Thursday, April 2, 2009

Minkow Trades on Inflated Resumes Gross $1.2 Million

(Bloomberg) -- Barry Minkow says he spent as much as $300,000 to develop a system for finding executives who pad their resumes. He says his firm grossed $1.2 million last year from options trades betting against their companies.

Minkow, a convicted felon, founded the San Diego-based company he calls the Fraud Discovery Institute in 2001. He has also made money giving speeches, writing books and selling videos called “Frauds Gone Wild,” and he says he tripled the firm’s annual revenue to $2 million in 2008 by focusing on resume discrepancies.

“We’re not in this to lose,” Minkow said. “What really increased the revenue was the resume shorting.”

The trading profits pay for other less-lucrative investigations or are donated to San Diego-based Community Bible Church, Minkow said. Last year, he paid himself $100,000 plus expenses from the institute. At the church, where he said he hasn’t received a salary for the past two years, Minkow is the senior pastor overseeing six other ministers. He converted to Christianity while he was in prison, he said.

In the past six months, Minkow has reported finding misstatements in at least 15 executives’ resumes that were posted in corporate filings, on Web sites and in press releases. All were independently confirmed by news organizations. After the disclosures, four executives left their companies, one was fined $100,000 and another was reassigned within his company.

Buying Put Options

Minkow profits by buying put options, giving him the right but not the obligation to sell a stock at a specific price by a specified date. A put option increases in value as the price of the underlying security falls. The more a stock declines, the more profitable it becomes for the option holder.

In his push to uncover resume inflation, Minkow has targeted industries in which he says he heard many complaints from investors, such as technology and financial services. Now he’s widening his search to other businesses and, he says, finding fewer instances of resume tampering.

“It’s more work to find them but they are still around,” Minkow, 43, said. “The hit ratio isn’t as high but it’s still high enough to make it a worthwhile endeavor.”

Finding Padded Resumes

Amtek Technologies, a San Diego Web and database designer, built the resume-culling software Minkow uses to his specifications last year, he said. Using one of his three Sony Corp. Vaio notebooks, Minkow imports data listing executives and their degrees from Hoover’s Inc., a provider of company information.

Minkow finds birthdates in databases at Merlin Information Services, in Kalispell, Montana, and LexisNexis, a unit of London-based Reed Elsevier Plc. The names are then sent through the National Student Clearinghouse, a non-profit organization that verifies educational credentials.

If no record is found, he sends faxes to the school requesting proof that a degree was awarded.

If neither method can verify the claim, he sends an investigator to the registrar’s office to confirm it, he said.

“We go out of our way to avoid the big mistake,” Minkow said. “When you areBarry Minkow, it’s one and done.”

Last week, the University of Michigan confirmed a Minkow claim that Concur Technologies Inc. Chief Executive Officer S. Steven Singh didn’t earn a bachelor’s degree reported in company filings from 1998 to 2007. Singh said the degree claim was a mistake. The board of directors issued a statement saying it has “complete confidence” in him.

Concur’s shares dropped 20 percent, to $18.20, March 20 when the news was reported. The stock fell 54 cents, or 2.7 percent, to $19.28, at 4 p.m. New York time today in Nasdaq Stock Market composite trading.

Microsemi Corp.

Microsemi Corp. slumped 38 percent in the two trading sessions after Minkow on Dec. 2 disputed the credentials of Chief Executive Officer James Peterson. The shares rebounded 10 percent on Dec. 5, after the board pledged to support Peterson while it conducted a review. The board said Jan. 29 that Peterson hadn’t been awarded degrees from Brigham Young University.

Microsemi said that Peterson would remain as CEO, though he would pay $100,000 and forgo a bonus. He resigned as a director of Stec Inc., effective March 5, Stec said in a filing.

Intrepid Potash Inc. fell 6.5 percent Feb. 11 after Minkow said PresidentPatrick Avery didn’t receive two degrees he claimed to hold. The stock rebounded 9 percent in the two trading sessions after Avery resigned.

“When I saw Minkow’s report, I sold” Intrepid’s shares, said Stephen Odberg, a Denver-based investor who said he made a profit. “If you lie about something as simple as a degree, how do we know about other things we cannot see, like a warehouse?”

Federal Prison

At age 16, Minkow began a carpet-cleaning company, ZZZZ Best Co., in Southern California. He took it public and the value eventually exceeded $211 million, according to a 1987 Wall Street Journal article.

To make his business appear successful, Minkow prepared fake receipts that fooled auditors and investors. When the scheme fell apart, he was convicted in 1988 of 57 counts of fraud and conspiracy and sentenced to 25 years in federal prison. He served more than seven years before being released in 1995.

A judge in 2002 dismissed a court order that originally required Minkow to pay $26 million in restitution. U.S. District Judge Dickran Tevrizian ended Minkow’s probation and relieved him from obligations for unpaid restitution.

Minkow said investors recouped most of their money and he is still paying off $7 million owed to Union Bank of California, a debt Minkow figures to be repaying “forever.”

Gone are the bright red Ferrari and the 5,000-square-foot mansion. He now drives a leased Acura with child-safety seats in the back. He lives with his wife and two children in a 2,000- square-foot home in Poway, a suburb northeast of San Diego.

Poor Childhood

Minkow said he grew up in a Los Angeles suburb as a poor Jewish boy who accepted handouts from his synagogue. In prison, he earned bachelor’s and master’s degrees in Church Ministries from Liberty University while serving time in prison. He later earned a master’s in Divinity from Liberty. University spokeswoman Tanya Hedrick confirmed the degrees.

For the past 12 years, Minkow has spent Sundays preaching at the Bible Church, a 1,400-member evangelical congregation housed in a suburban office park.

“Barry is one of the smartest people I’ve ever met in my life,” said James Ratley, president of the 50,000-member Association of Certified Fraud Examiners. “As far as being reformed, that’s something only Barry knows.”

Source: www. Bloomgerg.com, By Peter J. Brennan in Los Angeles

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