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Copy of Tunneling - Case study - Martin Frankel's scam

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KaKa Ho

on 7 December 2012

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Transcript of Copy of Tunneling - Case study - Martin Frankel's scam

Tunneling - Case study

Martin Frankel's scam Martin Frankel’s Background Our views Ho Ka Wai (4054956)
Chau Kam Lam(4073172) Conclusion - The problem on moral value in business: Perspective for now and next generation

- The leak of inspection

- The importance of the awareness of shareholder

- Lots of cases which are similar to Martin Frankel
is also happening among the world (developed/undeveloped)—Beware Outline 1. Definition of Insurance Fraud
2. Martin Frankel’s background
3.Timeslot of the fraud
4.The processes
5.How he was caught
6.Punishment
7.Relationship between companies
8.Main causes leading to this fraud
9.Prevention
10.Effects
11.Conclusion
12.Our views
13.References
14.Q&A session - Borne in 1954
- Very interested in stock market after high school
- Became an American stock trader/ money manager
- The greatest financial scams in history
- Cause hundreds of millions of dollars in losses - This scandal seriously affects the reputation of the financial market
- Investors, company's owner should learn an invaluable lesson
- In reality, tunneling is really common
- To eliminate all the corruption is impossible
- All the parties should work hand in hand in order to prevent financial market getting worse The start Continuation At the end Processes Timeslot 1980 1999 Set up a money management firm near the end of 1980’s 1988 Pay some investor’s accounts to cash out others - 1985 started trading money
- After that , He launches the Frankel fund from the house of his parents
- 10 Investors in total, 1 million USD investment
- He never invested 1$ but he pretended big returns to his investors
- In 1988, the biggest investor wants out (500 000$)
- No money remains for other investors sue him - Directly afterwards started another fund in toledo called ''creative partner'' and promised unbelievable returns

- Had accumulated 14 million Dollar
in 1991

- Followed the same scheme as with the Frankel Fund, therefore the investors wanted money back and he needed more money - His solution: to buy an insurance company
Franklin American Life Insurance in Tennessee
- Specialised in burial services
(worth 3.7 million $)

- Raised reserves overnight to 18 million $

- Paid off investors with the stolen money

- There are thousands of policy holders that he had to pay out sooner or later - His solution: to buy another insurance company

- Same scheme as before continues until at the end of the 90s

- He owns 8 insurance companies worth over 200 million dollars in 6 states - Insurance commission is starting to put pressure on him
- To escape from the charges and to build credibility he tries to hide behind the katholic church
- Ownership of Thunor Trust was transferred to an entity called the Saint Francis of Assisi Foundation
- Gets famous people from the church involved
- Accountants valued the foundation's assets - some of which were managed by Liberty National - at $1.98 billion Definition of Insurance fraud
- Insurance companies hold customer premiums which are forbidden from operational use by the company

- When funding is needed, unscrupulous executives invade the premium accounts in order to pay corporate expenses

- Leads to financial statement fraud - A fire in his house in 1999
- Almost empty house with only some laptops remaining inside
- The fire came from papers burning in the house
- They were financial papers of money laundry and financial fraud counting hundreds of millions of dollars and called the cia
- He flought to Italy with 200 million dollar in assets (diamonds, gold etc…)
- The USA media is getting interested
- Arrested in Hamburg,Germany and indicated in federal court in Connecticut - Was sentenced in New Haven, CT to 16 years and 8 months in federal prison in 2004

- Senior Judge Ellen Bree Burns of Federal District Court, said that Mr. Frankel who used corrupt cash to finance his large in amount of lifestyle and then became an international fugitive How he was caught Punishment Franklin American Life Insurance Co
(TN Holding Co.) Why Martin Frankel would become successful to tunnel such large amount of money? Fake names of Martin Frankel Steve Maty Rothschild Using fake names - Steve Maty Rothschild, Eric Stevens, Robert Guyer, Fauato Fausti
- The story of Martin Frankel's many names, and how he used them, comes from police reports, regulatory documents, investigators, former investors and acquaintances - Appeared around 1987 in Martin Frankel's notebook.
- Showed up in business correspondence written by Frankel
- He gained his own mailing address
How it is discovered
- Nobody knew that Steve Marty Rothschild existed until a private investigator found an envelope in Frankel's trash
- The PI had been hired by Frankel's former boss
- The real Stephen Rothschild : a Toledo lawyer
- In 1989, he was hired by a friend, Ted Bitter, to recoup $65,000 Bitter had entrusted to Frankel a stock investment that had vanished Eric Stevens - The name came into being sometime around 1989, after Frankel began romancing his ex-boss's wife
- More than just a name on a business envelope
- He came across as an experienced bond trader eager to employ a novel and lucrative strategy
How it to be successful
- Real Eric Stevens: didn't dress like a slick broker. He wore: faded jeans, thick glasses, T-shirts. His hair: unruly
- Working out of the home of Martin Frankel's parents, Stevens set up a bogus trust fund, Thunor Trust, and teamed up in 1991 with John A
- Hackney, a Tennessee bank executive, to persuade small Southern insurance companies to wire him money to invest through a company he called Liberty National Securities, Inc. Robert Guyer - Eric Stevens: between 1991 and 1998
- During those breaks, Martin Frankel became Robert Guyer (position: president of Liberty National Securities)
Why it would be successful
- None of the insurance companies that were wiring huge sums of money to Liberty National bothered to check the Robert Guyer name at the bottom of the company's correspondence
- Or the Robert Guyer signature on a September 1998 contract to handle the insurance companies' portfolios.
How it is discovered
- Date: May 1999, a fax arrived at the Michigan office of the real Robert Guyer, the real president of the legitimate Liberty National Securities
- An eye-popping question: Where was the $950 million they had on account at his firm? Fausto Fausti - Real Fausto Fausti : has a bank account in Switzerlland, is one rich son-of-a-gun
- Case: In April, a month before firefighters found piles of documents burning in two fireplaces in the ransacked and empty mansion at 889 Lake Avenue, the amount of $3 million was transferred to Fausti's Swiss bank account.
Why it would be successful
- Martin Frankel, via the People's Bank in Bridgeport, Conn.
- Martin Frankel's propensity for using other people's names: most certainly damaged quite a few insurance companies - embarrassed the Vatican and left U.S. financial regulators scratching their heads Social area Administrative work How to prevent? Education by exercising Spiritual Qualities and Integrity : - When people realize the benefits of enhancing & exercising their spiritual qualities
- And having high integrity in daily life
- Also when they are aware of the serious bad consequences of corruption
- Then, instead of practicing corruption
- They will become more loving, sincere, kind, honest, empathic, dutiful and rightful people away from corruption General Public against Corruption: - General public should stand collectively against corruption
- Putting an eye to the company that you are investing on so as to reduce the risk of financial tunneling Setting Supervising Committee Top-Down Approach: Law - Leaders at the top like president, Prime Minister, Cabinet Ministers, State Ministers, Chief Ministers,etc
- Should be the examples of integrity and clean governance
- Therefore, the administration & management committee is needed to take actions Strict & Clean Law Enforcers: Severe Laws against Corruption: Police Department & Army should be strictly clean in terms of corruption Severe laws should be in place to punish anyone booked under corruption charges fast Positive Social Value Shareholders Effects - Because of the case of Martin Frankel, people would question “When Honest People are not respected by Society and the wrong social value is encouraged”
- In the corrupted society, honest & hardworking people will not be respected but will be considered as fools
- And so even those who were sincere & hard working before will start joining the corrupted race of the fallen society
- Thus, the evils of corruption will spread all over with no future hope & aspiration to live for Concern1: Where the Corrupted Money go?
- Shareholders understand the consequences of financial tunneling

Concern 2:
- The victim of shareholders would take this case as a lesson:
- Being aware the governance and operation of the company before being the shareholder
- Be more cautious to their investment Institutions, Laws, regulations - Heated discussion:
What is the best method to improve the law or regulation so as to reduce the risk of the financial tunneling
(like the case of Martin Frankel)

- The level of restriction:
How to make the law or regulations stricter

- The level of the punishment:
How to increase/ measure the punishment—jail/ penalty
Martin Frankel:16 yrs in jail - enough/reasonable?

- The level of the difficulty of the enforcement of the law: How to make the law or regulation efficient to work: Achieve the aim CEO of other companies - The case of Martin Frankel has set a good sample to them

- Not trying to tunneling > moral testing

- More people/ media in society put an eye on them

- Heated discussion of law/ regulation/suggestion
reduce the risk of tunneling

- Ways to prove themselves working as in a moral and equal way 1991 Start Business 1992 Pay a fine and agree to be barred by the SEC 1998 - Thunor Trust purchases an insurance
company domiciled in Alabama

- Tennessee and Mississippi insurance regulators become suspicious of insurer's asset supervision arrangements(late) - Thunor Trust purchases an insurance company domiciled in Arkansas
(February)
- Begin travel and escape from US
(Disappeared to avoid prosecution)(May)
- Fire in home, set filing cabinets on fire
-Arrest in Germany(September - October) 2004 - On 10th December
- He was sentenced to 200 months
(16 years 8 months) in federal prison
- A state court in Tennessee also sentenced Frankel to 16 years Q & A Session 1989 SEC begins investigation of Mr. Frankel for carenesses and misstatements to investors about his investment practices August :
Liberty National Securities registers in Tennessee and is claimed that controlled by Martin Frankel
September :
He supposedly establish an investment fund called Thunor Trust using nominee grantors and files application and then buys a Tennessee insurance company References 1. Wikipedia
2. GAO slides http://www.gao.gov/assets/100/90807.pdf
3. Astro databank http://www.astro.com/astro-databank/Frankel,_Martin
4. CON ARTIST http://www.thehallofinfamy.org/inductees.php?action=detail&artist=martin_frankel 5. Accountants like http://www.accountantslike.com/2011/03/top-10-biggest-white-collar-crimes-and.html
6. Crime library http://www.trutv.com/library/crime/notorious_murders/classics/frankel/6.html
7. Slate http://www.slate.com/articles/news_and_politics/explainer/1999/07/what_did_martin_frankel_do.html 1994 - 1995 Thunor Trust purchases four more insurance companies domiciled in Mississippi,Oklahoma, and Missouri Relationship International Financial Corp.
(OK Holding Co.) Thunor Trust(TN) (Martin Frankel) Fake Liberty National Securities
(CT,NY,MI,OH) Real Liberty National Securities(MI) Farmers and Ranchers(OK) First National life insurance(MS) International Financial(MO) Franklin American(TN) Franklin Protective(MS) Old Southwest(AR) Family Guarantee(MS) More than 200M (Martin Frankel) The Conspirators with Marty Regulatory Weaknesses Another reasons of being successful in tunneling Hackney:
- Front for insurance activities
- In September 2000, affirmed guilty to RICO conspiracy and money laundering
- Lossed assets obtained illegally

Robert Guyer:
- Front for securities activities
- In September2000, affirmed guilty to securities fraud and tax evasion

- Others have affirmed guilty/under investigation Weaknesses throughout the insurance regulation process
- Not enough oversight of changes in ownership
- Vulnerability in routine financial analyses
Repeated instances of not enough tools, policies,
procedures and information sharing
- Emphasizing theme:
Insufficient professional suspicion Authorities and organizations
- NAIC:
Bring out 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 method for carrying on criminal checks on industry applicants Continuous NAIC Corrective Actions/Plans - Preventing From Frankel Matter

Provide more guidance for investment activities

Improve the review procedures

Require prior notification on significant reinsurance transactions 8. http://e-pao.net/epSubPageExtractor.asp?src=leisure.Essays.Why_Corruption_is_Bad_for_Everybody
9. http://www.ccfr.org.cn/cicf2012/papers/20120129072746.pdf
10.http://lubbockonline.com/stories/071199/bus_071199088.shtml
Full transcript