Hall of Fame Con Men: Mark Morze – Part 2 of 2

(If you missed Part 1, you can find it here)

So, what about the CFO of ZZZZ Best? In part one I wrote about the headlines that many may have seen in any business or auditing class teaching about famous stock frauds. But in this particular case, there is so much more to it than that. I have to say, after doing some brief research on this story, I am amazed that things go so out of hand with some of the highest paid regulators and auditors on the case without anyone blowing the whistle.

Mark Morze was a tax accountant and one of the guys that created the thousands of fraudulent documents to fool multiple accounting firms. He got into loan brokering and raising money for some of his clients. He was introduced to Barry after hearing he needed money for expansion. He was charging 5% to broker loans.

Many customers said they were happy to pay that. He charged Barry 10% and made a fortune defrauding and raising cash for his new favorite client. He started doing some factoring where they borrowed against a receivable and that person was paid off through an appraiser instead of an insurance company.

They got suspicious and wanted to see one of their construction sites, and found that address for the building didn't exist. Barry then asked Mark to create the paperwork to make it appear real “just like the others.” A few weeks later, Barry told him all of the jobs were faked. He says that things always started out well-intentioned, but as many of you may have heard, the road to Hell is paved with good intentions.

Mark later raised the cash to take the company public, while pitching a 50% profit on the company. He was getting a 10% commission. Not small change for anyone at the time. It’s also interesting to note that a journalist asked for their contractor’s license, which was one of the first dominoes in bringing them down since they didn't actually have one. Hundreds if not thousands of people looked at the same documents and never asked them that question before. Mark served 4.5 years in prison for his efforts.

Such a story of excess and greed that it’s impossible to be on their side of it, but at least Minkow seemed to be trying to do some good. He taught business ethics at Pepperdine, lecturing to lawyers and MBA students on fraud and accounting auditing classes. (side note that I love when the people reporting on these stories pronounce all four of the Z’s)

In retrospect, so many of the inconsistencies of 50% profit margins in a single digit industry, one man doing all of the work to make up the illegitimate part of the business (he was the only listed employee), and everything else should have raised red flags. They fooled the top accounting firms, auditing firms, bankers, and attorneys in the 1980s. He simply set the expectation levels low to ensure that if something didn't smell right, he could tweak it to sneak things by. They literally did all of the heavy lifting for him, as he admits in the interview link below.

People never asked for invoices. He would buy a cashiers check, which was made out to the bank, copy it, then whiteout his own name, type in a bogus name, then give the copy back to the auditors. They never saw one cancelled check as a result. Simply amazing. He partly blames compartmentalization at big firms where the left hand doesn't know what the right hand was doing.

Here’s Mark’s biggest lesson: you need to bring in outsiders that have impunity from offending you. Their internal ethics group is not enough. Their loyalty is to the company that signs his check. Bring in an outsider so there’s no nepotism or fear of losing their job. This gives comfort to investors and shareholders. The other message is that there’s a possibility a corporate executive might go to jail but that’s not that realistic or else our jails would be overflowing with them. Now we've evolved to the point where a company can lose tens of billions of worth based on how you handle something that lacked proper ethics, due diligence, and total lack of follow through.

There is no honor among thieves. If you rat on a larger crook, you do less time. Every day at work, spend two minutes doing extra due diligence for industry standards, call a bank reference, check D&B, check their incorporation, check sales taxes, check vendors. Make a journal entry of it. Send and email to someone you trust and walk away from it. End of the year, you’ll have a list of 250 things that you can show you gave a crap about proving you’re extra diligence to make sure something wasn't amiss. This is so you can indemnify yourself. No one else will do this.

Mark's claim of why he went along with the scam at the time was that he would have missed out on $2.5MM in cash and another $4.5MM in stock in the company. He got an 8-year sentence and served 5 of those years. Of course he also claims he wished he heard from someone like him before going through all of this. Nice try.

My favorite part of this story is what Minkow wrote on the inside of an autographed book he gave to the judge who initially sent him to prison, saying, “Dear Judge Tevrizian, you are absolutely the best judge ever seated on a federal bench. You have my love and respect always. And don’t be fooled by the good press. I am a liar and thief saved by God’s grace.”

Mark Morze - Part 1

Ernst and Whinney not allowed to reveal possible fraud

 

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