A couple of weeks ago, we examined the interesting case of Barry Minkow, who seemed to have reformed after his ZZZZ Best escapades, but instead he disappointed us with a new incident of securities fraud. Sentencing was scheduled for June 16, but this has been postponed to July, in part to allow the judge more time to study the issues. In particular, we find interesting Minkow’s objections to the presentence investigation report.
First, Barry Minkow through his attorney objects to a restitution amount of $583 million payable to Lennar. He argues, correctly we believe, that the “victims of this offense were the stockholders of Lennar, not Lennar itself.” The distinction is important because the stockholders at the time of Minkow’s crime may not be the same stockholders that exist today because of trading activities. Minkow points out that the stockholders “were the only victims if they had sold their positions in Lennar at a time Minkow and Marsch had caused the stock to drop, and not after it had recovered once the fraud became public” because the stock price would have recovered its value. In a world with mostly efficient markets, this comment is correct.
Minkow further argues that the government has the burden to identify these shareholders, and we disagree. The court could create a trust fund and disburse money to those persons and corporations that could prove they were stockholders at the time of Minkow’s fraud and sold shares of Lennar before the fraud became public.
Second, Barry Minkow asks for leniency because of his “health history and current health needs,” including “high cholesterol, kidney stones, migraine headaches, ADD, and an inability to produce an adequate amount of hormones.” He also chronicles a history of drug abuse. To this we scratch our heads and ask the relevance of these details. The health problems did not cause him to undertake securities fraud, so they are extraneous to the sentencing decision. Besides, if health concerns are legitimate for consideration, the court also should investigate the health consequences to investors who suffered the drop of stock prices because of his fraudulent behavior.
A third argument is that Mr. Minkow assisted the FBI and other law enforcement agencies in identifying and analyzing financial frauds. The brief claims that he “had uncovered approximately 22 frauds, totaling over $1.4 billion, and impacting over 300,000 people.” If these claims are factual, then they do call for leniency. The question for the judge is how much leniency.
Fourth, Minkow admits that he is guilty of securities fraud and claims that he is truly sorry for this act and to those harmed by his actions against Lennar. Even if true, we outsiders must ask whether he is remorseful of his fraud or sorry that he got caught. We cannot read his heart and so cannot evaluate the degree to which he is really contrite.
Fifth, he points out that he has a wonderful wife and he has twin sons who need him because they have severe ADHD and dyslexia. Again, what is the relevance of this? If he didn’t want to go to prison, he should have avoided the securities fraud. Perhaps we are not very compassionate; but then again, Mr. Minkow was not very compassionate of those he defrauded.
In general, society will stem the occurrence of securities fraud only to the extent it vigilantly ferrets out the criminals and it metes out punishment that will deter possible copy cats. If we don’t investigate the evil acts and enforce the laws, white collar crime will grow more and more. Further, if society dispenses weak punishments, it will aid and abet future criminals.
On the other hand, we do recognize that Minkow may have played a significant role helping out various law enforcement agencies. For this reason—and this reason alone—the judge should consider some degree of leniency. But not too much clemency, for Barry did this with eyes open, heart brazen, and bank account awaiting augmentation. His admitted guilt calls for some punishment.
POSTSCRIPT: On July 21, 2011, Judge Patricia Seitz sentenced Mr. Minkow to prison for five years and required restitution to Lennar Corporation for $583 million. Sentence is to begin in 60 days.
This essay reflects the opinion of the authors and not necessarily the opinions of The Pennsylvania State University, The American College, or Villanova University.