A Miami judge has ruled that former Los Angeles con man Barry Minkow lied, concealed material witnesses and destroyed or discarded key evidence in the libel and extortion lawsuit filed against him by home-building giant Lennar Corp. By doing so, Minkow has forfeited his right to defend himself in the case, the court said.
Florida State Court Judge Gill Freeman on Dec. 27 abruptly granted Lennar's request for sanctions against Minkow, who now must pay attorney and investigative fees estimated in the millions of dollars.
The emerging scandal is expected to be the focus this year of a court hearing in which a judge will decide how much Minkow owes Lennar — a possibly ruinous price tag approaching hundreds of millions of dollars.
The default and “terminating sanctions” Freeman imposed against Minkow are “highly unusual” and limited to egregious cases, says John Nockleby, a professor of law and director of the civil justice program at Loyola Law School. “It's a big deal.”
Lennar saw its stock plummet more than 20 percent — nearly $500 million — in the two trading days following the January 2009 release by Minkow of his Fraud Discovery Institute's report critical of Lennar.
Lennar general counsel Mark Sustana said this week, “We hope that the court's findings with regard to Mr. Minkow's dishonesty will protect other companies from having to expend substantial time, money and resources to fight Mr. Minkow's unfounded allegations.”
If Freeman's ruling isn't overturned on appeal, the repercussions are significant, Nockleby says — “especially for someone like Minkow, who is trying to rehabilitate himself and put himself out there as a fraud investigator, someone who is teaching the feds how to investigate frauds.”
Minkow served seven years in prison for operating a massive Ponzi scheme in the 1980s that defrauded investors in his ZZZZ Best carpet cleaning business out of as much as $100 million. But in recent years he has been warmly received by top media organizations that embraced his story of redemption.
Painted as a reformed con who now investigates companies for fiscal fraud, he told 60 Minutes' Steve Kroft in a flattering interview in 2005 that he had no room for error in his tough-minded reports. “It's called one and done,” Minkow said.
But last summer, Judge Freeman declared that Minkow has no credibility and “will lie, plain and simple.”
After giving Minkow glowing coverage, the mainstream media have been silent about Minkow's latest downfall, ignoring the judge's Dec. 27 order, which L.A. Weekly posted online in its news blog, The Informer. The MarketWave blog posted a summary of the Weekly's story the next day.
The ruling is Minkow's first loss in court in connection with his fraud investigation outfit.
“That's a terrible place to be in if you're Minkow,” Nockleby says. “If this is upheld, it's how much in damages you pay, not whether you pay.”
In its Oct. 14 cover story, “Minkow 2.0,” the Weekly described how Minkow shorted stocks in order to profit from companies that, soon after he invested in them, were the subject of critical reports issued by Minkow's fraud institute. Minkow shorted Lennar a month before his negative report on the company, then lied about it in an April 2009 deposition.
Judge Freeman declared, “Minkow's misconduct has been pervasive, intentional and committed to gain unfair advantage over plaintiffs and to deceive this court.”
She added: “No remedy short of default, together with full reimbursement of the attorneys' fees and costs incurred in connection with [Lennar's] extensive and continuous efforts to obtain evidence and discovery, can restore plaintiff to the position it would have occupied in the absence of [Minkow's] willfulness and bad faith.”
Minkow's attorney, Alvin E. Entin of Entin & Della Fera, said last week that he had not seen the order, and Minkow did not return calls seeking comment.
In the Weekly's October article, Minkow blamed his dubious conduct on health problems. Last August, he told the judge his negligence was due to working 18 hours a day on a movie about his life.
Lennar and its lead attorney, Daniel Petrocelli of O'Melveny & Myers, took on Minkow in 2009 after Minkow and FDI leveled serious accusations at the company and its top executive. The firm added Minkow's name to its ongoing libel and extortion lawsuit against Nicolas Marsch III, a San Diego developer who had hired Minkow to investigate Lennar.
Three other companies also sued Minkow over his invest-then-slam tactics, including Herbalife Ltd. and Usana Health Sciences, which both settled with him.
Herbalife's stock fell after Minkow correctly claimed that Herbalife president Gregory Probert had inflated his academic credentials. Minkow went further, though, claiming the company had violated laws on testing and labeling — accusations the company denied.
After Minkow called the firm a Ponzi scheme in a withering report in early 2009, Medifast, a diet-food company, filed a $270 million defamation lawsuit against Minkow. But Minkow's publicly issued report carried weight, and Medifast's shares tumbled 30 percent.
Months later, Minkow told the Weekly that he had invested in Medifast stock, betting its value would sink.
Reporters for the Wall Street Journal, 60 Minutes, Fox News and other news outlets have for years painted Minkow as a redeemed figure with an insider's understanding of fraud investigations.
Those same media outlets have failed to cover the Lennar case, which throws into extreme doubt Minkow's claims of a personal turnaround and raises profound questions in the public record about his credibility.
In the 1980s, Minkow was a brilliant young L.A. scammer who built an elaborate Ponzi scheme by lying to reporters, federal regulators and even Oprah Winfrey. He eventually duped investors out of as much as $100 million.
He was convicted in 1988, sentenced to 25 years in prison and ordered to repay his victims $26 million. At the time, it was one of the toughest punishments for a white-collar crime in U.S. history.
Among the documents Minkow recently hid, according to Judge Freeman, were those that showed the “perfunctory nature of Minkow's research and investigation before he accused Lennar and its executives of operating like a Ponzi scheme, giving its COO (Jonathan Jaffe) a disguised kickback, (and) being a financial crime in progress.”
Minkow also concealed from the court key witnesses, such as private investigator Paul Palladino, who disagreed with the content of Minkow's January 2009 report on Lennar and objected to its release, the judge said.
Palladino told the Weekly in October that he found no evidence to prove wrongdoing in one of 10 “red flags” Minkow cited against Lennar, yet Minkow published his iffy accusations anyway.
In his deposition, Palladino says, “I was very upset, to put it mildly.”
Minkow also withheld the fact that he stood to gain $1 million from his client, Marsch. The developer had hired Minkow as a corporate sleuth after filing a lawsuit against Lennar over the development of The Bridges, a luxury housing project in Rancho Santa Fe.
Lennar says it received a letter from Marsch in July 2008, threatening to air the home builder's “dirty little secrets” if Marsch didn't receive financial satisfaction. A San Diego court found no merit to Marsch's allegations that Lennar owed him money.
Nor did Minkow disclose the identity of Jeffrey Sachs, identified in court documents as his partner. The Weekly's cover story cited bankruptcy records showing that on May 8, 2009, developer Marsch transferred ownership of his opulent, $10 million home in Vail, Colo., to Minkow's company, DegreeFraud.com LLC, and Jeffrey Sachs.
Sachs is the person financing a pending movie about Minkow's storied redemption.
The judge said the prejudice to Lennar was made “irremediable” when Minkow jettisoned an older computer that might have contained relevant documents and e-mails.
Minkow even lied to the court and his own lawyers about going to an emergency room on Aug. 2, when he was supposed to be headed to court in Florida, the judge said. Instead of being hospitalized for nausea, anxiety, kidney stones, food poisoning and a migraine — as Minkow had claimed — the Weekly reported that he was holed up at the Ritz-Carlton in Marina del Rey. The next day, Minkow went to an anti-aging doctor in San Diego.
In Florida last week, the judge stated: “The court finds that Minkow's misconduct was willful, tactical, egregious and inexcusable, and that such misconduct has permeated the entirety of this litigation.”
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