Martin Frankel: Sex, Greed and $200 Million Fraud
The Big Time
At some point in 1991, Marty linked up with John Hackney, a Tennessee businessman with some banking experience. He fancied himself a deal maker and wanted to put together a group of investors to buy the financially troubled Franklin American Life Insurance Co. of Franklin, Tennessee.
Just around that time, Marty was setting up Thunor Trust, a company that according to documents filed with Tennessee regulators was endowed with $3.7 million from three investors, which included Sonia, a relative of an investor in Creative Partners Fund, and a man whose name had been used without his knowledge. John Hackney became the sole trustee of Thunor Trust.
Marty had created Thunor Trust to acquire insurance companies that were in financial trouble and, as a result, could be purchased at very low prices. Why did Marty want to buy insurance companies with financial problems? Because state regulators required that insurance companies keep very large reserves so that they could pay out claims from their policyholders. Generally insurance companies would be required to invest those reserves in very high-grade securities, such as government bonds and highly-rated corporate bonds. But Marty had other plans for those millions of dollars in reserves and believed that he could use them as he wished without attracting the attention of the state regulators.
The plan was to use these large reserves to fund an acquisition binge of more and more insurance companies bringing in more and more reserves. The trick was to deceive the regulators into thinking that the reserves were untouched, which required a lot of creative money transfers from company to company. Not only would these "looted" reserves fund Marty's plan to build an insurance empire, but they would also fund a lifestyle for Marty that became increasingly lavish.
The first insurance company to be purchased under this scheme was Franklin American Life Insurance Co. in October of 1991. Insurance regulators were thrilled to see this financially weak company with the newly promised Thunor investment of almost $4 million, which brought Franklin's capital and surplus funds above the level that the state of Tennessee required. Consequently, Franklin was once again allowed to write new policies.
And with this acquisition, Thunor Trust suddenly had access to Franklin Life's $20 million in reserves for its nefarious purposes. The first thing Marty did was to shut down his Creative Partners Fund and pay off the investors handsomely from the looted reserves of the insurance company.
The core concept behind these illegal dealings is called a Ponzi scheme after Charles Ponzi, who became wealthy from this pyramid scheme in the 1920s. It's very simple: investors give the investment company money and expect a profit, but the fraudulent investment manager pockets much of the investment, but keeps some available in reserve. When one of the investors asks for his money, he is given the money from the reserve . As long as all the investors don't ask for their money at the same time, the scheme goes on undetected.
In this case, the money from the investors in Creative Partners Fund was used to start Thunor Trust and purchase Franklin Life Insurance. Some of the $20 million in Franklin Life reserves were illegally used to pay off the investors in Creative Partners Fund. Marty understood that it was highly unlikely that policy holders in Franklin Life would ever submit claims approaching $20 million, so he had lots of money to use for himself as long as the state regulators didn't figure out what he was doing.
The next step in this scam would be to buy more insurance companies in various states. That way, when regulators in one state audited one of Marty's insurance companies, there was ample time to move the reserves from another of Marty's insurance companies in another state into the reserve account for the audited insurance company.
Over the next few years, Thunor Trust purchased a number of small insurance companies for very low prices in states throughout the South and Oklahoma. With the acquisition of each new company came the millions of dollars in reserves, all of which increased Marty's acquisition war chest. Gradually, the deals became larger, as did the "dowry" of reserves that came with each acquired company. In 1998, Thunor bought First National Life Insurance Co. of America, with $100 million in assets for a purchase price of $48 million. Unlike many earlier acquisitions, this Alabama insurance company was not a financial mess. By the end of 1998, Thunor companies claimed to have $434 million in assets.
Marty had assembled for his various purposes an impressive empire, but he wasn't satisfied. He put together an outrageous plan to involve the Catholic Church in a bogus charity and money-laundering scheme.