now a fraud-detection consultant in San Diego, he criticized the light punishment given to other corporate wrongdoers.
Senior executives today have too much to gain and not enough to lose by misleading or even lying to investors and regulators, Minkow said.
In most fraud cases, executives succumb to the temptation of reporting fictitious financial data or hiding information because they think the act is just a temporary plan while they improve their operations. They don’t think they are committing fraud and they don’t think they will get caught, Minkow said.
At ZZZZ Best, which grew into a ponzi scheme, Minkow said his plan was to survive long enough to publicly trade his stake in the company to repay investors.
ZZZZ Best claimed to be making a fortune restoring water and fire-damaged buildings. Investors were given badges and hard hats and taken on tours of alleged restoration projects in abandoned buildings with which ZZZZ Best had no connection.
The temptation to break the rules won’t disappear unless punishment is severe, Minkow said. Executives who break the rules should be “hammered” and get a minimum seven years of hard time, he said.
Minkow said he spent 11 months in solitary confinement at Terminal Island Federal Prison in Los Angeles, locked in a cell 23 hours a day for most of his first year behind bars.
“They thought I was an escape risk,” said Minkow, now a pastor at Community Bible Church in San Diego.
Young, athletic and pumped up on steroids when he was sentenced, Minkow said he was bench-pressing 380 pounds in the prison gym.
“Not a lot of people were picking on me,” he said.
But the situation would be very different for any of the senior executives in the middle of high-profile corporate scandals today.
“They’d be preyed upon,” Minkow said. “They’d be paying for protection.”
It’s a severe scenario, but essential if the new audit and corporate governance rules authorities and lawmakers are considering are to have any teeth, he said.
“Right now, there’s no perception of prosecution,” he said.
Minkow’s sentence remains an anomaly, in part because he drew a particularly tough judge, said David Nesbitt, an FBI agent at the time of Minkow’s conviction and now a director of forensic accounting in Los Angeles with the consulting firm KPMG.
“We almost fell over when they pronounced his sentence,” Nesbitt said.
As much as law enforcement applauded Minkow’s sentence at the time, Nesbitt said it probably has had no effect on other scandals in corporate America.
In addition to wanting the courts to start setting new examples, Minkow said companies and investors need to become more vigilant about fraud.
“The average consumer does more due diligence in the grocery store, differentiating between good bananas and bad bananas, than they do putting their life savings into an investment,” he said.