Reference no: EM131380079

Barry: The Afterlife After being released from jail in 1995, Minkow became a preacher and a fraud investigator, and he spoke at schools about ethics. This all came to an end in 2011, when he admitted to helping deliberately drive down the stock price of Lennar, a home-building company, and was sent back to prison. The facts below explain what happened to Barry since 1995. In 1997, Minkow became the senior pastor of Community Bible Church in San Diego. Soon after his arrival, a church member asked him to look into a money management firm in nearby Orange County. Suspecting something was not right, Minkow used his "fraud-sniffing" abilities to alert federal authorities, who discovered the firm was a $300 million pyramid scheme.

This was the beginning of the Fraud Discovery Institute, a for-profit investigative firm. Minkow managed to dupe the investment community again; several Wall Street investors liked what they saw and sent him enough money to go after bigger targets. By Minkow's estimate, he had uncovered $1 billion worth of fraud over the years. We assume that Minkow missed the adrenalin rush of committing fraud that kept him going for so long in the 1990s, and in 2009 he issued a report accusing the major homebuilder Lennar of massive fraud. Minkow claimed that irregularities in Lennar's off-balance-sheet debt accounting were evidence of a massive Ponzi scheme. He accused Lennar of not disclosing enough information about this to its shareholders, and also claimed that a Lennar executive took out a fraudulent personal loan. Minkow denounced Lennar as "a financial crime in progress" and "a corporate bully."

From January 9, 2009 (when Minkow first made his accusations) to January 22, Lennar's stock tumbled from $11.57 a share to only $6.55. Minkow issued the report after being contacted by Nicholas Marsch, a San Diego developer who had filed two lawsuits against Lennar for fraud. One of Marsch's suits was summarily thrown out of court, while the other ended with Marsch having to pay Lennar $12 million in counterclaims. Lennar responded by adding Minkow as a defendant in a libel-and-extortion suit against Marsch. According to court records, Minkow had shorted Lennar stock, buying $20,000 worth of options in a bet that the stock would fall. Minkow also forged documents alleging misconduct on Lennar's part. He went forward with the report even after a private investigator he had hired for the case could not substantiate Marsch's claims.

(In an unrelated development, it was also revealed that Minkow operated the Fraud Discovery Institute out of the offices of his church and even used church money to fund it-something which could have potentially jeopardized his church's tax-exempt status.) On December 27, 2010, Florida circuit court judge Gill Freeman issued terminating actions against Minkow in response to a motion by Lennar. Freeman found that Minkow had repeatedly lied under oath, destroyed or withheld evidence, concealed witnesses, and deliberately tried to "cover up his misconduct."

According to Freeman, Minkow had even lied to his own lawyers about his behavior. Freeman determined that Minkow had perpetuated "a fraud on the court" that was so egregious that letting the case go any further would be a disservice to justice. In her view, "no remedy short of default" was appropriate for Minkow's lies. She ordered Minkow to reimburse Lennar for the legal expenses it incurred while ferreting out his lies. Lennar estimates that its attorneys and investigators spent hundreds of millions of dollars exposing Minkow's lies. On March 16, 2011, Minkow announced through his attorney that he was pleading guilty to one count of insider trading. According to his lawyer, Minkow had bought his Lennar options using "nonpublic information." The plea, which was separate from the civil suit, came a month after Minkow learned that he was the subject of a criminal investigation. Minkow claimed not to know at the time that he was breaking the law. The SEC had already been probing Minkow's trading practices.

On the same day, Minkow resigned his position as senior pastor, saying in a letter to his flock that because he was no longer "above reproach," he felt that he was "no longer qualified to be a pastor." Six weeks earlier, $50,000 in cash and checks was stolen from the church during a burglary. Though unsolved, it was noted as suspicious due to Minkow's admitted history of staging burglaries to collect insurance money. The nature of the "nonpublic information" became clear a week later, when federal prosecutors filed a criminal information action against Minkow, with one count of conspiracy to commit securities fraud. Prosecutors charged that Minkow and Marsch conspired to extort money from Lennar by driving down its stock.

The complaint also revealed that Minkow had sent his allegations to the Federal Bureau of Investigation (FBI), Internal Revenue Service (IRS), and SEC, and that the three agencies found his claims credible enough to open a formal criminal investigation into Lennar's practices. Minkow then used confidential knowledge of that investigation to short Lennar stock, even though he knew he was barred from doing so. Minkow opted to plead guilty to the conspiracy charge rather than face charges of securities fraud and market manipulation, which could have sent him to prison for life.

On March 30, 2011, Minkow pleaded guilty and was eventually sent to jail for five years and ordered to pay Lennar $584 million in damages-roughly the amount the company lost as a result of the bear raid. The ruling stated that Minkow and Marsch had entered into a conspiracy to wreck Lennar's stock in November 2008. With interest, the bill could easily approach $1 billion-far more than he stole in the ZZZZ Best scam.

Questions (continued)

1. What factors do you think motivated Minkow to return to his evil ways after becoming a respected member of the community following his release from prison in the ZZZZ Best fraud?

2. Using Kohlberg's stages of moral development, how would you characterize Minkow's actions after being released from prison in the ZZZZ Best fraud? Explain the effects of Minkow's actions on the stakeholders who relied on him to act in a professional manner.