International Swindle Guts Old Southwest

by Michael Whiteley  on Monday, Mar. 31, 2014 12:00 am  

A version of this article originally appeared in Arkansas Business on Aug. 2, 1999. It is being republished as part of Arkansas Business' 30th anniversary issue. You can access the digital edition for free here.

Even as regulators in Virginia and Mississippi mapped the financial fissures gaping beneath Franklin American Life Insurance Co. last February, company executives were in Little Rock winning approval for their final acquisition.

Seven days after a merger approved by the Arkansas Insurance Department between Franklin and tiny Old Southwest Life Insurance Co. was to have taken effect, someone in charge of the Jacksonville burial insurance company wired $5.2 million of Old Southwest’s assets to the Franklin, Tenn., bank of its new parent company.

Converted for a few minutes into a cashier’s check, the bulk of Old Southwest’s assets were wired again from a Franklin bank to a “sham” New York investment account controlled by fugitive financier Martin Frankel.

The April 6 transfer gutted the reserves of the four-decades-old Jacksonville company and made Arkansas a minor player in a scandal that has broadened to include $350 million in missing insurance assets, ensnared Catholic charities tied to the Vatican and spawned an international manhunt.

The fallout is growing, along with questions of who in government knew of Frankel’s involvement and could have intervened.

In fact, Virginia’s insurance commissioner is suing his Mississippi counterpart over whether investigators withheld information that could have diverted the wire transfer of $45 million from a Virginia-based burial insurance company three days after Frankel’s associates looted Old Southwest.

Arkansas Insurance Commissioner Mike Pickens says he’s not troubled by the actions of state regulators, even though Tennessee insurance officials gave Franklin American a clean bill of health just prior to Arkansas’ approval of the sale on Feb. 24, 1999. He says Tennessee didn’t know any different at the time.

“I think a lot of the criticism that the Tennessee department has sustained really is unfair,” Pickens says. “I have a lot of questions for federal regulators.”

Alerted by Mississippi Insurance Commissioner George E. Dale, Arkansas joined regulators in six states to put Franklin American, Old Southwest and six other companies networked under the name Thunor Trust into receivership.

All six, including Old Southwest, were tied to a “custodial,” an unlicensed securities broker working under the names Frankel, David Rosse and Eric Stevens.

Most have been gutted by what regulators say was a plot to steal at least $350 million from insurance companies stretching from Oklahoma to New York.

Court records filed by Virginia regulators trace nearly $45 million from Tennessee bank accounts through the Bank of New York and on to a numbered account controlled by Frankel at Banque SCS Alliance SA in Geneva, Switzerland.

Virginia Insurance Commissioner Alfred W. Gross sued on July 6, saying the insurance companies under the Thunor Trust umbrella were under regulatory scrutiny by early 1999 and Frankel’s schemes were “beginning to unravel.”

He says Mississippi alerted Thunor officials to their concerns in March —soon enough to stop the April wire transfers and alert Arkansas officials in time to prevent Old Southwest’s takeover from being finalized.

“The Thunor insurance companies, the vehicles for Frankel’s schemes, are hopelessly insolvent, with the possible exception of [Franklin American],” Gross says in the lawsuit. “Virtually every dollar these companies showed as assets disappeared.”

Steve A. Uhrynowycz, deputy receiver for Pickens’ agency, is running the burial insurance company in Jacksonville and says it could survive through the end of the year without its assets.

“We’re not selling new policies, but we’re still paying claims and bills,” he says. “If we’re not able to recover the assets, we would have to take the company into liquidation and sell the block of business to another carrier.”

Old Southwest sold “pre-need” policies and annuities to cover burial expenses. The policies carried average face values of $7,500 and were sold to about 4,000 people throughout most of Arkansas. State officials say all claims will be covered by the Arkansas Life Disability Guaranty Association insurance pool.

“Arkansas is lucky,” adds Everett Sinor, staff attorney for the Tennessee Department of Commerce & Insurance. His agency has been thrust to the center of an investigation that now includes the FBI, the U.S. Securities & Exchange Commission and Interpol.

A Tale of Two Cities

Based on records filed with regulators in Arkansas, Colorado, Tennessee and Virginia, the odyssey of Old Southwest appears almost an afterthought.

The insurance empire that news reports say began with a bank of computers piled on card tables in Frankel’s $3 million Greenwich, Conn., mansion had all but collapsed by the time entities associated with him courted life companies in Arkansas and Colorado in late 1998.

Both firms, Old Southwest Life Insurance Co. in Jacksonville and The Capitol Life Insurance Co. in Golden, Colo., had long histories in their communities and recent legacies of trouble.

Capitol Life had amassed assets of $438.1 million. But it was struggling.

“We knew the president of Capitol Life, and we were very familiar with the company. We’d had it under supervision for years,” says Nancy Ryan, public affairs director for the Colorado Division of Insurance.

By comparison, Old Southwest was small. Born inside the offices of a Jacksonville funeral home in 1959, the company was wholly owned by Westelle Kemp Moore and her family.

With three employees, Old Southwest paid $1,800 a month to rent offices at Moore’s Jacksonville Funeral Home. It listed its furnishings at the time of the sale as two armoires, four Queen Anne chairs, three tables, a black office chair, a refrigerator, a sliding partition and a postage machine.

Annual reports show a steady increase in assets — from $5.1 million to $5.9 million between 1994 and last year. Reserves, the cash and investments stored to back policies, increased from $4.3 million to $4.9 million during the period.

Westelle Moore and members of her family declined to discuss the company. One family member who asked not to be named said the company suffered from a family feud that prompted division of the family’s holdings four years ago.

Control of the insurance company switched from Boyce Freeman Moore and his immediate family to his sister, Jimmie Lee Moore in 1995. The Moores went looking for a buyer, says a former financial consultant.

Franklin American, based just outside of Nashville, offered $400,000 up front for the Jacksonville company in late 1998, plus an amount equal to the company’s estimated $752,000 in capital and surplus, maintenance on its interest and asset valuation, and a share of the unrealized gains on stocks and bonds.

More exotic entities associated with Frankel made a similar offer in Golden in October 1998, promising $550,000 in cash. There the stories take on stark differences — except for a murky link to what Arkansas investigators know as Frankel’s Liberty National Securities Inc.

Pickens and Gross say the 44-year-old securities broker had run afoul of the SEC and been banned from investing other people’s money by 1992.

“What I do know is that at one point the SEC revoked Martin Frankel’s license,” Pickens says. “I don’t know whether it was part of the plea agreement, but they sealed his record and allowed him to go on his merry way.”

Frankel had become custodian of the investments of a complex network of insurance companies operated by the Thunor Trust. At the top of that group was 49-year-old former consultant and security information executive, John Alvis Hackney, who’d assumed the role of trustee in 1991.

Beneath Hackney were two corporations: International Financial Corp., with a trio of companies in Mississippi, Oklahoma and Missouri, and Franklin American, with seven companies and agencies in Tennessee and Mississippi.

Spurred by a growing fascination with the Catholic Church, Frankel formed a second leg of his insurance empire on Aug. 10, 1998: The St. Francis of Assisi Foundation. Pledged to “serve and help the poor and alleviate suffering,” the charity listed its trustee as Father Peter Jacobs, a New York priest. The trust listed addresses in Vatican City and the Virgin Islands and pledged $50.1 million in equity securities as its sole asset.

Jacobs used the Washington, D.C., law firm of Robert Strauss, the former U.S. ambassador to the Soviet Union and former chairman of the Democratic National Committee, to help convince Colorado regulators.

Tennessee Commerce & Insurance Department spokeswoman Marilyn Elam says Frankel took his Catholic charity west after Mississippi insurance regulators declared in early 1999 that church ownership of the insurance company would be illegal. They launched their investigation of the Thunor Trust.

The approach also failed in the Rockies. Ryan says a St. Francis foundation representative withdrew the Colorado application after state regulators demanded answers to 23 questions.On to Arkansas

Hackney and Franklin American signed an agreement to buy Old South-west from Moore’s Investment Co. Inc. on Dec. 11 — seven days after Colorado scared off Frankel. The company filed a formal application with the Arkansas Insurance Department on Jan. 14.

There was no mention of Frankel, the Catholic charities or the Vatican.

Arkansas officials said they reviewed the application during a hearing in February and quizzed Wade A. Willis, Franklin’s EVP and secretary.

They noted A.M. Best, the nation’s premier insurance rating house, had given Franklin American high marks and upgraded its rating in 1998.

Contacted prior to approval of the Arkansas merger, Tennessee regulators raised no questions of solvency. Like Old Southwest, Franklin American had built a healthy business selling burial packages through a network of funeral homes.

“When you compared the operations, the products and the administration of the two companies, it made a lot of sense that Franklin American was seeking to acquire a small company ... as they had done previously in many other states,” says Arkansas Deputy Commissioner Mel Anderson.

Anderson awaited a call from Old Southwest announcing plans for the final merger. That would have prompted a second review from regulators in Arkansas and Tennessee.

The merger was postponed, he says. Then the company’s assets were removed from Arkansas with Hackney’s knowledge and absent Pickens’ permission — a felony in Arkansas.

The money was almost immediately transferred to the “Dreyfus Account” at the Bank of New York, an account controlled by Frankel and Liberty National Securities. Arkansas regulators aren’t sure where it went from there.

Virginia regulators spelled out a strikingly similar transfer three days later from Settlers Life, a life insurance handling re-insurance for Hackney’s First National Life in Mississippi.

Regulators say nearly $44.8 million left Settlers accounts in Charlotte, N.C., at 11:32 a.m. on April 9, lingered in First National’s bank account in Tennessee, and left again about three hours later for the Dreyfus Account in New York.

On April 12, the exact amount of the Settlers transfer plus $17,640.49 in weekend interest was wired to an account controlled by Frankel in Switzerland.

Frankel disappeared from his home in Connecticut on May 4, when, The Wall Street Journal reports, he flew out of the small airport in White Plains, N.Y., and eventually landed in Rome.

With Frankel gone, Mississippi regulators placed First National Life, Family Guaranty Life Insurance Co. and Franklin Life Insurance Protective Life Insurance Co. into rehabilitation on May 10, triggering a string of regulatory actions across the U.S.

Anderson said he learned of the wire transfer on May 13. Four days later, Arkansas moved in and took control of Old Southwest. He says the department has a chance of recovering the money and doesn’t think it went to Switzerland.

He and Pickens are not sure who — if anyone — to blame for the losses.

“I’d give anything if we had received a Form A [application] with St. Francis of Assisi or information like this on it,” he says of the Colorado documents. “But we didn’t.”

Since Then ...

2014: Martin Frankel was caught in Germany in June 2000. He pleaded guilty to 24 federal felonies and was sentenced in 2004 to serve almost 17 years. He is incarcertated at the federal prison at Fort Dix, N.J., with an anticipated release date of Sept. 7, 2015.

In 2008, Arkansas finally received $1.3 million from the $72 million in assets seized from Frankel. The money was used to reimburse the Arkansas Life & Health Insurance Guaranty Association and other creditors of Old Southwest.

 

 

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