Former fraudster turned self-styled fraud investigator Barry Minkow said he and his firm, Fraud Discovery Institute, are the subject of a probe by the U.S. Securities and Exchange Commission.
The SEC in January sent subpoenas to Minkow, FDI and other parties thought to have ties to Minkow and his firm. Minkow said he is the target of the investigation, though the SEC doesn't make this clear in communications accompanying the subpoenas.
The SEC states the "investigation is a non-public, fact-finding inquiry," intended "to determine whether there have been any violations of the federal securities laws," according to copies of three of the subpoenas and related materials reviewed by Dow Jones Newswires.
An SEC spokesman declined to discuss the matter. In the subpoenas, the SEC says the investigation, titled "In the Matter of Fraud Discovery Institute," doesn't mean that it has concluded that the subpoena recipients "or anyone else" has broken the law, nor does it mean that the agency has a "negative opinion of any person, entity or security."
Minkow has been a vocal critic of several public companies, and has issued scathing reports on the FDI website that have prompted some target companies to both sue Minkow and press the SEC to investigate him. These companies claim Minkow spreads false information to harm the price of their shares, which enriches Minkow and his cohorts via short positions they place in hopes that the securities fall in value.
Minkow acknowledges that he takes short positions in some of the companies he criticizes, and said he shared with the SEC his trading account names and passwords so the agency has a complete record of all his transactions.
Minkow served seven years in prison for the fraud that was his ZZZZ Best Co. carpet-cleaning business, which collapsed about 23 years ago. He became a Christian minister in prison and then became an independent fraud investigator following his incarceration.
The subpoenas also ask, among other things, for all communications regarding six companies FDI has criticized: InterOil Corp. (IOC), Lennar Corp. (LEN, LENB), Pre-Paid Legal Services Inc. (PPD), Medifast Inc. (MED), Herbalife Ltd. (HLF) and Usana Health Sciences Inc. (USNA).
Aside from those subpoenaed, the SEC wants information on all contacts the recipients had with more than two dozen other people, including two journalists with Dow Jones Newswires, Ben Dummett in Toronto and Michael Rapoport in New York, who have both covered InterOil. Neither of the two journalists has received any subpoenas or other requests from the SEC related to the Fraud Discovery investigation, nor has Dow Jones Newswires.
The SEC also wants to know, according to the subpoenas, about Minkow's involvement with Whitney Tilson, who runs a $135-million New York hedge fund. Tilson declined to reveal whether he had been subpoenaed, but said he has known Minkow for years, has paid him for his services and believes there is "no one more qualified" to uncover the kinds of frauds that help investors feel secure that their negative bets on companies are well founded.
Tilson said there is a fine line between the SEC investigating legitimate potential wrongdoing and the agency being used by companies. He said he is "very confident Barry Minkow will be exonerated."
Michael Tanczyn, Medifast general counsel, said Medifast did complain to the SEC about Minkow and FDI, but "it is our understanding that the SEC does not or will not tell us what they're doing." He said Medifast conducted its own investigation of Minkow's allegations against it and determined they were "false, misleading and without merit."
The other five companies either declined to comment or didn't respond to interview requests.
Minkow said he has complied with the subpoenas, including submitting a lengthy narrative explaining his actions in detail. He calls the investigation an attempt by the companies he has attacked to use regulators to muzzle him. The SEC will see he and his firm have broken no securities laws, Minkow said, and he hopes afterward the SEC will turn its attention to the companies pressing for this investigation.
In a post last Friday on his FDI website, Minkow acknowledged the investigation, and said it is coming to light only recently because the office of Rep. Anthony Weiner (D., N.Y.) leaked the information to the press. Weiner, whose office denies any involvement in alerting the media to the situation, recently criticized gold-coin company Goldline International, and Minkow issued a report defending Goldline.
Goldline issued two press releases taking issue with the congressman's findings, and said it wasn't given the opportunity to "correct the misstatements in his report." Goldline said it complies with all applicable laws, noted its "A+" rating with the Better Business Bureau and 50-year history, and said it has "the most comprehensive written disclosures in the precious metals industry."
Minkow, who takes credit for uncovering some $1.8 billion in frauds, calls Weiner's report a politically motivated shot, as Goldline is a sponsor of conservative radio and television host Glenn Beck, a fierce critic of Democrats. Beck has a show on the Fox News Channel, which like this newswire is owned by News Corp. (NWS, NWSA).
-By Maxwell Murphy, Dow Jones Newswires; 212-416-2171; firstname.lastname@example.org