ZZZZ Best Company, Inc.

ZZZZ Best Company, Inc.

On May 19, 1987, a short article in the

Wall Street Journal

reported that ZZZZ Best

Company, Inc., of Reseda, California, had signed a contract for a $13.8 million insurance

restoration project. This project was just the most recent of a series of large restoration

jobs obtained by ZZZZ Best (pronounced "zee best"). Located in the San Fernando Valley of

southern California, ZZZZ Best had begun operations in the fall of 1982 as a small, door-to-

door carpet cleaning business. Under the direction of Barry Minkow, the extroverted 16-

year-old who founded the company and initially operated it out of his parents' garage, ZZZZ

Best experienced explosive growth in both revenues and profits during the first several

years of its existence. In the three-year period from 1984 to 1987, the company's net

income surged from less than $200,000 to more than $5 million on revenues of $50 million.

When ZZZZ Best went public in 1986, Minkow and several of his close associates became

multimillionaires overnight. By the late spring of 1987, the market value of Minkow's stock

in the company exceeded $100 million, while the total market value of ZZZZ Best surpassed

$200 million. The youngest chief executive officer in the nation enjoyed the "good life,"

which included an elegant home in an exclusive suburb of Los Angeles and a fire-engine red

Ferrari. Minkow's charm and entrepreneurial genius made him a sought-after commodity

on the television talk show circuit and caused the print and visual media to tout him as an

example of what America's youth could attain if they would only apply themselves. During

an appearance on

The Oprah Winfrey Show

in April 1987, Minkow exhorted his peers with

evangelistic zeal to "Think big, be big" and encouraged them to adopt his personal motto,

"The sky is the limit."

Less than two years after appearing on

Oprah

, Barry Minkow began serving a 25-year

prison sentence. Tried and convicted on 57 counts of securities fraud, Minkow had been

exposed as a fast-talking con artist who swindled his closest friends and Wall Street out of

millions of dollars. Federal prosecutors estimate that, at a minimum, Minkow cost investors

and creditors $100 million. The company that Minkow founded was, in fact, an elaborate

Ponzi scheme. The reported profits of the firm were nonexistent and the large restoration

contracts, imaginary. As one journalist reported, rather than building a corporation,

Minkow created a hologram of a corporation. In July 1987, just three months after the

company's stock reached a market value of $220 million, an auction of its assets netted

only $62,000.

Unlike most financial frauds, the ZZZZ Best scam was perpetrated under the watchful eye of

the Securities and Exchange Commission (SEC). The SEC, a large and reputable West Coast

law firm that served as the company's general counsel, a prominent Wall Street brokerage

firm, and an international public accounting firm all failed to uncover Minkow's daring

2

scheme. Ultimately, the persistence of an indignant homemaker who had been bilked out of

a few hundred dollars by ZZZZ Best resulted in Minkow being exposed as a fraud.

How a teenage flimflam artist could make a mockery of the complex regulatory structure

that oversees the U.S. securities markets was the central question posed by a congressional

subcommittee that investigated the ZZZZ Best debacle. That subcommittee was headed by

Representative John D. Dingell, chairman of the U.S. House Committee on Energy and

Commerce. Throughout the investigation, Representative Dingell and his colleagues

focused on the role the company's independent auditors played in the ZZZZ Best scandal.

The ZZZZ Best prospectus told the public that revenues and earnings from

insurance restoration contracts were skyrocketing but did not reveal that the

contracts were completely fictitious. Where were the independent auditors and the

others that are paid to alert the public to fraud and deceit?

Like many other daring financial frauds, the ZZZZ Best scandal caused Congress to

reexamine the maze of rules that regulate financial reporting and serve as the foundation of

the U.S. system of corporate oversight. However, Daniel Akst, a reporter for the Wall Street

Journal who documented the rise and fall of Barry Minkow, suggested that another ZZZZ

Best was inevitable. "Changing the accounting rules and securities laws will help, but every

now and then a Barry Minkow will come along, and ZZZZ Best will happen again. Such

frauds are in the natural order of things, I suspect, as old and enduring as human needs."

The Early History of ZZZZ Best Company

Barry Minkow was introduced to the carpet cleaning industry at the age of 12 by his

mother, who helped make ends meet by working as a telephone solicitor for a small carpet

cleaning firm. Although the great majority of companies in the carpet cleaning industry are

legitimate, the nature of the business attracts a disproportionate number of shady

characters. There are essentially no barriers to entry: no licensing requirements, no

apprenticeships to be served, and only a minimal amount of startup capital is needed. A 16-

year-old youth with a driver's license can easily become what industry insiders refer to as a

"rug sucker," which is exactly what Minkow did when he founded ZZZZ Best Company.

Minkow quickly learned that carpet cleaning was a difficult way to earn a livelihood.

Customer complaints, ruthless competition, bad checks, and nagging vendors demanding

payment complicated the young entrepreneur's life. Within months of striking out on his

own, Minkow faced the ultimate nemesis of the small businessperson: a shortage of

working capital. Because of his age and the fact that ZZZZ Best was only marginally

profitable, local banks refused to loan him money. Ever resourceful, the brassy teenager

came up with his own innovative ways to finance his business: check kiting, credit card

forgeries, and the staging of thefts to fleece his insurance company.

3

Minkow's age and personal charm allowed him to escape unscathed from his early brushes

with the law that resulted from his creative financing methods. The ease with which the

"system" could be beaten encouraged him to exploit it on a broader scale.

Throughout his tenure with ZZZZ Best, Minkow recognized the benefits of having an

extensive social network of friends and acquaintances. Many of these relationships he

developed and cultivated at a Los Angeles health club. After becoming a friend of Tom

Padgett, an insurance claims adjuster, Minkow devised a scheme to exploit that friendship.

Minkow promised to pay Padgett $100 per week if he would simply confirm over the

telephone to banks and any other interested third parties that ZZZZ Best was the recipient

of occasional insurance restoration contracts. Ostensibly, Minkow had obtained these

contracts to clean and do minor remodeling work on properties damaged by fire, storms, or

other catastrophes. Minkow convinced the gullible Padgett that the sole purpose of the

confirmations was to allow ZZZZ Best to circumvent much of the bureaucratic red tape in

the insurance industry.

From this modest beginning, the ZZZZ Best fraud blossomed. Initially, Minkow used the

phony insurance restoration contracts to generate the paper profits and revenues he

needed to convince bankers to loan him money. Minkow's phony financial statements

served their purpose, and he expanded his operations by opening several carpet cleaning

outlets across the San Fernando Valley. Minkow soon realized that there was no need to tie

his future to the cutthroat carpet cleaning industry when he could literally dictate the size

and profitability of his insurance restoration "business." Within a short period of time,

insurance restoration, rather than carpet cleaning, became the major source of revenue

appearing on ZZZZ Best's income statements.

Minkow's "the sky is the limit" philosophy drove him to be even more innovative. The

charming young entrepreneur began using his bogus financial statements to entice wealthy

individuals in his ever-expanding social network to invest in ZZZZ Best. Eventually, Minkow

recognized that the ultimate scam would be to take his company public, a move that would

allow him to tap the bank accounts of unsuspecting investors nationwide.

Going Public with ZZZZ Best

Minkow's decision to take ZZZZ Best public meant that he could no longer control his firm's

financial disclosures. Registering with the SEC required auditors, investment bankers, and

outside attorneys to peruse ZZZZ Best's periodic financial statements.

ZZZZ Best was first subjected to a full-scope independent audit for the 12 months ended

April 30, 1986. George Greenspan, the sole practitioner who performed that audit,

confirmed the existence of ZZZZ Best's major insurance restoration contracts by contacting

Tom Padgett. Padgett served as the principal officer of Interstate Appraisal Services, which

reportedly contracted the jobs out to ZZZZ Best. By this time, Padgett was an active and

willing participant in Minkow's fraudulent schemes. Minkow established Interstate

3

Minkow's age and personal charm allowed him to escape unscathed from his early brushes

with the law that resulted from his creative financing methods. The ease with which the

"system" could be beaten encouraged him to exploit it on a broader scale.

Throughout his tenure with ZZZZ Best, Minkow recognized the benefits of having an

extensive social network of friends and acquaintances. Many of these relationships he

developed and cultivated at a Los Angeles health club. After becoming a friend of Tom

Padgett, an insurance claims adjuster, Minkow devised a scheme to exploit that friendship.

Minkow promised to pay Padgett $100 per week if he would simply confirm over the

telephone to banks and any other interested third parties that ZZZZ Best was the recipient

of occasional insurance restoration contracts. Ostensibly, Minkow had obtained these

contracts to clean and do minor remodeling work on properties damaged by fire, storms, or

other catastrophes. Minkow convinced the gullible Padgett that the sole purpose of the

confirmations was to allow ZZZZ Best to circumvent much of the bureaucratic red tape in

the insurance industry.

From this modest beginning, the ZZZZ Best fraud blossomed. Initially, Minkow used the

phony insurance restoration contracts to generate the paper profits and revenues he

needed to convince bankers to loan him money. Minkow's phony financial statements

served their purpose, and he expanded his operations by opening several carpet cleaning

outlets across the San Fernando Valley. Minkow soon realized that there was no need to tie

his future to the cutthroat carpet cleaning industry when he could literally dictate the size

and profitability of his insurance restoration "business." Within a short period of time,

insurance restoration, rather than carpet cleaning, became the major source of revenue

appearing on ZZZZ Best's income statements.

Minkow's "the sky is the limit" philosophy drove him to be even more innovative. The

charming young entrepreneur began using his bogus financial statements to entice wealthy

individuals in his ever-expanding social network to invest in ZZZZ Best. Eventually, Minkow

recognized that the ultimate scam would be to take his company public, a move that would

allow him to tap the bank accounts of unsuspecting investors nationwide.

Going Public with ZZZZ Best

Minkow's decision to take ZZZZ Best public meant that he could no longer control his firm's

financial disclosures. Registering with the SEC required auditors, investment bankers, and

outside attorneys to peruse ZZZZ Best's periodic financial statements.

ZZZZ Best was first subjected to a full-scope independent audit for the 12 months ended

April 30, 1986. George Greenspan, the sole practitioner who performed that audit,

confirmed the existence of ZZZZ Best's major insurance restoration contracts by contacting

Tom Padgett. Padgett served as the principal officer of Interstate Appraisal Services, which

reportedly contracted the jobs out to ZZZZ Best. By this time, Padgett was an active and

willing participant in Minkow's fraudulent schemes. Minkow established Interstate

4

Appraisal Services and Assured Property Management for the sole purpose of generating

fake insurance restoration contracts for ZZZZ Best.

In testimony before the congressional subcommittee that investigated the ZZZZ Best

scandal, Greenspan insisted that he had properly audited Minkow's company. Greenspan

testified that while planning the 1986 audit he had performed various analytical

procedures to identify unusual relationships in ZZZZ Best's financial data. These

procedures allegedly included comparing ZZZZ Best's key financial ratios with industry

norms. Regarding the insurance contracts, Greenspan testified that he had obtained and

reviewed copies of all key documents pertaining to those jobs. However, Greenspan

admitted that he had not inspected any of the insurance restoration sites.

Congressman Lent:

Mr. Greenspan, I am interested in the SEC Form S-1 that ZZZZ Best Company filed with the

SEC. . . . You say in that report that you made your examination in accordance with generally

accepted auditing standards and accordingly included such tests of the accounting records and

other auditing procedures as we consider necessary in the circumstances. . . . You don't say in

that statement that you made any personal on-site inspections.

Mr. Greenspan:

It's not required. Sometimes you do; sometimes you don't. I was satisfied that these jobs existed

and I was satisfied from at least six different sources, including payment for the job. What could

you want better than that?

Congressman Lent:

Your position is that you are an honest and reputable accountant.

Mr. Greenspan:

Yes, sir.

Congressman Lent:

You were as much a victim as some of the investors in this company?

Mr. Greenspan:

I was a victim all right. . . . I am as much aghast as anyone. And every night I sit down and say,

why didn't I detect this damned fraud.

Retention of Ernst & Whinney by ZZZZ Best

Shortly after Greenspan completed his audit of ZZZZ Best's financial statements for fiscal

1986, which ended April 30, 1986, Minkow dismissed him and retained Ernst & Whinney to

perform the following year's audit. Apparently, ZZZZ Best's investment banker insisted that

Minkow obtain a major accounting firm to enhance the credibility of the company's

financial statements. At approximately the same time, and for the same reason, Minkow

retained a high-profile Los Angeles law firm to represent ZZZZ Best as its legal counsel.

The congressional subcommittee asked Greenspan what information he provided to Ernst

& Whinney regarding his former client. In particular, the subcommittee wanted to know

whether Greenspan discussed the insurance restoration contracts with the new auditors.

Congressman Wyden:

4

Appraisal Services and Assured Property Management for the sole purpose of generating

fake insurance restoration contracts for ZZZZ Best.

In testimony before the congressional subcommittee that investigated the ZZZZ Best

scandal, Greenspan insisted that he had properly audited Minkow's company. Greenspan

testified that while planning the 1986 audit he had performed various analytical

procedures to identify unusual relationships in ZZZZ Best's financial data. These

procedures allegedly included comparing ZZZZ Best's key financial ratios with industry

norms. Regarding the insurance contracts, Greenspan testified that he had obtained and

reviewed copies of all key documents pertaining to those jobs. However, Greenspan

admitted that he had not inspected any of the insurance restoration sites.

Congressman Lent:

Mr. Greenspan, I am interested in the SEC Form S-1 that ZZZZ Best Company filed with the

SEC. . . . You say in that report that you made your examination in accordance with generally

accepted auditing standards and accordingly included such tests of the accounting records and

other auditing procedures as we consider necessary in the circumstances. . . . You don't say in

that statement that you made any personal on-site inspections.

Mr. Greenspan:

It's not required. Sometimes you do; sometimes you don't. I was satisfied that these jobs existed

and I was satisfied from at least six different sources, including payment for the job. What could

you want better than that?

Congressman Lent:

Your position is that you are an honest and reputable accountant.

Mr. Greenspan:

Yes, sir.

Congressman Lent:

You were as much a victim as some of the investors in this company?

Mr. Greenspan:

I was a victim all right. . . . I am as much aghast as anyone. And every night I sit down and say,

why didn't I detect this damned fraud.

Retention of Ernst & Whinney by ZZZZ Best

Shortly after Greenspan completed his audit of ZZZZ Best's financial statements for fiscal

1986, which ended April 30, 1986, Minkow dismissed him and retained Ernst & Whinney to

perform the following year's audit. Apparently, ZZZZ Best's investment banker insisted that

Minkow obtain a major accounting firm to enhance the credibility of the company's

financial statements. At approximately the same time, and for the same reason, Minkow

retained a high-profile Los Angeles law firm to represent ZZZZ Best as its legal counsel.

The congressional subcommittee asked Greenspan what information he provided to Ernst

& Whinney regarding his former client. In particular, the subcommittee wanted to know

whether Greenspan discussed the insurance restoration contracts with the new auditors.

Congressman Wyden:

5

Mr. Greenspan, in September 1986, Ernst & Whinney came on as the new independent

accountant for ZZZZ Best. What did you communicate to Ernst & Whinney with respect to the

restoration contracts?

Mr. Greenspan:

Nothing. I didthere was nothing because they never got in touch with me. It's protocol for the

new accountant to get in touch with the old accountant. They never got in touch with me, and it's

still a mystery to me.

Representatives of Ernst & Whinney later testified that they did, in fact, communicate with

Greenspan prior to accepting ZZZZ Best as an audit client. However, Ernst & Whinney did

not comment on the nature or content of that communication. (Greenspan was not recalled

to rebut Ernst & Whinney's testimony on this issue.)

Exhibit 1 contains the engagement letter signed by Ernst & Whinney and Barry Minkow in

September 1986. The engagement letter outlined four services that the audit firm intended

to provide ZZZZ Best: a review of the company's financial statements for the three-month

period ending July 31, 1986; assistance in the preparation of a registration statement to be

filed with the SEC; a comfort letter to be submitted to ZZZZ Best's underwriters; and a full-

scope audit for the fiscal year ending April 30, 1987. Ernst & Whinney completed the

review, provided the comfort letter to ZZZZ Best's underwriters, and apparently assisted

the company in preparing the registration statement for the SEC; however, Ernst &

Whinney never completed the 1987 audit. The audit firm resigned on June 2, 1987, amid

growing concerns that ZZZZ Best's financial statements were grossly misstated.

6

Exhibit 1

Ernst & Whinney's ZZZZ Best Engagement Letter

September 12, 1986

Mr. Barry Minkow

Chairman of the Board

ZZZZ Best Co., Inc.

7040 Darby Avenue

Reseda, California

Dear Mr. Minkow:

This letter is to confirm our understanding regarding our engagement as independent

accountants of ZZZZ BEST CO., INC. (the Company) and the nature and limitations of the

services we will provide.

We will perform the following services:

1. We will review the balance sheet of the Company as of July 31, 1986, and the related

statements of income, retained earnings, and changes in financial position for the three

months then ended, in accordance with standards established by the American Institute

of Certified Public Accountants. We will not perform an audit of such financial

statements, the objective of which is the expressing of an opinion regarding the

financial statements taken as a whole, and, accordingly, we will not express an opinion

on them. Our report on the financial statements is presently expected to read as

follows:

"We have made a review of the condensed consolidated balance sheet of ZZZZ BEST CO.,

INC. and subsidiaries as of July 31, 1986, and the related condensed consolidated

statements of income and changes in financial position for the three-month period ended

July 31, 1986, in accordance with standards established by the American Institute of

Certified Public Accountants. A review of the condensed consolidated financial statements

for the comparative period of the prior year was not made.

A review of financial information consists principally of obtaining an understanding of the

system for the preparation of interim financial information, applying analytical review

procedures to financial data, and making inquiries of persons responsible for financial and

accounting matters. It is substantially less in scope than an examination in accordance with

generally accepted auditing standards, which will be performed for the full year with the

objective of expressing an opinion regarding the financial statements taken as a whole.

Accordingly, we do not express such an opinion. Based on our review, we are not aware of

7

any material modifications that should be made to the condensed consolidated interim

financial statements referred to above for them to be in conformity with generally accepted

accounting principles.

Our engagement cannot be relied upon to disclose errors, irregularities, or illegal acts,

including fraud or defalcations, that may exist. However, we will inform you of any such

matters that come to our attention.

2. We will assist in the preparation of a Registration Statement (Form S-1) under the

Securities Act of 1933 including advice and counsel in conforming the financial

statements and related information to Regulation S-X.

3. We will assist in resolving the accounting and financial reporting questions which will

arise as a part of the preparation of the Registration Statement referred to above.

4. We will prepare a letter for the underwriters, if required (i.e., a Comfort Letter), bearing

in mind the limited nature of the work we have done with respect to the financial data.

5. We will examine the consolidated financial statements of the Company as of April 30,

1987, and for the year then ended and issue our report in accordance with generally

accepted auditing standards approved by the American Institute of Certified Public

Accountants. These standards contemplate, among other things, that (1) we will study

and evaluate the Company's internal control system as a basis for reliance on the

accounting records and for determining the extent of our audit tests; and (2) that we

will be able to obtain sufficient evidential matter to afford a reasonable basis for our

opinion on the financial statements. However, it should be understood that our reports

will necessarily be governed by the findings developed in the course of our examination

and that we could be required, depending upon the circumstances, to modify our

reporting from the typical unqualified opinion. We will advise you, as our examination

progresses, if any developments indicate that we will be unable to express an

unqualified opinion. Because our examination will be performed generally on a test

basis, it will not necessarily disclose irregularities, if any, that may exist. However, we

will promptly report to you any irregularities which our examination does disclose.

Our fees will be derived from our customary rates for the various personnel involved plus

outof- pocket expenses. Certain factors can have an effect on the time incurred in the

conduct of our work. Among these are the general condition of the accounting records, the

amount of assistance received from your personnel in the accumulation of data, the size

and transaction volume of business, any significant financial reporting issues that arise in

connection with the SEC's review of the S-1, as well as unforeseen circumstances. Based

upon our current understanding of the situation, the amount of our proposed billing for the

various services which we will be providing are estimated to be:

Review of the July 31, 1986 financial statements

$ 5,000-$7,500

Assistance in the preparation of the Registration Statement

8,000-30,000

Comfort Letter

4,000-6,000

7

any material modifications that should be made to the condensed consolidated interim

financial statements referred to above for them to be in conformity with generally accepted

accounting principles.

Our engagement cannot be relied upon to disclose errors, irregularities, or illegal acts,

including fraud or defalcations, that may exist. However, we will inform you of any such

matters that come to our attention.

2. We will assist in the preparation of a Registration Statement (Form S-1) under the

Securities Act of 1933 including advice and counsel in conforming the financial

statements and related information to Regulation S-X.

3. We will assist in resolving the accounting and financial reporting questions which will

arise as a part of the preparation of the Registration Statement referred to above.

4. We will prepare a letter for the underwriters, if required (i.e., a Comfort Letter), bearing

in mind the limited nature of the work we have done with respect to the financial data.

5. We will examine the consolidated financial statements of the Company as of April 30,

1987, and for the year then ended and issue our report in accordance with generally

accepted auditing standards approved by the American Institute of Certified Public

Accountants. These standards contemplate, among other things, that (1) we will study

and evaluate the Company's internal control system as a basis for reliance on the

accounting records and for determining the extent of our audit tests; and (2) that we

will be able to obtain sufficient evidential matter to afford a reasonable basis for our

opinion on the financial statements. However, it should be understood that our reports

will necessarily be governed by the findings developed in the course of our examination

and that we could be required, depending upon the circumstances, to modify our

reporting from the typical unqualified opinion. We will advise you, as our examination

progresses, if any developments indicate that we will be unable to express an

unqualified opinion. Because our examination will be performed generally on a test

basis, it will not necessarily disclose irregularities, if any, that may exist. However, we

will promptly report to you any irregularities which our examination does disclose.

Our fees will be derived from our customary rates for the various personnel involved plus

outof- pocket expenses. Certain factors can have an effect on the time incurred in the

conduct of our work. Among these are the general condition of the accounting records, the

amount of assistance received from your personnel in the accumulation of data, the size

and transaction volume of business, any significant financial reporting issues that arise in

connection with the SEC's review of the S-1, as well as unforeseen circumstances. Based

upon our current understanding of the situation, the amount of our proposed billing for the

various services which we will be providing are estimated to be:

Review of the July 31, 1986 financial statements

$ 5,000-$7,500

Assistance in the preparation of the Registration Statement

8,000-30,000

Comfort Letter

4,000-6,000

8

Audit of financial statements as of April 30, 1987

24,000-29,000

We will invoice you each month for the time charges and expenses incurred in the previous

month and such invoices are due and payable upon presentation.

Larry D. Gray, Partner, is the Client Service Executive assigned to the engagement. Peter

Griffith, Audit Manager, and Michael McCormick, Tax Manager, have also been assigned.

We greatly appreciate your engagement of our firm; if you have any questions, we shall be

pleased to discuss them with you. Please indicate your acceptance of the above

arrangements by signing and returning the enclosed copy. This letter constitutes the full

understanding of the terms of our engagement.

Very truly yours,

Ernst & Whinney

By Larry D. Gray, Partner

ACCEPTED:

ZZZZ BEST CO., INC.

Barry J. Minkow, Chairman of the Board (signed)

9/16/86

8

Audit of financial statements as of April 30, 1987

24,000-29,000

We will invoice you each month for the time charges and expenses incurred in the previous

month and such invoices are due and payable upon presentation.

Larry D. Gray, Partner, is the Client Service Executive assigned to the engagement. Peter

Griffith, Audit Manager, and Michael McCormick, Tax Manager, have also been assigned.

We greatly appreciate your engagement of our firm; if you have any questions, we shall be

pleased to discuss them with you. Please indicate your acceptance of the above

arrangements by signing and returning the enclosed copy. This letter constitutes the full

understanding of the terms of our engagement.

Very truly yours,

Ernst & Whinney

By Larry D. Gray, Partner

ACCEPTED:

ZZZZ BEST CO., INC.

Barry J. Minkow, Chairman of the Board (signed)

9/16/86

9

The congressional subcommittee investigating the ZZZZ Best fraud questioned Ernst &

Whinney representatives at length regarding the bogus insurance restoration contracts

contracts that accounted for 90 percent of ZZZZ Best's reported profits. Congressional

testimony disclosed that Ernst & Whinney repeatedly insisted on visiting several of the

largest of these contract sites and that Minkow and his associates attempted to discourage

such visits. Eventually, Minkow realized that the auditors would not relent and agreed to

allow them to visit certain of the restoration sites, knowing full well that none of the sites

actually existed.

To convince Ernst & Whinney that the insurance restoration contracts were authentic,

Minkow plotted and carried out a series of sting operations that collectively cost millions of

dollars. In the late fall of 1986, Larry Gray, the engagement audit partner for ZZZZ Best, told

client personnel that he wanted to inspect a restoration site in Sacramento on which ZZZZ

Best had reported obtaining a multimillion-dollar contract. Minkow sent two of his

subordinates to Sacramento to find a large building under construction or renovation that

would provide a plausible site for a restoration contract. Gray had visited Sacramento a few

weeks earlier to search for the site that Minkow had refused to divulge. As chance would

have it, the building chosen by the ZZZZ Best conspirators was the same one Gray had

identified as the most likely site of the insurance restoration job.

Minkow's two confederates posed as leasing agents of a property management firm and

convinced the supervisor of the construction site to provide the keys to the building one

weekend on the pretext that a large, prospective tenant wished to tour the facility. Prior to

the arrival of Larry Gray and an attorney representing ZZZZ Best's law firm, Minkow's

subordinates visited the site and placed placards on the walls at conspicuous locations

indicating that ZZZZ Best was the contractor for the building renovation. No details were

overlooked by the two co-conspirators. They even paid the building's security officer to

greet the visitors and demonstrate that he was aware in advance of their tour of the site

and its purpose. Although the building had not been damaged and instead was simply in

the process of being completed, the sting operation went off as planned.

Exhibit 2 presents

the memorandum Gray wrote describing his tour of the buildinga memorandum

included in Ernst & Whinney's ZZZZ Best workpapers.

10

Exhibit 2

Ernst & Whinney Internal Memo Regarding Visit to ZZZZ Best

Restoration Project

TO: ZZZZ Best Co., Inc. File

FROM: Larry D. Gray

RE: Visit to Sacramento Job

At our request, the Company arranged for a tour of the job site in Sacramento on November

23rd [1986]. The site (not previously identified for us because of the confidentiality

agreement with their customer) had been informally visited by me on October 27. I knew

approximately where the job was, and was able to identify it through the construction

activity going on.

On November 23, Mark Morse accompanied Mark Moskowitz of Hughes Hubbard & Reed

and myself to Sacramento. We visited first the offices of the Building Manager, Mark Roddy

of Assured Property Management, Inc. Roddy was hired by the insurance company (at Tom

Padgett's suggestion according to Morse) to oversee the renovation activities and the

leasing of the space. Roddy accompanied us to the building site.

We were informed that the damage occurred from the water storage on the roof of the

building. The storage was for the sprinkler systems, but the water was somehow released

in total, causing construction damage to floors 17 and 18, primarily in bathrooms which

were directly under the water holding tower, then the water spread out and flooded floors

16 down through about 5 or 6, where it started to spread out even further and be held in

pools.

We toured floor 17 briefly (it is currently occupied by a law firm) then visited floor 12

(which had a considerable amount of unoccupied space) and floor 7. Morse pointed out to

us the carpet, painting and clean-up work which had been ZZZZ Best's responsibility. We

noted some work not done in some other areas (and in unoccupied tenant space). But per

Mark, this was not ZZZZ Best's responsibility, rather was work being undertaken by

tenants for their own purposes.

Per Morse (and Roddy) ZZZZ Best's work is substantially complete and has passed final

inspection. Final sign-off is expected shortly, with final payment due to ZZZZ Best in early

December.

Morse was well versed in the building history and in the work scope for ZZZZ Best. The

tour was beneficial in gaining insight as to the scope of the damage that had occurred and

the type of work that the Company can do.

11

Congressional investigators quizzed Gray regarding the measures he took to confirm that

ZZZZ Best actually had a restoration contract on the Sacramento building. They were

particularly concerned that he never discovered the building had not suffered several

million dollars in damages a few months earlier, as claimed by ZZZZ Best personnel.

Congressman Lent:

... Did you check the building permit or construction permit?

Mr. Gray:

No, sir. That wouldn't be necessary to accomplish what I was setting out to accomplish.

Congressman Lent:

And you did not check with the building's owners to see if an insurance claim had been filed?

Mr. Gray:

Same answer. It wasn't necessary. I had seen the paperwork internally of our client, the support

for a great amount of detail. So, I had no need to askto pursue that.

Congressman Lent:

You understand that what you saw was not anything that was real in any sense of the word? ...

You are saying you were duped, are you not?

Mr. Gray:

Absolutely.

Before allowing Ernst & Whinney auditors to visit a bogus restoration project, Minkow

insisted that the firm sign a confidentiality agreement.

Exhibit 3 presents a copy of that

agreement. Members of the congressional subcommittee were troubled by the following

stipulation of the confidentiality agreement: "We will not make any follow-up telephone

calls to any contractors, insurance companies, the building owner, or other individuals

involved in the restoration contract." This restriction effectively precluded the auditors

from corroborating the insurance restoration contracts with independent third parties.

Resignation of Ernst & Whinney

Ernst & Whinney resigned as ZZZZ Best's auditor on June 2, 1987, following a series of

disturbing events that caused the firm to question Barry Minkow's integrity. First, Ernst &

Whinney was alarmed by a

Los Angeles Times

article in mid-May 1987 that revealed

Minkow had been involved in a string of credit card forgeries as a teenager. Second, on May

28, 1987, ZZZZ Best issued a press release, without consulting or notifying Ernst &

Whinney, that reported record profits and revenues.

12

Exhibit 3

Ernst & Whinney's Confidentiality Agreement with ZZZZ Best

Regarding Visits to Restoration Projects

Mr. Barry Minkow, President

ZZZZ Best Co., Inc.

7040 Darby Avenue

Reseda, California

Dear Barry,

In connection with the proposed public offering (the Offering) of units consisting of

common stock and warrants of ZZZZ Best Co., Inc. (the Company), we have requested a tour

of the site of the Company's insurance restoration project in Sacramento, California,

Contract No. 18886. Subject to the representations and warranties below, the Company has

agreed to arrange such a tour, which will be conducted by a representative of Assured

Property Management Inc. (the Representative), which company is unaffiliated with

Interstate Appraisal Services. The undersigned, personally and on behalf of Ernst &

Whinney, hereby represents and warrants that:

1. We will not disclose the location of such building, or any other information with respect

to the project or the building, to any third parties or to any other members or

employees of our firm;

2. We will not make any follow-up telephone calls to any contractors, insurance

companies, the building owner, or other individuals involved in the restoration project;

3. We will obey all on-site safety and other rules and regulations established by the

Company, Interstate Appraisal Services, and the Representative;

4. The undersigned will be the only representative of this Firm present on the tour.

This Confidentiality Letter is also being furnished for the benefit of Interstate Appraisal

Services, to the same extent as if it were furnished directly to such company.

12

Exhibit 3

Ernst & Whinney's Confidentiality Agreement with ZZZZ Best

Regarding Visits to Restoration Projects

Mr. Barry Minkow, President

ZZZZ Best Co., Inc.

7040 Darby Avenue

Reseda, California

Dear Barry,

In connection with the proposed public offering (the Offering) of units consisting of

common stock and warrants of ZZZZ Best Co., Inc. (the Company), we have requested a tour

of the site of the Company's insurance restoration project in Sacramento, California,

Contract No. 18886. Subject to the representations and warranties below, the Company has

agreed to arrange such a tour, which will be conducted by a representative of Assured

Property Management Inc. (the Representative), which company is unaffiliated with

Interstate Appraisal Services. The undersigned, personally and on behalf of Ernst &

Whinney, hereby represents and warrants that:

1. We will not disclose the location of such building, or any other information with respect

to the project or the building, to any third parties or to any other members or

employees of our firm;

2. We will not make any follow-up telephone calls to any contractors, insurance

companies, the building owner, or other individuals involved in the restoration project;

3. We will obey all on-site safety and other rules and regulations established by the

Company, Interstate Appraisal Services, and the Representative;

4. The undersigned will be the only representative of this Firm present on the tour.

This Confidentiality Letter is also being furnished for the benefit of Interstate Appraisal

Services, to the same extent as if it were furnished directly to such company.

13

Minkow intended this press release to restore investors' confidence in the company

confidence that had been shaken by the damaging

Los Angeles Times

story. Third, and most

important, on May 29, Ernst & Whinney auditors discovered evidence supporting

allegations made several weeks earlier by a third-party informant that ZZZZ Best's

insurance restoration business was fictitious.

The informant had contacted Ernst & Whinney in April 1987 and asked for $25,000 in

exchange for information proving that one of the firm's clients was engaging in a massive

fraud. Ernst & Whinney refused to pay the sum, and the individual recanted shortly

thereafter, but not until the firm determined that the allegation involved ZZZZ Best.

(Congressional testimony disclosed that the individual recanted because of a bribe paid to

him by Minkow.) Despite the retraction, Ernst & Whinney questioned Minkow and ZZZZ

Best's board of directors regarding the matter. Minkow insisted that he did not know the

individual who had made the allegation. On May 29, 1987, however, Ernst & Whinney

auditors discovered several cancelled checks that Minkow had personally written to the

informant several months earlier.

Because ZZZZ Best was a public company, the resignation of its independent auditor had to

be reported to the SEC in an 8-K filing. This requirement alerts investors and creditors of

circumstances that may have led to the change in auditors. At the time, SEC registrants

were allowed 15 days to file an 8-K auditor change announcement. After waiting the

maximum permissible time, ZZZZ Best reported the change in auditors but, despite Ernst &

Whinney's insistence, made no mention in the 8-K of the fraud allegation that had been

subsequently recanted.

The SEC requires a former audit firm to prepare a letter to be filed as an exhibit to its

former client's 8-K auditor change announcement. That exhibit letter must comment on the

8-K's accuracy and completeness. In 1987, former audit firms had 30 days to file an exhibit

letter, which was the length of time Ernst & Whinney waited before submitting its exhibit

letter to the SEC. In that letter, Ernst & Whinney revealed that ZZZZ Best's insurance

contracts might be fraudulent.

The congressional subcommittee was alarmed that 45 days passed before the charges of

fraudulent misrepresentations in ZZZZ Best's financial statements were disclosed to the

public. By the time the SEC released Ernst & Whinney's exhibit letter to the public, ZZZZ

Best had filed for protection from its creditors under Chapter 11 of the federal bankruptcy

code. During the period that elapsed between Ernst & Whinney's resignation and the public

release of its 8-K exhibit letter, ZZZZ Best obtained significant financing from several

parties, including $1 million from one of Minkow's close friends. These parties never

recovered the funds invested in, or loaned to, ZZZZ Best. As a direct result of the ZZZZ Best

debacle, the SEC shortened the length of time that registrants and their former auditors

may wait before filing auditor change documents.

The congressional subcommittee also quizzed Ernst & Whinney representatives regarding

the information they disclosed to Price Waterhouse, the audit firm Minkow retained to

replace Ernst & Whinney.

Congressman Wyden wanted to know whether Ernst &

13

Minkow intended this press release to restore investors' confidence in the company

confidence that had been shaken by the damaging

Los Angeles Times

story. Third, and most

important, on May 29, Ernst & Whinney auditors discovered evidence supporting

allegations made several weeks earlier by a third-party informant that ZZZZ Best's

insurance restoration business was fictitious.

The informant had contacted Ernst & Whinney in April 1987 and asked for $25,000 in

exchange for information proving that one of the firm's clients was engaging in a massive

fraud. Ernst & Whinney refused to pay the sum, and the individual recanted shortly

thereafter, but not until the firm determined that the allegation involved ZZZZ Best.

(Congressional testimony disclosed that the individual recanted because of a bribe paid to

him by Minkow.) Despite the retraction, Ernst & Whinney questioned Minkow and ZZZZ

Best's board of directors regarding the matter. Minkow insisted that he did not know the

individual who had made the allegation. On May 29, 1987, however, Ernst & Whinney

auditors discovered several cancelled checks that Minkow had personally written to the

informant several months earlier.

Because ZZZZ Best was a public company, the resignation of its independent auditor had to

be reported to the SEC in an 8-K filing. This requirement alerts investors and creditors of

circumstances that may have led to the change in auditors. At the time, SEC registrants

were allowed 15 days to file an 8-K auditor change announcement. After waiting the

maximum permissible time, ZZZZ Best reported the change in auditors but, despite Ernst &

Whinney's insistence, made no mention in the 8-K of the fraud allegation that had been

subsequently recanted.

The SEC requires a former audit firm to prepare a letter to be filed as an exhibit to its

former client's 8-K auditor change announcement. That exhibit letter must comment on the

8-K's accuracy and completeness. In 1987, former audit firms had 30 days to file an exhibit

letter, which was the length of time Ernst & Whinney waited before submitting its exhibit

letter to the SEC. In that letter, Ernst & Whinney revealed that ZZZZ Best's insurance

contracts might be fraudulent.

The congressional subcommittee was alarmed that 45 days passed before the charges of

fraudulent misrepresentations in ZZZZ Best's financial statements were disclosed to the

public. By the time the SEC released Ernst & Whinney's exhibit letter to the public, ZZZZ

Best had filed for protection from its creditors under Chapter 11 of the federal bankruptcy

code. During the period that elapsed between Ernst & Whinney's resignation and the public

release of its 8-K exhibit letter, ZZZZ Best obtained significant financing from several

parties, including $1 million from one of Minkow's close friends. These parties never

recovered the funds invested in, or loaned to, ZZZZ Best. As a direct result of the ZZZZ Best

debacle, the SEC shortened the length of time that registrants and their former auditors

may wait before filing auditor change documents.

The congressional subcommittee also quizzed Ernst & Whinney representatives regarding

the information they disclosed to Price Waterhouse, the audit firm Minkow retained to

replace Ernst & Whinney.

Congressman Wyden wanted to know whether Ernst &

14

Whinney had candidly discussed its concerns regarding Minkow's integrity with Price

Waterhouse.

Congressman Wyden:

I am going to insert into the record at this point a memo entitled "Discussion with successor

auditor," written by Mr. Gray and dated June 9, 1987. Regarding a June 4 meeting, Mr. Gray,

with Dan Lyle of Price Waterhouse concerning the integrity of ZZZZ Best's management, you

stated that you had no reportable disagreements and no reservations about management integrity

pending the results of a board of directors' investigation. Then you went on to say that you

resigned because, and I quote here: "We came to a conclusion that we didn't want to become

associated with the financial statements." Is that correct?

Mr. Gray:

That is correct.

Mr. Wyden:

... Mr. Gray, you told the committee staff on May 29, 1987, that when you uncovered evidence

to support allegations of fraud that you decided to pack up your workpapers and leave the ZZZZ

Best audit site. How did your leaving without telling anybody except the ZZZZ Best

management and board of directors the reasons for leaving help the public and investors?

A final twist to the ZZZZ Best scandal was an anonymous letter Ernst & Whinney received

one week after the firm resigned as ZZZZ Best's auditor. At that time, no one other than

Ernst & Whinney and ZZZZ Best's officers was aware of the firm's resignation. The letter,

shown in

Exhibit 4, contained several allegations suggesting that ZZZZ Best's financial

statements were fraudulent. According to the congressional testimony, Ernst & Whinney

forwarded this letter to the SEC on June 17, 1987:

15

Exhibit 4

Anonymous Letter Received by Ernst & Whinney Regarding

ZZZZ Best

June 9, 1987

Ernst & Whinney

515 South Flower

Los Angeles, California 90021

Dear Mr. Wilson:

I am an individual having certain confidential information regarding the financial condition

of ZZZZ Best Co., Inc. I have read the prospectus and your Review Report dated October 3,

1986, and recognize you have not done an examination in accordance with generally

accepted auditing standards, but that such audit will be forthcoming by you.

I wish to make you aware of the following material facts which require you to confirm or

disaffirm:

1. The electric generators which appear on the balance sheet under Note 6 as being

purchased for $1,970,000 were purchased for scrap for less than $100,000 thru

intermediaries of ZZZZ Best and resold to ZZZZ Best at the inflated value. The sole

purpose was to boost the assets on the balance sheet. These generators have never

been used and have no utility to the company.

2. Note 5 of the balance sheet discusses joint ventures and two restoration contracts.

These contracts are fictitious as are the bookkeeping entries to support their validity.

Interstate Appraisal Service [sic] did not let such contracts although they confirm their

existence. The same is true for the alleged $7,000,000 Sacramento contract and the

$40-100 million contracts with Interstate.

3. Further, checks made and passed between ZZZZ Best, its joint venturers and some of its

vendors are no more than transactions among conspirators to support the validity of

these restoration contracts.

4. Earnings reported by ZZZZ Best are being reported as Billings in excess of costs and

estimated earnings on restoration contracts. These contracts do not exist nor do the

earnings. This can be confirmed directly by contacting the alleged insurance carriers as

well as physical inspections as to the existence and extent of the contracts.

5. Billings and Earnings for 1985 and 1986 were fabricated by the company before being

presented to other accountants for certification.

Confirmation of these allegations can be accomplished by a careful due diligence. Such due

diligence on your behalf is imperative for your protection.

Very truly yours,

16

B. Cautious

Collapse of ZZZZ Best

The

Los Angeles Times

article published in mid-May 1987 that disparaged Barry Minkow

ultimately doomed the young entrepreneur and his company. Several years earlier, a

homemaker had fallen victim to Minkow's credit card forgeries. Minkow had added a

fraudulent charge to a credit charge slip the woman had used to make a payment on her

account. Despite her persistence, Minkow avoided repaying the small amount. The woman

never forgot the insult and tracked down, and kept a record of, individuals who had been

similarly harmed by Minkow. At the urging of this woman, a reporter for the

Los Angeles

Times

investigated her allegations. The woman's diary eventually became the basis for

the

Los Angeles Times

article that, for the first time, cast doubt on the integrity of the "boy

wonder" who was the talk of Wall Street.

The newspaper article triggered a chain of events that caused ZZZZ Best to collapse and

disappear less than three months later. First, a small brokerage firm specializing in newly

registered companies with suspicious earnings histories began short-selling ZZZZ Best

stock, forcing the stock's price into a tailspin. Second, Ernst & Whinney, ZZZZ Best's law

firm, and ZZZZ Best's investment banker began giving more credence to the allegations and

rumors of financial wrongdoing by Minkow and his associates. Third, and most important,

the article panicked Minkow and compelled him to make several daring moves that cost

him even more credibility. The most critical mistake was his issuance of the May 28, 1987

press release that boldly reported record profits and revenues for his firm.

Epilogue

Among the parties most vilified for their role in the ZZZZ Best scandal was Ernst &

Whinney. The transcripts of the congressional testimony focusing on the ZZZZ Best fraud

included a list of 10 "red flags" that the audit firm had allegedly overlooked while

examining ZZZZ Best's financial statements (see Exhibit 5). Ernst & Whinney officials flatly

rejected assertions that their firm was even partially to blame for the ZZZZ Best fiasco. In

his congressional testimony, Leroy Gardner, the West Coast director of accounting and

auditing for Ernst & Whinney, maintained that when all the facts were revealed, his firm

would be totally vindicated:

The ZZZZ Best situation proves at least one thing: a well-orchestrated fraud will

often succeed even against careful, honest, hardworking people. . . . The facts that

have begun to emerge establish t