June 21, 1999
Vanished Money Manager
May Have Taken Millions
By DEBORAH LOHSE and MITCHELL PACELLE
Staff Reporters of THE WALL STREET JOURNAL
A cache of burning documents in a hastily abandoned mansion in
Greenwich, Conn. A reclusive money manager who has disappeared. At
least $218 million, and possibly billions, missing. Money wired to a Swiss
bank account. And several insurance companies insolvent and in
receivership.
It's all part of a bizarre saga that the Federal Bureau of Investigation
and
insurance regulators are still trying to unravel.
But what they have discovered so far is worthy of a John Grisham novel.
According to the affidavit of an FBI agent filed in federal court in
Bridgeport, Conn., the latest chapter of this tangled tale began unfolding
on
May 5 when a fire alarm sounded at a $3 million contemporary stone
home at 889 Lake Ave. in the ultraexclusive "back-country" section of
Greenwich, the home and office of Martin R. Frankel.
Astrological Charts
When firefighters arrived, the home was empty. Two fireplaces were
stuffed with burning documents, some of them shredded, a filing cabinet
was ablaze in the kitchen, and used fire extinguishers suggested a failed
effort to douse the blaze. Among the papers police later rescued from the
premises: a handwritten to-do list topped by the task "Launder money,"
followed by "get $ to Israel get it back in." Among Mr. Frankel's records,
the affidavit says, were personalized astrological charts designed to help
answer the following questions: "(1) 'Will I go to prison?' (2) 'Will Tom
turn me in?' (3) 'Should I leave?' (4) 'Should I wire money back from
overseas?' And (5) 'Will I be safe?' "
It soon emerged that the mysterious 44-year-old
occupant of this secluded home, who hasn't been
seen since before the fire, may have played a
central role in the possible disappearance of
hundreds of millions from as many as eight
insurance companies, which are now in
receivership. Moreover, Saint Francis of Assisi
Foundation, a Catholic charity set up last year by
Mr. Frankel, is now wondering what happened
to as much as $1.98 billion that Mr. Frankel is
supposed to have wired to charity accounts he
controlled during the past year.
"I've been commissioner of insurance for 24
years, and this is one of the biggest, in terms of
money, and weirdest things that I've ever dealt with," says George Dale,
the insurance commissioner of Mississippi. "This thing is a long way from
being over."
In an effort to solve the mystery, investigators have turned to a cast
of
characters that includes Mr. Frankel's onetime bodyguard and security
chief, who claims in a lawsuit that Mr. Frankel misappropriated his name;
John A. Hackney, a Franklin, Tenn., businessman who ran the insurance
companies purchased with money that may have come from Mr. Frankel;
and several Catholic priests and lay leaders.
Missing Funds
Investigators have their hands full trying to separate fact from the web
of
fiction Mr. Frankel appears to have woven. So far, they don't even have
a
clear picture of how much is missing. At a minimum, a half dozen insurance
companies are missing at least $218 million, regulators say. A lawsuit
filed
by a group of insurance companies puts the losses at a far higher $915
million. And then there's the $1.98 billion that is supposed to have moved
through the charity, although it has yet to be determined whether those
figures are accurate, and if so, where that money ended up.
The insurance companies involved, which span six states, are little known,
and none are publicly traded. At least three are subsidiaries of closely
held
Franklin American Corp., based in Franklin, Tenn.
What's going on here? In his affidavit, FBI special agent Joseph Dooley
offered his own conclusion: "Since at least 1991 Martin R. Frankel,
operating under several different aliases and corporate entities ... devised
and executed a scheme to defraud by wire several insurance companies
across the country. Frankel, through fraudulent pretenses, representations
and promises, obtained control of the liquid assets and insurance-policy
premiums proceeds," ostensibly invested them through a "fraudulent"
brokerage firm, then "drained" the assets, transferring them to accounts
he
controlled. Finally, said Mr. Dooley, Mr. Frankel "laundered these funds,
purchasing untraceable assets."
The affidavit describes a complicated series of transfers of more than
$44
million in insurance premiums that wended through accounts at two U.S.
financial institutions before landing in a Swiss bank account.
More Than 80 Computers
The central character of this story has been an enigma to his neighbors
ever since he rented a house on a secluded cul-de-sac in the upscale
suburb of New York in the early 1990s. He told neighbors his name was
Mike King, that he was in the securities business, running money for a
Swiss bank, recalls one neighbor. He set up the headquarters office for
his
Liberty National Securities in the 14-room stone contemporary on four
acres, installing fiber-optic cables and satellite receivers, and eventually
carted in more than 80 computers, according to neighbors and the
affidavit. Robert Guyer, who owns another Liberty National Securities that
is registered with the National Association of Securities Dealers, claims
to
have known Mr. Frankel years ago, but says he and his firm have no
current relationship with Mr. Frankel.
The living room became Mr. Frankel's trading floor: a single easy chair
surrounded by video monitors and telephones, according to one person
who has seen the offices. There were televisions tuned to CNBC in every
room, including the bathroom, and keypads controlled access to interior
rooms, this person says. Bedrooms were converted to offices, save the
one Mr. Frankel used for sleeping, he adds.
Mr. Frankel had little contact with his neighbors, and seldom emerged
from his house. But other people, including many young women, came and
went at all hours, says Greenwich lawyer Philip Russell, who represents
several people in the neighborhood who were irritated by the activity.
Two
years ago, police were summoned to a nearby house his company rented
after a 22-year-old woman was found hanging from an elevated deck. It
was ruled a suicide. The dead woman was "a quasi-employee and/or
girlfriend," a Greenwich police officer explained recently.
"At best, he was an unusual neighbor," says Mr. Russell. After renting
for
several years, last July one of Mr. Frankel's companies paid $3 million
for
the headquarters/home, then in January plunked down $2.6 million for
another home across the street. "He must have had $1 million of leased
cars in the driveway -- all of them Mercedes," says one neighbor.
Erecting a Guardhouse
This year, he began beefing up security, encircling the property with
six-foot fences and walls, and erecting a guardhouse. David Rosse, a
Peeksville, N.Y., security specialist, says Mr. Frankel agreed to pay him
$10,000 a month to provide personal security. Mr. Rosse, who is now
suing Mr. Frankel in Connecticut Superior Court in Stamford for alleged
nonpayment and use of his name for business transactions, says he spent
$100,000 adding security cameras, recorders, alarms, and lighting to the
property, according to the suit. Through his lawyer, Mr. Rosse declined
to
comment.
Investigators have now begun to piece together a checkered past for Mr.
Frankel. He wasn't even supposed to be trading securities. His license
was
revoked by the Securities and Exchange Commission in 1992, after an
administrative proceeding on complaints about the sale of limited
partnerships.
One year earlier, Mr. Frankel had been introduced by phone to Mr.
Hackney, a Tennessee-based consultant specializing in financial-institution
acquisitions, according to a person close to Mr. Hackney. Mr. Frankel,
who apparently was calling himself Eric Stevens, offered to help Mr.
Hackney buy insurance companies, this person says. In the fall of 1991,
Thunor Trust was started to do just that, starting with Franklin American.
Mr. Hackney, through his lawyer, declined to comment.
The trust was funded by three individuals, according to Tennessee
insurance commission records. But one of the three, Edward Krauss,
denies having contributed any money to, or having any part in, the trust.
He
says his signature was forged on the Tennessee documents. Mr. Krauss,
an executive at the Greater Columbus Chamber of Commerce in Ohio, is a
friend of Mr. Frankel's brother Robert, and occasionally worked as a
personnel consultant for Martin Frankel in late 1998 and early 1999.
In any case, the trust succeeded in taking control of at least nine insurance
companies for about $71 million, most of them specializing in small
insurance policies designed to cover the funeral expenses of the insured.
It
is unclear where the money to buy these companies came from.
Liberty's Low Commissions
Liberty National Securities, the securities firm Mr. Frankel ran, began
investing the assets of these insurers, which were pleased by Liberty's
low
commissions and what they thought were market-beating returns, says the
person close to Mr. Hackney.
Meanwhile, last summer, Mr. Frankel set up the St. Francis of Assisi
charity, and allegedly using an alias, recruited trustees, including New
York
lawyer Thomas Bolan, a former federal prosecutor. Mr. Frankel told the
trustees that he intended to give money to the charity, that his own Liberty
National would invest the money, and that the profits would be used for
charitable purposes, according to New York lawyer Maurice Nessen,
who represents Mr. Bolan.
After forming the organization, Mr. Frankel began wiring money, by a
circuitous route, to St. Francis of Assisi accounts at Liberty National,
says
Mr. Nessen. A financial audit of the organization provided by Mr. Nessen,
which was conducted by the Franklin, Tenn., accounting firm of Leuty &
Heath PLLC, reported that the organization had assets of $1.98 billion
on
March 31. Mr. Bolan believed Mr. Frankel "had loads of money at his
disposal, legitimate money," says Mr. Nessen. Calls to the accounting firm
and its principals weren't returned.
Mr. Frankel's complex financial dealings began to unravel last year.
Mississippi and Tennessee insurance regulators conducting routine exams
grew concerned about the concentration of assets that Thunor-owned
insurance companies had invested with obscure Liberty National, which
they were having trouble contacting.
Confusing Explanations
In a Mississippi exam earlier this year, Mr. Hackney gave what Mr. Dale,
the insurance commissioner, says were confusing accounts of whether the
St. Francis charity had become the new owner and beneficiary of Thunor.
That would be an unauthorized change of control, Mr. Dale notes.
Confused by the explanations, Mr. Dale put three Thunor-controlled
insurers under state supervision, and ordered Liberty National to return
about $200 million of the insurance companies' assets.
Mr. Frankel told Mr. Hackney that the assets would be available by May
10, but when Mr. Hackney tried calling Mr. Frankel on May 7 -- two
days after the fire -- he got no answer, according to a lawsuit filed by
the
Thunor insurance companies in Nashville federal court. It seeks to block
Liberty National from taking proceeds from sales of securities it held
on
their behalf.
In the days preceding the fire, people were seen shredding documents and
removing computers from Mr. Frankel's Greenwich home, according to
the FBI agent's affidavit. The day before the fire, a moving van was
spotted at the home, the affidavit said. Among the documents later
recovered were "research on extradition from various countries, including
Brazil, as well as the anonymous banking practices of at least one foreign
country," the affidavit adds.
In his wake, Mr. Frankel has left a mess.
Seven insurance companies, plus one that bought "reinsurance" from
Franklin, have been taken over by state regulators. At least four are
considered insolvent, and others may be ruled so at a later date. That
means any claims on thousands of policies will be paid out of state
guaranty funds, which are funded by collecting from other insurers in the
states where the policyholders live. Regulators say that, because small
insolvencies are relatively common, the debacle shouldn't result in
extraordinary expenses for insurers nationwide.
The condition of Mr. Frankel's charity is murkier. It is unclear how much
money Mr. Frankel passed through the foundation, where the money came
from, and where it went. "We don't know where the money is," says Mr.
Nessen.