The Alan Teale Empire
In April 1994, a sixty-four-year-old British native named Alan Arthur Teale died of heart and kidney failure after contracting pneumonia while serving a seventeen-year sentence in a U.S. prison for insurance fraud. Thus ended the life and career of one of the most remarkable con men in history. Teale's involvement in the American insurance industry lasted less than a decade, but in that period he established a labyrinth of companies and individuals that would eventually defraud consumers for millions of dollars. How the son of a London bus driver whose formal education ended at high school could have gone on to become the mastermind behind what would be called "the Super Bowl of insurance fraud" is a story not only of individual ambition and malice but also of the vulnerabilities of the insurance industry itself to fraud and deception. For Teale and his many associates were masters at seeing the loopholes and legal ambiguities that surround the industry and exploiting them.
Most of the Teale schemes took advantage of two of the weaknesses in the insurance industry discussed in the Introduction. First, there is the inherent difficulty of establishing the value of the assets that guarantee that insurance companies are capable of paying claims; a condition that is exacerbated when the companies are located offshore. As we shall see, in a variety of schemes Teale used bogus government securities and other forms of "fictitious capital" to convince regulators of the financial wherewithal of his companies. He took advantage of a number of "regulatory voids" in the insurance industry that allowed him to operate insurance companies largely outside the scrutiny of state regulators.
Teale's crimes were so serious that they merited a series of congressional hearings headed by Senator Sam Nunn, held in 1991, nearly two years before Teale was indicted. Senator Nunn, and other members of the committee, were concerned that the entire insurance industry was on the brink of collapse, just as the savings and loan industry had come close to a meltdown. Everywhere they looked they saw insolvent companies, millions of dollars in losses, and the hand of Alan Teale. In the course of those hearings, the committee's investigators discovered a "vast network" of white-collar criminals whose operations were "global in nature" and whose activities went far beyond insurance to include crimes committed in the securities and banking industries.
Before coming to the United States in 1981, Alan Teale had spent nearly thirty years in the European insurance industry, establishing an unremarkable, but also unblemished, career. During that period in his life he was, in the words of a reporter who knew him, "the archetypal pin-striped grey man, whose horizons extended no further than the string of worthy committees on which he sat." It was only when he emigrated that he discovered, like so many before him, the potential fortunes to be made in the "land of opportunity." And, in the early 1980s, one of the best places to discover those opportunities was Miami.
The Insurance Exchange of the Americas
In the late 1970s, William Sadowski, a Florida legislator, had a vision: to create a new Lloyd's of London in south Florida that would become a gateway to the Caribbean, providing insurance to the growing corporate interests of that region as well as to South and Central America. While not formally affiliated with Lloyd's, Florida's version would be modeled on the venerable English institution. As such, it would not be an insurance company per se but would be comprised of various syndicates in which investors pooled their funds to take on a variety of risks. In 1979, the Florida legislature passed a bill enabling the creation of Sadowski's vision and giving it a name: the Insurance Exchange of the Americas (IEA).
The key to IEA, and what set it apart from insurance companies, was that it would not be regulated by the state, but instead would be "self-regulated." According to Sadowski, who would become IEA's counsel, "this system wouldn't work with a lot of regulation." This was the beginning of the 1980s, a time when deregulation was not only a catchy buzzword, but also a philosophy embraced by politicians and business leaders alike. In 1980, Ronald Reagan was elected President, having campaigned on a platform that stressed deregulated markets and, specifically, the withdrawal of government from key financial industries. In that same year, the first of a series of laws were passed that loosened restrictions on the nation's savings and loan institutions. The disastrous consequences of that legislation would only fully be appreciated a decade later. It is not surprising, then, that in this environment the concept of a "self-regulated" insurance market would have been seen as the way of the future.
In May 1981, Alan Teale, formerly the director of the British Brokers Association, the brokers organization for Lloyd's of London, whose résumé also listed several stints as a university professor and as an "adviser to several governments," was appointed as director of the IEA. One of the reasons he was appointed was because of his knowledge of the Lloyd's system and his perceived ability to transplant the Lloyd's model to south Florida. Another was his salesmanship. "In the formative years of the exchange," one IEA official would later say, "[W]e needed a used-car salesman with a British accent. And that's just what we got."
On April 4, 1983, IEA opened for business operating out of a 30,000-square-foot facility in downtown Miami, with the blessing of most of the city's public officials and $50,000 from the Miami Chamber of Commerce.
According to the enabling legislation, while the state Department of Insurance would not directly regulate the IEA, it was responsible for reviewing the applications of those who applied for membership to the IEA and, in the words of its former head, to make sure that everyone involved "has clean hands." In hindsight, the state was less than completely diligent in inspecting the hands of all the IEA's members, as many of them had questionable histories when they joined, and many more, who may have had clean hands when they joined, went on to get their hands very dirty indeed.
Stephen Arky was the first elected chairman of the IEA board of governors. Arky committed suicide in July 1985 while he was being investigated for his connection with a firm, ESM Securities, that was at the center of a scheme that resulted in a crisis in the Ohio savings and loan industry.
Another investor in IEA was Fred Carr who would later gain notoriety for his role in the failure of Executive Life, a fiasco that resulted in $3 billion in losses, after the junk bonds Carr had purchased from Michael Milken turned out to be nearly worthless.
Soon after the Interamerican syndicate was approved to write business on the IEA, one of its principals, Jose Pina, was accused by the state of defrauding 112,000 persons who held policies from his Universal Casualty Insurance Co.
Then there was Peter Cameron-Webb, the lead underwriter for the Usher syndicate, who arrived at the IEA after a long career at Lloyd's that ended when Lloyd's uncovered evidence of his involvement in what came to be known as the "missing millions scandal," in which Cameron-Webb and another underwriting manager, Peter Dixon, along with twelve colleagues, allegedly misappropriated $53.2 million from syndicates under Cameron-Webb's control.
When the IEA opened for business in April 1983, it had four syndicates and a total capitalization of $6 million. In its first year and a half of business IEA did very well. By the end of 1984, the fifteen syndicates operating on the IEA took in $100 million in premiums. In May 1984, Teale was forced out as head of the IEA, though that did not end his involvement. IEA's financial success continued for the next couple of years; in 1986, the IEA took in $200 million in premiums.
Despite these outward signs of success, trouble for the IEA soon began to develop. In the spring of 1986, Omaha Indemnity Company, a unit of Mutual of Omaha, filed a suit against the Royal American Managers (RAM) syndicate, alleging fraud. Rumors began to surface about other syndicates being in trouble and, by March 1987, seven were under court-ordered rehabilitation. After several attempts to revive it failed, in January 1988 IEA was placed into receivership by a state judge. When regulators finally got around to cleaning up the IEA mess they discovered some $200 million in liabilities, which they ultimately settled for about five cents on the dollar.
How an organization that was launched admid such high hopes and ambitions could have sunk so quickly was the subject of an inquiry by a Florida task force. In its report the task force cited a number of factors that led to the demise of the IEA, but focused its attention on the failure of self-regulation. Not only did the IEA fail to regulate itself, but "the apparent genuine belief by DOI [Florida Department of Insurance] that the IEA was self-regulating prevented aggressive oversight of the IEA by DOI." Another factor, was the extensive "incestuous relationships" among the members of the board, including the fact that "many people who owned management companies were on the Board of Governors ..."
Other critics pointed to the inherent instabilities of the markets in which IEA was involved. Despite the fact that the IEA was created as a vehicle for targeting expanding Latin American and South American business, it entered the business during a "soft" period in the market, meaning that there were more insurers offering products than there were consumers to purchase them. As a result, the IEA's members were forced to take on riskier and less predictable fringe business. The syndicates on the IEA, which often specialized in certain types of coverage, took on a wide variety of highly risky business in which potential claims, and thus losses, were very high. For example:
The syndicate led by Peter Cameron-Webb underwrote 50 percent of a New Jersey racetrack's offer to pay $2 million to the owners of a Kentucky Derby winner if their horse continued its winning streak in New Jersey. When the horse crossed the finish line ahead of the field, the syndicate lost $1 million.
An IEA syndicate headed by Richard Lehman, a Miami attorney, took the lead in providing nearly $1 million in coverage to a championship Angus bull. The animal, whose estimated market value was $5.5 million, was thought to be the most expensive bull in the world. At the time Lehman commented, "We all took a little piece of the bull. We figured the bull's semen will probably double in value if he dies, so we can't be hit too hard."
The IEA was one of the participants in a $57.5 million policy that insured Universal City studio against injury or illness of Tom Selleck during the taping of his television series, Magnum, P.I.
While the state's task force did not explicitly cite fraud, it was well known that several of the syndicates had become ensnared in allegations of criminal wrongdoing. The most prominent of these scandals involved the RAM syndicate and the Omaha Indemnity Company.
Among other things, the RAM scandal revealed the inherent dangers posed by Managing General Agents (MGAs) in the insurance industry. As a means to expand their client base, insurance companies often enter into arrangements with MGAsindividuals or firmsin which the MGA is given the power to underwrite business in the name of the company, to handle claims, and to arrange reinsurance. In a 1990 report to Congress on insolvencies in the insurance industry, a committee headed by Representative John Dingell cited unregulated MGAs as a factor in many of those insolvencies. AS Representative Dingell's committee pointed out,
[t]here is an inherent conflict for MGA's [sic] between writing quality business and earning commissions on the volume of business written. MGA's [sic] are not insurance companies, and their activities are not generally regulated by state insurance authorities.
The RAM/Omaha Indemnity case illustrates just how dangerous this conflict can become for companies that, in insurance industry parlance, "give the pen" to MGAs without carefully monitoring their activities.
In 1982, Omaha Indemnity, a wholly owned subsidiary of the well-known Mutual of Omaha Insurance Company, signed an agreement with World American Underwriters, an MGA based in Missouri, in which World American would do underwriting and arrange reinsurance, primarily low-risk property/casualty policies in Omaha Indemnity's name. World American was managed by James Wining and Willie Schonacher. Soon thereafter, Wining and Schonacher left World American to form Royal American Managers, which controlled two syndicates on the IEA, and they convinced Omaha Indemnity to allow RAM to act as an MGA for the insurance company.
Officials at Omaha Indemnity had expected that RAM would write a relatively low volume of business and would provide reinsurance through their IEA syndicates. At first, things seemed to be going well. After the first fifteen months, RAM reported taking in $7.9 million in premiums. However, as Omaha Indemnity would soon learn, this was only a small fraction of the business RAM was actually writing. By 1986, RAM had actually taken in $193 million in premiums, while reporting only $61 million to Omaha Indemnity. Of the total amount, Omaha Indemnity would later claim in a lawsuit, Wining and Schonacher pocketed $34.6 million. Messrs. Wining and Schonacher accomplished this feat by chartering "a complicated network of interrelated companies in the United States and offshore to take a cut of Omaha Indemnity's premiums at every step of the insurance and reinsurance process."
How could they write such a high volume of business in such a short period of time? The answer was fairly simple: They took on high-risk, low-profit businessincluding insurance policies for taxicab companies, long-haul truckers, and restaurantsthat other insurers did not want, and offered cut-rate prices. And why not, since as MGAs they were not responsible for paying any of the claims these policies generated? They then reinsured many of the policies through their own reinsurance company, Fielding Reinsurance Limited, of the Turks and Caicos, where both Wining and Schonacher maintained beachfront homes, and diverted a substantial portion of those premium dollars to themselves.
In 1986, Omaha Indemnity filed a suit against RAM, Wining, and Schonacher, claiming that they had lost hundreds of millions of dollars as a result of their deceit. The next year the two RAM-controlled syndicates on the IEA were placed into receivership. In 1989, Omaha Indemnity was awarded $225 million in its suit against RAM, although officials at the company recognized that the likelihood of their ever seeing a substantial portion of that award was slim. Ultimately, Mutual of Omaha was forced to contribute $250 million to keep its subsidiary afloat.
As the Omaha Indemnity lawsuit dragged on through the courts, Wining and Schonacher were not idle. While they were being investigated for their misdeeds in connection with RAM, the entrepreneurial duo embarked on new insurance scams. In 1987, operating out of their Missouri headquarters, they formed Laramie Insurance in Wyoming and transferred assets to the company from their offshore company, Fielding Reinsurance Limited. By 1989, Laramie Insurance was in serious financial difficulties, leaving millions of dollars in unpaid claims.
One might wonder how two individuals who were already under a cloud of suspicion for insurance fraud were able to obtain a license to start an insurance company, particularly one that had questionable assets. Simple: Like several other crooked insurance owners who moved their businesses to Wyoming during the period, Wining and Schonacher bribed the state's insurance commissioner, flying him to a family reunion aboard their corporate jet and putting several of his and other state officials' relatives on their board of directors.
In March 1992, Wining and Schonacher were finally convicted on federal charges in connection with the RAM/Omaha Indemnity scheme and for filing false financial statements for Laramie Insurance. Amazingly, despite having been convicted of crimes involving the theft of $20 million from Omaha Indemnity and $5 million from Laramie's policyholders, Schonacher received a prison sentence of two years. James Wining, after pleading before the court about the need to take care of his mentally handicapped son, was given a sentence of five years' probation. In explaining his sentence Judge Dean Whipple stated: "What I really did was sentence Wining to care for that boy for the rest of his life, gave him a life sentence." The light punishments Wining and Schonacher received did not escape the notice of the press. One newspaper editor opined:
Judge Whipple's leniency is appalling. It's no wonder some people have lost confidence in the justice system. An unemployed breadwinner could go to jail for writing bad checks to feed his kids. So could an uneducated kid who tries to earn money for child support by running drugs. But a James R. Wining can work several years setting up a scheme to rip off a major insurance company, paying himself $450,00 a year in money he had no right to lay his hands on ... Then, when the law catches up to him, he avoids jail time by reminding the court of the obligations of parenthood.
For many of those involved with it, the IEA was a launching pad for numerous projects, legitimate and illegitimate; Wining and Schonacher, for example, were able to use the money they stole from Omaha Indemnity to start Laramie Insurance. It was also a great place to make contacts that would pay off in the future. Alan Teale, who left the IEA in 1984, was able to use the contacts he made there to create an incredibly elaborate network of insurance companies, reinsurance companies, and brokerage houses that he would use to bilk millions of dollars out of individuals and companies in the years to come.
The International Underwriting Association
For the ever-resourceful Mr. Teale, his forced departure from the IEA wasn't the end of his career, but an opportunity to start anew. He remarried, to Charlotte Rentz, a former vice-president at the Universal Insurance Group in Florida, a company run by the brother of IEA member Jose Pina. The couple moved to Atlanta, Georgia, and began putting together a series of new business enterprises that would end up making insurance fraud history.
Operating out of a suite of offices in an Atlanta business park, Teale's operation housed dozens of supposedly independent offshore insurance companies, reinsurance companies, managing general agents, and consulting firms, many of which operated under the umbrella of an organization called the International Underwriting Association (IUA). By 1988, the IUA consisted of thirty ostensibly independent insurance and reinsurance companies, many of which held charters in foreign countries: fifteen in the Turks and Caicos islands; two in Barbados; one each in Panama, Belgium, the British Virgin Islands, and Cypress; two in Canada; and the rest in the United States. With the exception of Canada, what these foreign jurisdictions had in common was very lax regulation on insurance companies chartered on their soil but that did business elsewhere.
Over the next five years these companies figured in numerous insurance scams all over the United States in what appeared to be an epidemic of white-collar crime. Investigators working for Senator Nunn's committee collected detailed evidence on a number of these schemes. But it was not until Teale was arrested in 1993 that federal prosecutors began to put together all the pieces of the IUA puzzle in which all the signs pointed ultimately to Alan Teale.
In their indictment of Teale and his colleagues, prosecutors sketched the outlines of what was a massive fraud, involving hundreds of individuals and scores of companies that operated in dozens of countries. First, Teale and Rentz
would use other con men to front as legitimate insurance brokers and agents to form a national and international network ("network") of companies represented to be insurance companies, when ... the "network" and its companies were merely vehicles for fraud and part of a con game designed to defraud consumers who were tricked into believing that they were buying insurance.
Second, an essential part of this "network" was that many of the companies were "formed in foreign countries such as Belgium, the Turks and Caicos Islands (British West Indies), the Republic of Ireland, and the Bahamas, to avoid licensing and auditing procedures required of American insurance companies." Third, the various schemes, in essence, involved the following:
[T]he defendants would issue and cause to be issued insurance policies promising to pay claims, when, as the defendants well knew, they had diverted the flow of premiums out of the United States to offshore foreign bank accounts to be used for their own personal benefit and the benefit of others and to the detriment of policy holders and potential claimants.
The companies were run as Ponzi schemes in which Teale and his associates "would pay some claims to avoid early detection by state insurance regulators to allow the defendants and others to defraud more consumers who were tricked into believing they were buying insurance." Fourth, in order to keep the Ponzi schemes going long enough to generate huge profits, Teale and colleagues employed a number of techniques:
[W]hen consumers attempted to have the defendants and their co-conspirators pay claims, the defendants and their co-conspirators would claim that the consumers were to blame for their losses or that claims adjusters, insurance agents, attorneys and others were to blame, when as the defendants well knew, consumers were not being paid because they had diverted the premium payments of the consumers to the personal benefit of themselves and others, and because their companies were worthless.
[O]nce the defendants' companies were shut down by state insurance regulators, the defendants and their co-conspirators would start new companies under different names, and would continue to operate under the newly named companies.
[D]efendants would create the illusion that Alan Teale was not involved in the network of companies by setting up multiple addresses and telephone numbers, when, the defendants well knew, those addresses and telephone numbers were controlled by the defendant Alan Teale and his co-conspirators.
In other words, these scams were elaborate shell games in which the dollars paid by policyholders in insurance premiums were channeled through a series of brokers, insurance companies, and offshore reinsurance companies, each of which siphoned off significant proportions of the original premium dollars, and in the end, when claims were submitted, there were no funds left to pay claims and all of the people involved in the insurance chain pointed their fingers at each other claiming that they, too, were victimized. What the real victims often did not know was that these entities were not in fact independent but were part of an organized network with Alan Teale at the center. By the time regulators could piece together the entire scheme, the players had moved on and started new companies. This process was well illustrated in a series of insurance scams that were headquartered in the unlikely location of Mobile, Alabama, but that operated on an international scale. The major players in this high-stakes game were: Teale and his wife, Charlotte Rentz, who operated behind the scenes; Stephen Coker, the owner of a Mobile insurance brokerage firm; and Gary Cowan, a southern California insurance broker.
According to a federal indictment, in February 1988, Coker purchased British and American Casualty Co., Ltd., a surplus lines carrier chartered in Tortola, British Virgin Islands. Coker then went about looting British and American through an elaborate money-laundering scheme. First, he set up a "bogus" reinsurance agreement with one of his own companies for $1 million and made sham loans to himself and others. He then moved the money out of Mobile and into bank accounts in the Cayman Islands and Nassau, Bahamas. Then he smuggled cash from the accounts back into the United States. Finally, to avoid paying claims, he put British and American into liquidation.