The Family Business
Michael Catain pleaded guilty last October to a role in the multibillion-dollar investment fraud allegedly run by Twin Cities entrepreneur Tom Petters. Facing up to 20 years in prison on a charge of conspiracy to commit money laundering, Catain agreed to cooperate with authorities in their ongoing investigation and prosecution of Petters.
“His father would not be pleased” about the cooperation, Barry Minkow says.
Catain’s father, Jack Catain, was a reputed mob figure and loan shark—not the kind of guy who would testify against an associate, according to Minkow. And Minkow would know better than most. Twenty years ago, in California, he and Jack Catain were embroiled in a headline-making financial scandal that had striking similarities to the Petters case.
Minkow today is senior pastor of the Community Bible Church in San Diego and cofounder of the Fraud Discovery Institute, a San Diego consulting business that tries to uncover financial crimes. But in the 1980s, he was a younger version of Tom Petters—a charismatic entrepreneur, wunderkind, and philanthropist whose fabulously successful Los Angeles carpet-cleaning firm, ZZZZ Best (pronounced “zee-best”), turned out to be a front for a money-laundering operation and an investment swindle.
His religious conversion occurred during the seven years he spent in prison following his 1988 conviction, at age 22, for heading what prosecutors called a Ponzi scheme. Defrauded investors reportedly lost up to $100 million. Minkow was ordered to pay $26 million in restitution. Small potatoes, he notes, compared with the $3.5 billion allegedly milked from investors in the Petters case.
Several “mafia sorts of people” were involved in the ZZZZ Best scam, Minkow says, including Jack Catain, who died in 1987 after he was convicted on an unrelated counterfeiting charge. At his own trial the following year, Minkow blamed the mobsters for forcing him into illegal activities, though he now acknowledges that “I was no angel, either.”
No organized-crime figures went to jail in connection with the case, however. Never mind that “Catain” ends with a consonant; Minkow says, “I have a philosophy: Never testify against anyone whose name ends in a vowel.”
Fall from Grace
Michael Catain, 52, was released on a $25,000 unsecured bond after entering his guilty plea last October. In January, he was taken back into custody after violating the terms of his release by hiding assets from the court.
He has no prior criminal record and no known connections to organized crime. His money-laundering role in the Petters scam was different from his father’s role in the ZZZZ Best fiasco, which Minkow says was limited to loan sharking. But there are parallels between the two cases that go beyond the family connection.
Until last September, when a longtime employee and co-conspirator informed federal authorities that Petters was running a massive investment fraud, the CEO of Petters Group Worldwide was a hero on the Twin Cities business scene. A St. Cloud boy who had made good, his holdings included Polaroid, Sun Country Airlines, and catalog-retailer Fingerhut Corporation. He drove a Bentley. He gave generously to community causes and supported anti-drug programs. He hosted gala fundraising events that attracted politicians, Hollywood and New York celebrities, and corporate titans.
Then Deanna Coleman, operating vice president for Petters Company, Inc. (PCI), the investment arm of Petters empire, blew the whistle. An FBI investigation led to charges that for more than 10 years, PCI had been engaged in a Ponzi scheme: Investors were promised quick, high returns—often more than 20 percent—then paid off with dollars that were put into the scheme by other investors. The money, invested by hedge funds, church groups, money managers, and private individuals, was also used to fund some of Petters’ other businesses and to underwrite lavish lifestyles for him and his cohorts.
In guilty pleas to various fraud charges at an October 8 hearing, Coleman, Catain, and Robert White, a former PCI officer, confirmed that their crimes hinged on nonexistent merchandise, mostly electronic equipment such as televisions and home-theater systems. PCI purportedly was buying these goods cheap and selling them at a hefty markup to retailers such as Costco and Sam’s Club. Investors were told that their money was used to buy the equipment, but the purchase orders and other documentation that PCI showed to investors were phony. The reselling business existed only on bogus paper.
One supplier of phantom merchandise was Nationwide International Resources, Inc., of Los Angeles, run by Larry Reynolds, who also pleaded guilty in October to a charge of conspiracy to commit money laundering. The other supplier was Enchanted Family Buying Company of Excelsior, run by Michael Catain.
Investors often were told to wire their money directly to NIR or Enchanted. Those entities would then forward the money to PCI, minus a “commission.”
Federal investigators determined that Enchanted was a shell company, evidently set up for the sole purpose of money laundering. Its office turned out to be in a car wash at 701 West Highway 7 in Excelsior that was owned by Catain. In his plea agreement, Catain testified that between 2002 and 2008, he helped Petters launder more than $12 billion through Enchanted, and received more than $3 million for his services.
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Petters, 51, was arrested in early October but not indicted until December 1, when he was charged with 20 counts of wire and mail fraud, conspiracy, and money laundering. He pleaded not guilty, and a tentative trial date was set for February 9 in U.S. District Court in St. Paul. That has since been pushed back to June. In late January, Petters was still being held without bond since his arrest. If convicted, he could face up to life in prison.
In the 1980s, Barry Minkow was a hero on the Los Angeles business scene. At the age of 15, he launched a carpet cleaning business from his parents’ suburban garage. In 1986, when he was 20, ZZZZ Best went public. Minkow’s 53 percent share of the company was briefly worth $100 million, according to an account in the New York Times. He drove a Ferrari. He appeared on the Oprah Winfrey Show. He generously supported anti-drug programs and other community projects.
But by the time of ZZZZ Best’s IPO, its primary business had shifted from carpet cleaning to insurance restoration—repairing and refurbishing buildings that had been damaged by fire or other causes.
Then a 1987 Los Angeles Police Department investigation led to charges that the insurance-restoration business was a sham—as phony as the electronic merchandise that Tom Petters supposedly bought and sold. Authorities also charged that ZZZZ Best was being used by organized-crime figures to launder large sums of drug money. Minkow was put on trial in 1988 for racketeering, securities fraud, and tax fraud, and went to prison.
Minkow says he first ran into Jack Catain in 1985. Catain had run Rusco Industries, a Los Angeles window and door manufacturer that allegedly was another front for laundering organized-crime money. He was also the third husband of Kathy Richards, Paris Hilton’s maternal grandmother.
Desperate for cash at the time, Minkow borrowed $25,000 from Catain—at an interest rate of $1,250 a week. Later that year, Minkow borrowed another $400,000 from Catain.
He won’t say whether the loans were the initial contact that led to his involvement with organized-crime figures, or if wise guys he already knew introduced him to Catain. In either case, Minkow lost some, if not all, control of his company to people who engineered the phony insurance restoration business and helped create the less-than-truthful prospectus for ZZZZ Best’s 1986 stock offering.
During their acquaintance, Minkow says he never met Jack’s son, Michael, who lived in Los Angeles at the time. But in his current capacity as a fraud expert, and because of the Catain connection, Minkow has followed the Petters case in the media. He sees patterns there that are common to investment scams.
One is the promise of unusually high returns. Petters Company was “talking about, what, 24 percent?” Minkow asks. “Warren Buffett is maybe the best investor ever, and at the top of his game, I doubt he got 24 percent.”
Another classic red flag was the absence of audited financial statements or other independent evidence of profitability, Minkow says: “Instead of due diligence by objective criteria, it depended on due diligence by word of mouth. It was, ‘Here, call this guy, Joe. He’s been investing with us for 10 years, and he can tell you we’ve never missed a payment.’”
When a Ponzi scheme begins to collapse, conspirators often fixate on the seductive idea of what Minkow calls “the cure—the thing that somehow will pay everybody back, and everything will be fine.” He speculates that for Petters, the cure was going to come from gambling. This would help explain the assertion in an FBI affidavit that Petters had gambling losses of more than $10 million at the time of his arrest, and was at the top of the comped-room guest list at the Bellagio Casino in Las Vegas.
The Music Mogul
Michael Catain’s Minneapolis attorney, Michael Colich, did not respond to requests for interviews or comments regarding this story. Since Catain arrived in the Twin Cities from Los Angeles in 1996, however, he has been a relatively high-profile citizen.
Until his arrest, Catain was best known as the owner of Liquid 8 Records, an independent music label that he founded in 2001, with Petters as an investor and evidently a silent partner. For a time, Liquid 8’s offices were located in Fingerhut’s Minnetonka headquarters building.
Twin Cities Business covered Liquid 8 back in 2004. Catain said the company’s name was inspired by a vanity license plate he had, which derived from his background as an appraiser and liquidator of unwanted stock from music retailers. He had originally moved to the Twin Cities to manage a liquidation company called Universal International, after Universal merged with his own Los Angeles liquidation firm.
Earlier, before Catain got into the liquidation business, he reportedly held jobs with United Artists and Elton John’s Rocket Records. His biography on the Web site of another of his business holdings, a computer-user support service called Doctor Mac Direct, is open to interpretation. One reading is that Catain’s breakthrough job at United Artists was a string attached to one of his father’s loans:
“Michael Catain is the CEO of Doctor Mac Direct as well as the founder, CEO, and driving force behind a hot new record label, Liquid 8 Records & Entertainment . . . . He grew up in Los Angeles, infused with both the high-end business world and the burgeoning music scene in Southern California. His father . . . was a key investor in United Artists records. After his father provided emergency financial backing to keep the troubled label afloat in the 1970s . . . at the age of 19, Michael broke into the music business at the top levels as A&R [artists and repertoire] director.”
Catain cofounded Excelsior-based Doctor Mac Direct in 2005. The company still exists, though the Web site of Bob “Dr. Mac” LeVitus now lists a California phone number and makes no mention of Catain. LeVitus did not respond to requests for comments for this story.
Liquid 8 began by signing once-popular artists whose stars had faded—rapper Vanilla Ice, heavy-metal band Fear Factory, and Daryl Hall, of Hall and Oates. On the local scene, it signed Twin Cities band G. B. Leighton. In 2003 and 2004, with KARE-11 TV as a partner, Liquid 8 co-sponsored Minnesota Idol competitions based on the popularAmerican Idol television show, then released albums by the winners and signed up Target and Best Buy for special distribution deals.
It’s difficult now to find anyone willing to talk about Catain or their work with him. Liquid 8 artists who were asked to comment for this story declined or failed to respond. Ryan Urness, general counsel for the electronic-entertainment publisher Navarre Corporation, in New Hope, confirms that Navarre was Liquid 8’s distributor until “we got out of the independent music-distribution business” in 2007. Urness says Navarre has no other comment on its relations with Liquid 8 or Catain.
Going Out of Business Sale
Liquid 8’s Web site is gone and its listed phone number no longer operates. Authorities froze all of Catain’s assets in October, along with those of other defendants in the Petters case.
But Minneapolis attorney Douglas Kelley of the Kelley & Wolter law firm, the court-appointed receiver in charge of those assets, says that small amounts of revenue continued to trickle in from sales of records in Liquid 8’s catalog. The checks were coming to the Enchanted Family Buying Company address at the Excelsior car wash, though Kelley has since instructed distributors to direct the checks to him.
The car wash was still operating in late January. Income from it (minus $14,000 that Catain skimmed off—the cause of his January detention) and from Liquid 8 was being funneled into a liquidation pool managed by Kelley. The money will be used to reimburse defrauded investors.
Also destined for the liquidation pool are properties, automobiles, and other assets belonging to the co-defendants. Those include Catain’s 8,000-square-foot log home on Enchanted Point in Shorewood, with 700 feet of Lake Minnetonka shoreline, which was up for sale as of January. So was Casa Tranquila, a villa in Costa Rica that Catain rented out to well-heeled vacationers.
Catain owned a smaller home in Shorewood and a condominium in downtown Minneapolis. Kelley says there’s no equity in those properties and they’re being returned to the bank. Catain’s Bentley has already been sold for $175,000 to Donnybrooke Motorsports in Spring Park.
The liquidation game has come full circle for Catain.
Believe It or Not
1970s: Catain’s professional bio, as supplied on his business Web sites and in press releases, has him breaking into the music business at an executive level at age 19, working as an artists and repertoire director for United Artists. The same bio indicates that his father Jack, a reputed mobster and loan shark and a convicted counterfeiter, loaned money to United before the company hired Michael Catain.
1996: Having left the recording industry, Catain is a retail liquidator, whose California firm has purchased a Minnesota liquidator, prompting Catain to move to the Twin Cities.
2001: Catain founds Liquid 8 Records, an independent record label that has Tom Petters as an investor and partner. Petters is alleged to have begun his Ponzi scheme six years earlier, in 1995.
2002: Catain founds Enchanted Family Buying Company, a shell company whose sole purpose is laundering funds for Petters.
2004: Catain buys the property at 4550 Enchanted Point in Shorewood for $1.5 million. According to an attorney for his neighbors, Catain gained their permission for a code variance to build a house there and promised them rights to build a dock on his Lake Minnetonka shoreline in return.
2005: Catain cofounds a tech support business for Macintosh computer users,Doctor Mac Direct.
2006: His new Enchanted Point house is complete, but Catain reneges on his promise to the neighbors about a dock, they say. Over the next two years, Catain files complaints about his neighbors to police and city officials in what the neighbors’ attorney calls a campaign of harrassment.
June 2008: Anchor Bank in Wayzata is concerned about the large sums moving in and out of an Enchanted Family Buying account. Catain covers with a lie. But already, the scheme is unraveling.
September 2008: With help from Catain’s co-defendant Deanna Coleman, the FBI,Internal Revenue Service, and United States Postal Inspection Servicebreak open their investigation of Petters, Catain, and their coconspirators by executing a search warrant on their offices, homes, and vehicles.
Also in 2008: Catain sues his neighbors for intentional affliction of emotional distress. They countersue Catain for defamation and making terroristic threats. The suits are on hold pending Catain’s sentencing in the Petters case.
2009: Catain’s sentencing will take place in U.S. District Court in St. Paul on a date yet to be determined as of late January.