Marty Frankel concocted one of the nation's largest insurance frauds under the noses of state regulators who may have been able to stop the scam if they had asked tougher questions about his business dealings, the General Accounting Office said.
The Toledo native bought a string of insurance companies beginning in 1991 and then looted the cash reserves of the businesses of $200 million in the ensuing years without state regulators ever asking questions about his empire, said a report by the investigative arm of Congress slated for release during a House subcommittee hearing today.
Federal investigators said the 45-year-old financier took advantage of weak laws and poor oversight in states where the companies were headquartered to orchestrate one of the most publicized frauds of the 1990s.
A former stockbroker in Toledo, Frankel moved to Greenwich, Conn., where he set up an unlicensed insurance brokerage from a fortress-like, two-mansion compound in one of the most exclusive areas of town.
Several years later, with authorities suspicious of his activities, he disappeared in May, 1999, leaving behind piles of smoldering documents. No. 1 on the "to do" list left in the mess was "launder money."
After hiding in Europe for four months as one of America's most famous fugitives, he was arrested at an upscale hotel in Hamburg, Germany, with a stack of forged travel documents and a stash of cash and diamonds.
He has since been convicted of passport fraud and tax evasion for failing to report the diamonds to German officials when he entered the country. He is in a jail in Hamburg, fighting extradition to the United States, where he faces federal and state fraud charges.
Investigators have said Frankel bought insurance companies in Tennessee, Mississippi, Arkansas, Oklahoma, and Missouri under the umbrella of Thunor Trust, which he established in 1991.
He used the names of three acquaintances - all from the Toledo area - to serve as the buyers on paper so that his identity would be secret. But regulators in Tennessee never bothered to check with the three individuals, two who claim their names were forged.
"The purchase of insurance companies under Thunor Trust provided a number of opportunities for regulators to ask questions about the prospective owners. We believe some of these questions should have been routine," the report said.
Regulators also failed to check quarterly reports filed by Frankel which showed that he was investing the reserves of the insurance companies in bonds and securities instead of depositing the assets in a bank, as required by state law.
Former Tennessee insurance commissioner Doug Sizemore resigned in August, 1999, after the oversights were reported in several newspapers, including The Blade.
The report criticizes insurance officials in Mississippi, saying a lack of communication in the department allowed Frankel to move one of his insurance companies to the state at the same time the department was growing suspicious of two other Frankel-controlled insurers.
In another instance, the report concludes that Tennessee officials never notified other states after discovering that another Frankel outfit - Franklin American Life - had looted its assets.
"During our review, we found no evidence that this information was proactively shared with other state regulators to help prevent the possibility of a potential scam spreading," the report says.
Historically, each state has regulated its own insurance industry, a fact the report says contributed to the Frankel case.
The report recommends that state insurance departments make sure that companies are worth the amount they claim. The report said states should start sharing more information with each other.
Bond and securities experts who reviewed quarterly reports filed by Frankel's companies said regulators should have questioned the astronomical returns that were being reported on the insurance reserve investments. At the time, Frankel was claiming 20 per cent or more returns on money invested in bonds, when he was stealing the money, the FBI says.
"There were red flags all over," Robert Hunter, a former Texas insurance commissioner, told The Blade.
U.S. Rep. John Dingell (D., Dearborn), who ordered the congressional report, said he wants states to make immediate improvements.
In a letter to the National Association of Insurance Commissioners, a group of state insurance regulators that recommends policy changes, Mr. Dingell implied that failure to do so may result in federal involvement.
"If state regulators cannot do the job insurance consumers deserve and require, new regulatory mechanisms must be put in place that will," he said.