UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16719 / September 22, 2000
SECURITIES AND EXCHANGE COMMISSION v. MARTIN R. FRANKEL and JOHN A. HACKNEY U.S. District Court, D. Conn., 3:00 CV 1778 (PCD)
The Securities and Exchange Commission today charged Martin R. Frankel and John A. Hackney with violating the antifraud provisions, as well as numerous other provisions, of the federal securities laws. The Commission's complaint alleged that Frankel, who was permanently enjoined from committing securities fraud and barred from the securities industry in 1992, masterminded a massive fraud to loot the assets of Franklin American Corporation ("FAC"), a public holding company, and numerous insurance companies located in Tennessee, Alabama, Oklahoma, Mississippi, Missouri and Arkansas. Hackney, the Chief Executive Officer of FAC, participated in Frankel's fraud and deliberately hid Frankel's control of FAC, and his control over FAC's investments, from the Commission, state insurance regulators, employees of FAC and the public.
The complaint alleged the following:
Frankel commenced his fraudulent scheme in 1990, when he wanted to obtain a source of funds to buy and sell securities, and he decided to acquire businesses with liquid assets. Frankel retained Hackney in October 1990 to help Frankel acquire a bank and, subsequently, an insurance company. Hackney knew that Frankel wished to hide his identity from the outset of their relationship. Hackney helped Frankel establish the Thunor Trust ("Thunor") to acquire FAC, a reporting company and the parent company of Franklin American Life Insurance Company ("Franklin Life"), while concealing Frankel's identity. Frankel appointed Hackney as Trustee of Thunor. When Thunor acquired FAC and Franklin Life, Frankel appointed Hackney to be CEO, President and a director of both companies. Thus, Hackney was positioned to serve as a front for Frankel.
During the eight-year period in which Hackney participated in the fraud, he received over $8 million in cash and other compensation from Frankel. These payments included trustee fees, a home for Hackney in Franklin, Tennessee, improvements to Hackney's country home in Guntersville, Alabama, charitable contributions, and a loan to Hackney's brother.
Through Thunor, Frankel ultimately acquired 83% of the outstanding stock of FAC. From 1991 through April 1999, Frankel directed FAC to acquire additional insurance company subsidiaries. Pursuant to Frankel's direction, Thunor also acquired and became the sole shareholder of International Financial Corporation ("IFC"), a holding company for four insurance companies. Frankel and Hackney caused FAC, IFC and their subsidiary insurance companies to invest their assets, which are reported to exceed $215 million, through Frankel. Specifically, Frankel claimed to invest funds forwarded to him by FAC, IFC and their insurance company subsidiaries in government securities through accounts purportedly maintained at Liberty National Securities, Inc. ("LNS"). On September 18, 2000, the Commission charged LNS, a registered broker-dealer located in Dundee, Michigan, and Robert Guyer, LNS' president, with aiding and abetting Frankel's fraud. See Lit. Release No. 16707. Frankel did not, however, set up accounts for FAC, IFC and the insurance company subsidiaries at LNS. Instead, Frankel fabricated trades, which he reported on phony LNS monthly account statements, and confirmations that Frankel generated and sent to FAC, IFC and their insurance company subsidiaries. Frankel invested a portion of the funds transferred to him by the insurance companies through brokerage accounts maintained at other broker-dealers. Frankel, however, used a significant portion of the insurance companies' funds for his personal living expenses, misappropriating millions of dollars.
Finally, FAC's periodic reports were materially inaccurate. In order to hide Frankel's involvement with FAC and the insurance companies, Hackney filed inaccurate annual and quarterly reports with the Commission. FAC's annual and quarterly reports failed to disclose that Frankel was a controlling shareholder of FAC, and that Frankel was also responsible for investing FAC's and its insurance company subsidiaries' assets through LNS in a related party arrangement. The annual and quarterly reports also materially misrepresented FAC's financial condition. For instance, FAC's annual and quarterly reports materially misstated FAC's revenues from investments that were purportedly being executed through LNS. Hackney also provided FAC's auditors with false information about the relationship among Frankel, Thunor, LNS and FAC. Additionally, Hackney filed proxy statements on behalf of FAC, and Schedules 13D on behalf of Thunor, that were materially misleading.
Accordingly, the Commission amended its complaint in SEC v. Robert J. Guyer and Liberty National Securities, Inc., 3:00 CV 1778 (PCD), to add Frankel as a defendant alleging that Frankel: 1) violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b) and 13(d) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13d-1 thereunder; 2) aided and abetted violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder; and 3) violated the terms of a previous Commission order barring him from the securities industry and that he should be ordered to comply with the terms of that order under Section 21(e) of the Exchange Act. In addition, the Commission charged that Hackney violated Section 10(b) and 13(b) of the Exchange Act and Rules10b-5 and 13b2-2 thereunder; and, as a control person, violated Sections 13(a) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 14a-9 thereunder; and aided and abetted violations of Section 13(d) of the Exchange Act and Rule 13d-1 thereunder. The Commission is seeking permanent injunctions against future violations of these provisions of the securities laws; disgorgement of ill-gotten gains and pre-judgment interest; civil penalties; and an order barring Frankel and Hackney from serving as officers or directors of a public company.
The Commission acknowledges the assistance of the U.S. Attorney's Office for the District of Connecticut in bringing this case.