A Wolf in Sheep's Clothing
By Bev Day, MBA, CFE
April 3, 2007
The Colorado episode in the Martin R. Frankel crime spree saga – one of the greatest insurance scandals in American history.
On October 19, 1998, the Financial Affairs Section of the Colorado Division of Insurance received a Form A filing from The Saint Francis of Assisi Foundation, to Serve and Help the Poor and Alleviate Suffering. This filing was an application by the Foundation to purchase Capitol Life Insurance Company. Capitol Life was a troubled company that the Division had placed under supervision in 1989, with oversight conducted by the Financial Affairs Section. The news that a company wanted to rescue our troubled company was enthusiastically welcomed. It appeared that a knight in shining armor had arrived to help keep the policyholders whole and to save the company from its inevitable measured and controlled death.
All applications were reviewed to assure compliance with state laws, that acquisition would be fair and reasonable for the policyholders and in the public interest. As we started our review, it seemed odd that The Saint Francis of Assisi Foundation wanted to buy an insurance company. Yet, a few religious orders do own insurance companies and fraternal organizations, so that would not immediately disqualify the application or cause us a great deal of concern. The acquisition application was signed by the sole Trustee, Reverend Father Peter Jacobs.
As we continued our review, several factors came to light that gave us pause, causing us to look closer. The fact that the Catholic Church was involved made us suspicious, not because it was a church, but because so many layers in the hierarchy of ownerships presented themselves. I called upon legal counsel to assist in the review and to flush out statutory compliance issues. My staff and I combined our findings with those of counsel and sent a letter questioning Father Jacobs about who they were and where the acquisition money would come from.
The Regulatory Investigative Letter
As a result of our review, a number of serious concerns and questions arose. Did the acquiring company have the capacity and expertise to operate an insurance company? Did they have the knowledge and ability to comply with our statutory requirements? Most importantly, the application lacked adequate assurances that the policyholders would be protected and more secure under the new management, than under the current operations. One of the statements made in the filing stood out. Father Jacobs implied he would have free reign over the company after the acquisition. We advised him that, to the contrary, even though the funds contributed to the company may foster a release from
supervision, we would still require certain filings from the company to assure ourselves
of its sustained solvency and statutory compliance.
The following list represents an abbreviated and paraphrased synopsis of the questions and requests contained in our letter sent to Father Jacobs. It provides insight into the issues, the standard regulatory process, and exposes the questionable state of the Form A filing:
Explain the potential competitive impact of this proposed merger of acquisition.
Provide details of contracts that would be entered into by the purchaser, relating to the acquisition
Provide the plan for attaining adequate insurance expertise and independence on the Boards of Capitol Life, CLICO Acquisition Corporation and The Saint Francis of Assisi Foundation, to Serve and Help the Poor and Alleviate Suffering.
Provide the plan to pay the phase III tax liability of Capitol Life should it become due.
Demonstrate statutory compliance that purchaser is not directly or indirectly owned by the Holy See, the central government of the Catholic Church. Colorado restricts direct or indirect ownership or financial control of insurance companies by governments.
Based on our review of the Deed of Settlement, you (Father Jacobs) are currently the sole trustee of The Saint Francis of Assisi Foundation. We understand that the Protector can at any time remove you as sole trustee or appoint one or more other persons as trustees. In the event that there is no Protector, then the beneficiaries are selected by the Monitor Ecclesiasticus Foundation to appoint one or more other persons as new trustees. Finally, it is our understanding that the Secretary of State of Vatican City chooses the Board of Directors of the Monitor Ecclesiasticus Foundation, and that the Pope chooses the Secretary of State of Vatican City.
Given this information and assuming that the controlling person is someone in the chain below the Pope or the Secretary of State, we were concerned that the Pope would be the ultimate controlling person. Since the ultimate controlling person must file an annual registration statement with Colorado, which includes annual audited financial statements, we want to be certain that the Pope or the Secretary of State is willing to comply with this requirement.
Identify the persons who are knowledgeable and competent in life insurance company matters and who have been involved to date in decisions made concerning the proposed change of control and future direction of Capitol Life.
We advised them that their request to release Capitol Life from supervision did not mean it would be released from active regulatory oversight.
Provide a plan for the investment policy that recognizes Colorado’s investment limitations.
Clarify the difference between the “Board of Directors” and the “Board of Trustees” and identify the members of the two boards.
The filing stated that the Saint Francis of Assisi Foundation’s assets were invested in the Jupiter Capital Growth Fund Limited and deposited at Prudential Securities and other financial institutions. Provide a detailed description of the Jupiter Fund, including a current prospectus and identify all institutions where these assets are held.
Confirm that The Saint Francis of Assisi Foundation intends to maintain the stated Risk Based Capital level of at least 300% above the company action level.
Provide pro-forma balance sheets for 1998-2001; include who prepared them and clarify their insurance expertise. Provide audited financial statements of The Saint Francis of Assisi Foundation to enable us to determine that funds are not encumbered.
Indicate who prepared the pro-forma financial statements included with the Business Plan. What is their relationship to The Saint Francis of Assisi Foundation, and what is their insurance industry expertise?
Explain why The Saint Francis of Assisi Foundation was established subject to the laws of the British Virgin Islands and not that of the United States.
Provide updated contact information for the Form A filing.
Final statement in our letter: “We had an initial meeting with the representatives of the purchaser. However, it is customary for us to meet the actual purchaser. Please contact me at . . . to set up a meeting time that is convenient for you.”
We sent the letter out on December 4, 1998. Weeks passed and we heard nothing. The president of Capital Life heard nothing. Reverend Father Peter Jacobs simply slipped away, and we never received an explanation why. The communication lines had vanished; the file was closed.
The Reason for Silence
By spring of 1999, the news broke. The assistant attorney general received an inquiry about the filing and the reason for the silence started to unfold. Martin Frankel had been operating Ponzi and money laundering schemes using insurance companies for nearly ten years in Arkansas, Mississippi, Missouri, Oklahoma and Tennessee. He was the mastermind of this and numerous schemes and had fled to Europe in May of 1999. Father Jacobs was one of his front men.
Perspective after the Fact
Colorado policyholders had escaped the looting by Martin Frankel. How was this possible? I believe diligence in thoroughly questioning the application was instrumental in stopping a tragedy in Colorado. This is not to say that we conducted ourselves any differently than other regulators would. Frankel, in this instance, changed his approach and sought to convince us of his benevolence with the Catholic Church connection and by sending Father Jacobs on the Colorado mission. This twisted approach in his scheme was part of his undoing. We had no idea Frankel was involved in this case until after the fact. We were elated when we found out that we had prevented his damage to Colorado policyholders.
The Frankel scandal shook the regulatory world to its core and spawned increased vigilance. In 1999, the Gramm-Leach-Bliley Act, Public Law 106-102, mandated changes in insurance regulation. The National Association of Insurance Commissioners answered the call and undertook an ambitious agenda to streamline, promote, and develop enhanced systems of communication among the states and worked with the Federal government to set up information sharing systems. While continual improvement in insurance regulation has always been in place, this Act catapulted the effort even further.
Reverend Father Peter Jacobs. Father Jacobs, in his early seventies at the time, had a long career with the Church in New York City, worked at Rice High School in Harlem and helped the downtrodden. He also lived a life among the city’s rich and famous, which was frowned upon by the archdiocese, and was suspended in 1982 for a period of five years. Nevertheless, Father Jacobs maintained favor with Rome. Martin Frankel convinced Father Jacobs and other Catholic Church dignitaries that he would contribute $50 million to the Monitor Ecclesiasticus Foundation and from there distribute funds to other charities. As part of the plan, they would purchase troubled insurance companies to further their cause. The Saint Francis of Assisi Foundation, to Serve and Help the Poor and Alleviate Suffering, was established in the British Virgin Islands in October of 1998, but Frankel back-dated it to August 10, 1998, as he felt that was a good astrological date.
Martin Frankel. Frankel started purchasing insurance companies in 1991 through Thunor Trust, his new business. The first insurance company he bought was Franklin American Life Insurance Company in Tennessee. Over the following years, he bought several insurance companies. He next planned to set up a fraudulent charity scheme using The Saint Francis of Assisi Foundation to show a proper front.
In May of 1999, the Mississippi Insurance Commissioner placed three of his companies under supervision. He acquired false identity and fled to Europe leaving behind burning papers in his Greenwich, Connecticut, mansion. He was captured in Hamburg, Germany, on September 4, 1999, while traveling under an assumed name. He was jailed in Germany and sentenced in June of 2000 to a three-year term for carrying false passports and smuggling in $10 million dollars worth of diamonds, gold and jewelry.
In March of 2001, Frankel was extradited to the United States. Besides having eleven (11) felony arrest warrants against him from Connecticut, he was indicted on thirty-six (36) Federal charges including wire fraud, money laundering, conspiracy, insurance fraud and securities fraud. He was charged with obtaining ownership and control of various insurance companies and then converting the assets for his personal use.
In 2004, Federal court sentenced Frankel to sixteen (16) years for the financial crime spree lasting ten years from his boyhood home in Ohio to Connecticut to Tennessee, Mississippi, Arkansas, Oklahoma, Missouri, Switzerland and the Vatican. His spree cost the victims over $200 million in financial losses.
Insurance Commissioners in four states filed a federal suit seeking $600 million in damages. The trickle down effect of lost jobs and unseen financial ruin of so many undoubtedly added up to many millions more.
On October 13, 2004, Father Jacobs pleaded guilty to one count of conspiracy to commit wire fraud and money laundering, and was sentenced to five years of probation.
In September 2002, Monsignor Emilio Colagiovanni, President of the Monitor Ecclesiasticus Foundation, pleaded guilty to one count of conspiracy to commit wire fraud and money laundering and on September 9, 2004 was ordered to pay a fine in the amount of $15,000.
As regulators, it is our job to be diligent, skillful and skeptical. Identifying and apprehending the criminal who is bent on hoodwinking the insurers and regulators will always be a challenge, and such individuals will always lurk around some corner. The Martin Frankel case set new wheels in motion and tore down many barriers to sharing information. Ideally the laws of the states and that of the Federal government will give the regulator access to basic and critical information such as fingerprint identification on a national scale, and resources to carry out investigations. It took a monumental scandal to cause changes, which has been the case in the past, not only for insurance regulation but for many other law enforcement activities. Our success in effectively regulating the insurance industry and identifying the villains comes down to how well we use the tools we have at hand and to how efficient we are at thinking beyond the obvious.
Colorado Division of Insurance records:
Form A Filing and related documents: Statement Regarding the Acquisition of Control of or Merger with a Domestic Insurer, October 19, 1998, signed by Reverend Father Peters Jacobs
Letter to Reverend Father Peter Jacobs, December 4, 1998, signed by Beverly J. Day, Chief of Financial Affairs for the Colorado Division of Insurance.
Colorado Revised Statutes Section 10-3-801, et seq.
The Pretender: How Martin Frankel Fooled the Financial World and Led the Feds on One of the Most Publicized Manhunts in History, A Wall Street Journal Book, Simon and Schuster, Ellen Joan Pollock, 2002.
United States General Accounting Office report, Regulatory Initiatives of the National Association of Insurance Commissioners, GAO-01-885R Regulatory Initiatives, July 6, 2001.
Testimony by Terri M. Vaughan, Commissioner of Insurance, Iowa, Vice President of the National Association of Insurance Commissioners before the Subcommittee On Oversight and Investigations, the Subcommittee on Financial Institutions and Consumer Credit,the Committee on Financial Services of the United States House of Representatives. Testimony Regarding: Information Sharing Among State and Federal Financial Regulators, March 6, 2001.
United States General Accounting Office report, INSURANCE REGULATION: Scandal Highlights, Need for Strengthened Regulatory Oversight,,GAO-GGD-00-198, September 19, 2000.
Various Wall Street Journal Articles printed in 1999.
Contact contributing writer Beverly J. Day at Bev@BevDay.com or 303-979-6734.
Copyright 2007 Beverly J. Day All Rights Reserved. No part of this article may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopy, recording or otherwise, without the prior written consent of the author.
The article was written for the Society of Actuaries and is included in the Regulation and Taxation Module of the Society of Actuaries. http://www.soa.org/
Excerpt from the Society of Actuaries Web site:
Regulation and Taxation Module
"The goal of the Regulation and Taxation module is to provide you with an understanding of, and appreciation for, the regulatory environment that affects the life and annuity insurance industry overall and actuaries in particular. The Regulation and Taxation FSA module is required for candidates seeking to complete the individual Life and Annuities specialty track for Fellowship."
Bio: Beverly J. Day, President and CEO of Dallas and Associates, Inc., a business coaching firm, was Chief of Financial Affairs for the Colorado Division of Insurance at the time of the Martin Frankel insurance scam. Prior to becoming Chief in 1992, she served as an insurance examiner for 15 years. As Chief she managed the regulation of troubled companies, supervised a team of financial analysts, proposed statutory law, testified before Colorado Legislative and Senate committees, and supervised the collection of over $100 million in premium taxes annually. She served on the National Association of Insurance Commissioners’ (N.A.I.C.) financial analysis working group (solvency surveillance), and was an N.A.I.C. instructor on the topics of financial analysis, and HMO financial reporting for industry leaders and regulators.
Ms. Day’s article The Art of Financial Regulation: Financial Analysis of Insurance Companies discusses financial analysis techniques, illustrated by her experience with a failed company. Her article appeared in The Examiner, the official publication of the Society of Financial Examiners, and won the 1998 Editor’s Choice award for outstanding contribution by a member.