Barry Minkow Fraud: How He Duped the FBI to Tell Him Secret Info on Lennar Corp.
By Beth Barrett
New details emerged in a plea deal signed by Barry Minkow showing how the ZZZZ Best con man-turned-fraud buster and pastor cleverly exploited the FBI to get proprietary information on home-builder Lennar Corp. -- then used that knowledge illegally to make huge secret trades of Lennar's stock.
Minkow duped the FBI to give him "specific, material, non-public" information -- specifically, the fact that the FBI was investigating Lennar. Yet the FBI probe, in turn, was based on a scathing, falsified 2009 report on Lennar produced by Minkow himself, via his Fraud Discovery Institute. Here's how it worked:
The scheme began a few years ago, after Minkow was retained for at least $1 million by Nicolas Marsch III, a San Diego developer who was in a payment dispute with Lennar. After that, Minkow's Fraud Discovery Institute issued its scathing report on the giant home-builder.
The FBI then launched an investigation of Lennar, based on Minkow's Fraud Discovery Institute's damning report. But a Florida judge later found the report to be "false and misleading," and produced by Minkow to artificially depress Lennar's stock price.
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Minkow's manipulative gambit worked: Lennar's stock plummeted $500 million over two trading days after Minkow issued the falsified report.
Minkow then abused his relationship with the FBI to obtain the secret information -- the fact that the bureau had opened an investigation into Lennar based on Minkow's report.
Once Minkow gleaned that information from the FBI, Minkow on March 16, 2009 opened a "nominee" account -- meaning under a name not his own -- and bought options contracts that would turn a profit if Lennar's stock plummeted.
The L.A. Weekly first raised serious allegations that Minkow was not the redeemed ex-con he purported to be, in its cover story "Minkow 2.0."
"Despite the fact that Minkow had a well-known duty to refrain from trading securities based on this information, Minkow transferred funds from a Morgan Stanley trading account to a trading account located in the Southern District of Florida held in a nominee's name," the plea agreement says.
He used the account "to execute multiple trades in Lennar Corporation options contracts."
An internal communication at the broker-dealer described Minkow's position as a "risky highly concentrated position in Lennar SSF's (option contracts)" comprised of more than 150 contracts, the plea agreement adds.
Minkow initially lied under oath, saying he had never shorted Lennar's stock by betting the stock would tumble.
When confronted with trading records, he admitted he had indeed shorted Lennar's stock both before and after issuing his falsified report.
Minkow later insisted he had "forgotten" about the trade he engaged in before he released his report -- a claim that Florida State Court Judge Gill Freeman said was "not credible."
Freeman noted that while Minkow wrote a May 7, 2010 email to associate Bill Lobdell referencing a "disaster" in Lennar trades the two had made, at a hearing Minkow testified he didn't know what those trades were.
The Weekly also reported Minkow admitted to taking a long position -- betting the stock would climb in value -- in December 2009.
Despite being asked repeatedly about his Lennar trading history, Minkow kept secret the existence of the stealth "nominee" trading account until the plea agreement was released.
Minkow's plea to one felony count of conspiracy to commit securities fraud carries up to five years in prison.
The U.S. Attorney said Minkow and others also relied on relationships with "analysts and market participants in the execution of this conspiracy."
"For instance, Minkow and others informed an analyst that Minkow and others were meeting with 60 Minutes, an investigative news show, to discuss fraud at Lennar Corporation.
"Despite the fact that many of Minkow's allegations were unsubstantiated and vague, the scope of the allegations and Minkow's public stature created 'headline risk' that materially and fraudulently depressed the value of Lennar Corporation's common stock.
"Once it became clear that Minkow's actions were materially impacting Lennar Corporation's stock price, representatives for Conspirator A (Marsch) offered to have Minkow retract his damaging fraud allegations in return for a payment of cash and Lennar Corporation common stock.
"As evidence of the positive effect of such a retraction, Conspirator A's representatives pointed to the experience of one or more other corporations that were the subject of similar allegations (and a subsequent retraction) by Minkow in recent years," the agreement says.
Marsch's attorney. Richard VanDyke of LaJolla. could not be reached for comment.
He told the LA Times that Marsch was "not a conspirator with Mr. Minkow in any way, shape or form. Mr. Minkow is on his own down there in Florida."
Lennar's CEO Stuart Miller says the company will continue to cooperate with authorities in the investigation.
Lennar's attorney, Daniel Petrocelli, adds: "All individuals responsible for this illegal conduct must be brought to justice. Conspiring, lying and manipulating the securities markets to extort money cannot be tolerated."