Briefing Slides on Martin Frankel's Alleged $200 Million	 
Insurance Scam (02-AUG-01, GAO-01-990R).			 
								 
This report provides information on insurance regulatory	 
oversight and information sharing in the matter of a highly	 
publicized insurance investment scam exposed in May 1999. Martin 
Frankel, with the assistance of others, allegedly obtained secret
control of entities in both the insurance and securities	 
industries. Instead of managing the assets of these companies in 
a prudent manner, he allegedly diverted them to other accounts he
controlled and used them to support the ongoing scam and his	 
lifestyle. The scam was finally exposed after insurance 	 
regulators in Mississippi took enforcement action against three  
of the Frankel-connected insurers by placing them under 	 
regulatory supervision. Weaknesses in key insurance regulatory	 
oversight activities, extending over several years, contributed  
to delays in detecting the investment scam. GAO found inadequate 
tools and measures for assessing the appropriateness of insurance
company purchasers, analyzing securities investments, evaluating 
the appropriateness of asset custodians, verifying insurers'	 
assets, and sharing information within and outside of the	 
insurance industry. In addition, GAO found weaknesses in the	 
support services provided by the National Association of	 
Insurance Commissioners, a voluntary association of state	 
insurance regulators.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-990R					        
    ACCNO:   A01512						        
  TITLE:     Briefing Slides on Martin Frankel's Alleged $200 Million 
             Insurance Scam                                                   
     DATE:   08/02/2001 
  SUBJECT:   Embezzlement					 
	     Fraud						 
	     Insurance regulation				 
	     Interagency relations				 
	     Securities fraud					 

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GAO-01-990R
     
GAO- 01- 990R Briefing Slides on Insurance Scam

August 2, 2001 The Honorable Michael G. Oxley Chairman Committee on
Financial Services House of Representatives

Subject: Briefing Slides on Martin Frankel's Alleged $200 Million Insurance
Scam

As you requested, this report transmits to you our briefing slides
describing insurance regulatory oversight and information sharing in the
matter of a highly publicized insurance investment scam exposed in May 1999.
(See enclosure I.) These slides present the results of our report Insurance
Regulation: Scandal Highlights Need for Strengthened Regulatory Oversight
(GAO/GGD-00-198, September 19, 2000). We used these or similar slides in, at
last count, 15 briefings to various federal and state officials and national
organizations. Enclosure II lists the various organizations and dates on
which the presentations were made. These slides detail the alleged
embezzlement of more than $200 million in insurance company assets over
nearly an 8-year period by Martin Frankel and associates. Mr. Frankel, a
former securities broker who was barred from that industry in 1992,
allegedly migrated to the insurance industry and continued to operate as a
rogue by engaging in illegal activity. The specific objectives of these
briefings were to (1) outline the alleged scam and (2) describe weaknesses
in oversight and information sharing by insurance regulators.

Throughout the 1990s, Martin Frankel, with assistance from others, allegedly
obtained secret control of entities in both the insurance and securities
industries. He is alleged to have anonymously acquired and controlled
insurance companies in several states and, despite being barred from the
securities industry, to have exercised secret control over a small
securities firm. Using the name of this securities firm, Mr. Frankel
allegedly took custody of insurance company assets and provided false
documents on investment activity to disguise his actual purpose. Instead of
managing these assets in a prudent manner, he allegedly diverted them to
other accounts he controlled and used them to support the ongoing scam and
his lifestyle. The scam was finally exposed after insurance regulators in
Mississippi took enforcement action against three of the Frankel-connected
insurers by placing them under regulatory supervision.

Weaknesses in key insurance regulatory oversight activities, extending over
several years, contributed to delays in detecting the investment scam. We
found inadequate tools and measures for assessing the appropriateness of
insurance company purchasers, analyzing securities investments, evaluating
the appropriateness of asset custodians, verifying insurers' assets, and
sharing information within and outside the insurance industry. We also found

United States General Accounting Office Washington, DC 20548

2 GAO- 01- 990R Briefing Slides on Insurance Scam

some weaknesses in support services provided by the National Association of
Insurance Commissioners (NAIC), a voluntary association of state insurance
regulators. NAIC weaknesses included weak interstate coordination and weak
oversight of entities controlled by holding companies. We also found gaps in
controls that would prevent migration of unscrupulous securities brokers to
other financial services industries.

Our September 2000 report (see enclosure III) included recommendations to
help prevent or detect similar investment scams in insurance companies by
proposing the adoption of appropriate asset custody arrangements, improved
asset verification procedures, and the sharing of confidential regulatory
information across industries and agencies. The report also contained
recommendations designed to broaden and help sustain cooperation among
regulators of different financial sectors. Agencies responding to the report
generally concurred with the report's findings, conclusions, and
recommendations. We also suggested that Congress consider requesting
periodic status reports on regulatory progress and plans in these areas.
Such reports would enable Congress to monitor progress and would encourage
states to adopt needed reforms.

We plan no additional distribution of this report. However, we will make the
report available to interested parties on their request. If you or your
staff have questions regarding this report, please contact me at (202)
512-8678 or Lawrence D. Cluff at (202) 512-8023. Key contributors to this
report are acknowledged in enclosure IV.

Sincerely yours, Richard J. Hillman Director, Financial Markets

and Community Investment Enclosures-4

3 GAO- 01- 990R Briefing Slides on Insurance Scam

Enclosure I Briefing slides

1

2

Insurance Regulation: Scandal Highlights Need for Strengthened Oversight

* What happened?  What are the regulatory weaknesses?

 What is being done to minimize future problems?

3

The $200 Million Insurance Scandal What happened?

4

5

What Happened: Major Events 1.

1985- 1988: Mr. Frankel works in securities industry; is fired from two
firms for differences with management

and activities leading to an SEC investigation.

2.

December 1989: SEC begins investigation of Mr. Frankel for omissions and
misstatements to investors

about his investment practices.

3

. August 1992: Mr. Frankel settles with SEC and is permanently barred from
the securities industry.

4

. August 1991: Liberty National Securities registers in Tennessee and is
allegedly controlled by Mr. Frankel.

(continued)

6

What Happened: Major Events 5.

September 1991: Mr. Frankel allegedly forms Thunor Trust using nominee
grantors and files application and

later buys a Tennessee insurance company.

6.

February 1994- March 1995: Thunor Trust purchases four more insurance
companies domiciled in Mississippi,

Oklahoma, and Missouri.

7.

February 1998: Thunor Trust purchases an insurance company domiciled in
Alabama.

8.

February 1999: Thunor Trust purchases an insurance company domiciled in
Arkansas. (continued)

7

Overview of the Scandal 1998 - 1999 9.

Late 1998: Tennessee and Mississippi insurance regulators become suspicious
of insurers? asset custody

arrangements.

10. Early May 1999: Mr. Frankel flees the U. S.

11. September- October 1999: Mr. Frankel is arrested in Germany and indicted
in federal court in Connecticut.

8

What Happened: The Scam

 Frankel gains secret control of a small securities firm and creates a
phony trust to purchase an insurer.

 He converts insurer assets to cash-- supposedly in custody of the
securities firm for T- bond trading.

 Instead, he steals cash and launders through secret accounts.

 Hides theft with false trading records, a stream of trading ?profits,? and
complicity of co- conspirators

controlling the insurance firm. (continued)

9

What Happened: The Scam

 Ultimately, Frankel buys six more insurers and steals their assets, each
time using previously stolen cash to

buy the insurers, maintain the scheme, and support his lavish lifestyle.

10

11

The Conspirators



Frankel:

The alleged mastermind. Jailed in Germany in September 1999 and subsequently
pleaded guilty to

German tax evasion. Returned to U. S. in March 2001 to face federal charges
of wire fraud, money laundering,

securities fraud, racketeering, and conspiracy.



Hackney

: Front for insurance activities. In September 2000, pleaded guilty to RICO
conspiracy and money

laundering. Forfeited assets obtained illegally.



Guyer

: Front for securities activities. In September 2000, pleaded guilty to
securities fraud and tax evasion.

 Others have pleaded guilty or are under investigation.

12

The $200 Million Insurance Scandal What were the regulatory weaknesses?

13

The Regulators

 Six state insurance regulators had primary jurisdiction over Frankel?s
various companies and used regulatory

support services provided by NAIC.

 SEC, NASDR, and state securities regulators had jurisdiction of the
securities firm.

 Scam went undetected by regulators for many years-- Why?

14

Regulatory Weaknesses -- Summary

 Weaknesses throughout the insurance regulation process

- inadequate oversight of changes in ownership

- weaknesses in routine financial analyses

- shortcomings in on- site examinations.

 Repeated instances of inadequate tools, policies, procedures, and
information sharing.

 Underlying theme: insufficient professional skepticism.

15

Change in Ownership

 Inadequate due diligence -- trust arrangement and unique investment
strategy not questioned.

- Trust named Mr. Hackney as irrevocable trustee.

- Trust arrangement left supposed ?grantors? with no control over their
money.

 Inadequate background checks -- e. g., no regulatory or criminal history
checks.

 Lack of coordination both intra- and inter- industry - e. g., interstate
coordination not timely.

- Arkansas regulators were unaware of problems with Thunor Trust insurers
found in other states.

16

Weaknesses in Routine Financial Analyses

 Inadequate analysis of securities investments -- for example, missed asset
turnover ratios.

(continued)

17

18

Routine Financial Analyses

Ineffective mechanisms to safeguard and monitor assets held by other
entities -- e. g., poor asset custodial

policies and procedures. -Missed or ignored disclosures on annual and
quarterly

statements that bonds were held by broker -- not by an authorized trust or
depository.

Inadequate securities- related expertise and information gathering -- e. g.,
no communication with state securities

regulators. -State securities regulators across the hall had

information about the real Liberty National Securities.

19

Weaknesses in On- site Examinations

 Failure to detect misappropriation of assets -- for example, inadequate
assessment of investment

strategy.

- Four full on- site examinations completed and one exam targeted on the
investment strategy.

- Examiners did not realize that the assets had been looted. (continued

)

20

Weaknesses in On- site Examinations

 Inadequate practices and procedures to verify the legitimacy of asset
custodians -- for example, no

independent verification.

- No effort to i denti fy and veri fy the legitimacy of the broker who
supposedly had custody of the assets.

(continued)

21

Weaknesses in On- site Examinations

 Limited sharing of information and coordination among regulators. For
example, no proactive alerts to other

states.

- When some states began to suspect a problem, their failure to communicate
with other states led to an

additional $50 million in losses.

22

The $200 Million Insurance Scandal What is being done to minimize future
problems?

23

What is Being Done to Minimize Future Problems?

 GAO recommendations

 Ongoing NAIC corrective actions/ plans

 Congressional activity

24

Summary of GAO Recommendations

 State insurance regulators: Improve asset verification methods and
information sharing.

 NAIC: Implement proposed corrective actions and strengthen accreditation
program.

 SEC: Improve information sharing with insurance regulators and help
prevent the migration of rogues.

 FBI and insurance regulators: Establish a means for conducting criminal
checks on industry applicants.

25

Ongoing NAIC Corrective Actions/ Plans Stemming From Frankel Matter

 Strengthen guidance for investment activities.

 Set threshold for flagging asset turnover ratio (> 0.25).

 Improve asset custodian interrogatories and review procedures.

 Design/ implement Form A database.

 Require prior notification on significant reinsurance transactions.

 Improve timing of exams/ greater use of targeted exams,

 Improve use of Part I accreditation in reviews.

 Develop proposed federal fingerprint legislation.

26

Congressional Activity

 March 6, 2001, hearing by House Financial Services Committee to begin
considering:

 Fingerprint checks in the insurance industry.

 Improved efficiency in sharing of criminal and regulatory history
information among regulators.

 More efficient public access to data already in the public domain.

(continued)

27

Congressional Activity

H. R. 1408 introduced April 4, 2001

 Purposes: safeguard public from fraud, improve/ streamline regulatory
coordination, reduce

duplicative information requests, help detect patterns of fraud, and take
advantage of advanced data

sharing technology/ internet.

 Create Antifraud Subcommittee to coordinate access and information sharing
by regulators.

 Allow SEC to consider disciplinary actions by other regulators.

28 GAO- 01- 990R Briefing Slides on Insurance Scam

Enclosure II Insurance Regulation: the Need for Strengthened Oversight

Table 1 shows the various organizations to which we have presented our
briefing Insurance Regulation: The Need for Strengthened Oversight.

Table1: List of Organizations and Date Receiving GAO Briefing Insurance
Regulation: The Need for Strengthened Oversight.

Organizations Date GAO Advanced Fraud Training October 12, 2000 Women in
Housing Finance October 19, 2000 New York Insurance Department December 12,
2000 Federal Bureau of Investigation-Economic Crimes Unit December 13, 2000
North American States Securities Associations January 22, 2001 New York
Insurance Department Property and Casualty Division January 22, 2001 Morgan
Stanley January 22, 2001 Connecticut Insurance Department January 23, 2001
International Insurance Council January 29, 2001 National Association of
Insurance Commissioners Anti Fraud

Taskforce March 26, 2001 Tennessee Insurance Department March 27, 2001
Tennessee State Auditors March 27, 2001 Texas Insurance Department April 25,
2001 Casualty Actuarial Society May 8, 2001 Boston Federal Reserve Bank Risk
Management Conference May 11, 2001

29 GAO- 01- 990R Briefing Slides on Insurance Scam

Enclosure III

INSURANCE REGULATION: Scandal Highlights Need for Strengthened Regulatory
Oversight

www.GAO.gov GAO/GGD-00-198

30 GAO- 01- 990R Briefing Slides on Insurance Scam

Enclosure IV GAO Contacts and Staff Acknowledgments

GAO Contact Lawrence D. Cluff (202-512-8023)

Acknowledgments In addition to Mr. Cluff, James R. Black, Thomas H. Givens
III, Rosemary Healy, Barry A. Kirby, Katherine Raheb, Paul G. Thompson,
Karen C. Tremba, and Desiree W. Whipple made key contributions to this
report.

(250036)
*** End of document. ***