Lessons from Minkow: Why Background Checks are Well Worth the Hassle

By Peter Goldmann, CFE

The media had a field day when it was announced in late March that Barry Minkow had pled guilty to engineering an insider trading scheme that cost its victim, Lennar Corp., some $500 million in market capitalization.

You'll recall that Minkow is the guy behind ZZZZ Best, a now long-defunct carpet cleaning company that has been the poster case for accounting fraud for more than 20 years. Back in the 1980s, Minkow launched the company and rapidly grew it into a concern boasting $200 million in market capitalization.

This impressed the heck out of Wall Street. The only problem was that when Minkow took the company public, it was basically a total sham, with phony financial documents, phony customers and huge real debts to investors and shareholders.

After ZZZZ Best collapsed in 1987, Minkow was convicted of securities fraud, racketeering, embezzlement and numerous other felonies, and went to prison -- where he remained for seven and a half years.

Yet it was at the end of his stretch that the real problems began. Minkow, having proclaimed to have found God while in prison and committed himself to new life of charity and magnanimity, became a pastor at the Community Bible Church in San Diego. He also published a book, appropriately entitled "Cleaning Up," which was an autobiographical proclamation of his departure from sin and unwavering commitment to God's work. So convinced was Minkow of his redemption that he explained his decision to become a pastor by writing: "…as a pastor I could influence people to live for God and avoid the pain and anguish of a life without God that I had already experienced. I would also have access to businessmen, whom I could meet with privately to encourage and, when appropriate, warn about the pitfalls of even small ethical compromise in business."

Fast-forward to 2010. Minkow, still pastoring and running the Fraud Discovery Institute, a for-profit firm that he set up to help catch white collar criminals, picked a fight with residential construction giant Lennar Corp. by accusing it of a massive accounting fraud.

According to court documents, Minkow "alleged widespread improprieties in Lennar's financial reporting and business structure, and attacked the personal character of Lennar's management," with "reckless disregard for their truth."

It turns out that none of the stuff Minkow said was true. But he recently pled guilty to securities fraud for shorting Lennar's stock after he released the erroneous information which triggered a 20 percent plunge in the company's stock price.

Once a Con...?
Why am I rehashing a fraud case that you probably already know about? Because Minkow's story offers critical lessons for all managers and executives, as well as fraud investigators and law enforcement.

It does not suggest that everyone you know is a crook. However, it does tell us that some white collar criminals appear to be "hard-wired" for fraud, and that no matter what impressive facades they create to convince the world that they have been rehabilitated, they really can't be trusted. If Barry Minkow could convince the FBI (which invited him to assist in pursuing fraudsters while he was running the Fraud Discovery Institute), and everyone else around him, what's to suggest that other ex-con fraudsters can or couldn't do the same?

According to Stephen Pedneault, CFE, CPA, a seasoned forensic accountant and investigator in Glastonbury, Conn., "I have seen personally or heard from colleagues (about) so many instances of individuals who have stolen, gotten caught, and stole again. I just had a case where the guy stole from an embezzlement victim. He was hired to help them after the theft, and started stealing from them, resulting in back-to-back embezzlements. He came through a national temporary placement firm, and, as it turned out, had been previously arrested and prosecuted for embezzling."

What it Means for You

The message for all is that it is more critical than ever to check the background of job candidates as well as existing employees. At a minimum: 
 

Check (and double-check) employee work and education histories. Due diligence is essential in evaluating the credentials and competence of new hires and becoming aware of any issues regarding personal integrity. Essential: Confirm all job applicants' work history and education as detailed on résumés.

Follow up thoroughly with all references provided by the candidate. Call every reference to verify that the applicants actually worked where they said they did. And ask probing questions about the candidate's performance, conduct and personality. Sometimes, references will reveal important details after an employee has left.

Toughen your performance evaluation practices. The Association of Certified Fraud Examiners (ACFE) recommends that after someone joins your organization, an evaluation of the new employee's compliance with company ethics and anti-fraud programs be incorporated into his or her regular performance reviews. This assumes, of course, that your organization has a comprehensive and up-to-date ethic and compliance policy. But it also means that an anti-fraud policy should be in place. Many organizations believe that the compliance and ethics "has fraud covered." Usually, it doesn't. An anti-fraud policy must specify actions which constitute fraud and spell out the rules for reporting incidents or red flags of misconduct. It is important that employees know that their performance will be evaluated on the basis of their adherence to this policy as well.

Conduct credit checks of prospective and existing employees. If you learn that a job prospect has filed for bankruptcy in the past or has an excessive amount of personal debt, this should be taken into consideration. It does not mean that the person is or will become a fraudster. But if you recall the Fraud Triangle's pressure component, you'll begin to wonder whether such a candidate could cross the line at some point. Note that according to law, you cannot check a person's credit without their written permission. If a candidate has a stellar credit history, he or she will have no hesitancy to give permission to conduct a credit check. Balking at this request, on the other hand, may be a sign that there are issues with the individual's credit history. (Editor's note: The ACFE encourages organizations to use credit checks (where legal) and to weigh their results in consideration among other hiring factors. According to the ACFE, a poor credit background should not be a sole determining factor as to whether to hire/not hire an individual, but can be a meaningful tool in drawing a larger picture of a candidate's hirability.)

The Moral of Minkow
And don't forget to do the same for your existing employees. Barry Minkow has shown us in his characteristically high-profile way how you can have a blemished past, ostensibly redeem yourself and convince the world of your newfound virtuousness, only to return to a life of fraud.

I wouldn't go so far as to suggest that "once a fraudster, always a fraudster." But do you want to take a chance of having Barry Minkow on your payroll?

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