Martin Frankel: Sex, Greed and $200 Million Fraud

Now on his own with his one client, Ted Bitter, Marty started his own brokerage business out of his parents' home. As a testament to Marty's ability to talk his way into just about anything, he convinced Chicago's LaSalle Street Securities to let him be their representative in Toledo.

He formed Winthrop Capital as the corporate entity for this venture. This time, Marty went further than just fraudulently signing an equipment lease as he did at John F. Schulte, Inc. He used the name and social security number of a friend and listed him as the president of Winthrop Capital all without the friend's knowledge or consent.

As part of LaSalle Street Securities, Marty took out large yellow pages ads, claiming to be the only brokerage that insured its accounts from losses and waited for potential clients to call him. In 1986, an opportunity arose from a contact that Marty had made while working for John Schulte. After hearing a wildly fanciful account of Marty's accomplishments, a businessman named Douglas Maxwell agreed to link up with Marty to create the Frankel Fund, an investment partnership fund in which the limited partners had to invest at least $50,000 each. Marty would bring to the fund his "highly touted" investment management prowess and Ted Bitter and John Herlihy, a new client who had responded to the LaSalle Street Securities ad. Maxwell would bring a set of good contacts with wealthy friends and relatives.

Ted Bitter told the press that Frankel ran the Frankel Fund out of his bedroom in his parents' house with all his machinery against one wall. "He tended to blame his parents for whatever was wrong with his life...He was nervous, tense, and he would begin to second-guess himself and would just sit there and freeze up."

Eventually, Frankel had to move to Palm Beach, Florida, to be near many of the wealthy investors that Maxwell knew. New promotional materials for the Palm Beach crowd cited Frankel's incredible success as a money manager incredible indeed. Fictional would be more accurate. Of the million or so dollars that eventually found its way into the Frankel Fund, a good chunk of it was lost from bad trades made by Maxwell (since Marty wouldn't trade) or various administrative and living expenses. Finally the game was over when Ted Bitter and John Herlihy complained to authorities. In a panic, Frankel repaid the one large investor that Maxwell had brought in, but the money he used to repay this large investor came out of the accounts of Ted Bitter and John Herlihy.

John Creamer, one of the lawyers that represented Frankel told the Wall St. Journal, "He's not a genius; he's not a financier. He's this kind of Woody Allenish character who people trust because he doesn't appear to be very sophisticated. He comes across as very goofy in a heartwarming way that would make you trust him."

In 1991, based upon the Frankel Fund fiasco, the Securities and Exchange Commission (SEC) barred Frankel for life from the securities business.

The SEC didn't spend a great deal of time investigating Frankel or the lies that he told the agency about being frugal with investors' money and being personally destitute. Frankel must have appeared to the SEC as a very small-time operator and with him theoretically banned from the securities business, the regulators probably did not see him representing a big threat to the investment community in the future.

What the SEC did not understand in 1991 was what Frankel had been doing with a new venture that he had created in 1989. Creative Partners Fund LP was another scam like the Frankel Fund, but the minimum investment was only $10,000 and designed to pull in a much broader base of investors that did not require a certain level of net worth to be able to invest. This time, Sonia, with her considerable administrative and marketing skills, was involved. She had left John Schulte and filed for divorce.

Far from being deterred by the federal government landing on him, Marty was just preparing himself for the big time: learning the finer points of creating shell corporations and offshore accounts, and laundering money.