Former Philadelphia mayoral candidate Tom Knox is among the victims of an alleged $30 million loan fraud that federal authorities say was operated by the owner of a Bala Cynwyd-based legal services company.
In all, Knox, a wealthy health-insurance executive, is out $1.4 million in loans he made to Legal Coverage Group Ltd. and its owner, Gary Alan Frank, 47. In financial documents, Frank dramatically inflated the size of his business, which provides legal services as a benefit that employers can offer their workers.
Federal agents arrested Frank on March 16 and charged him with wire fraud. Less than two weeks earlier, according to Knox, Frank had made a $13,000 interest payment on his debt, which included a $750,000 loan from Knox in December on top of an older $665,000 loan.
"He was paying me [the interest] every month religiously for about 4½ years," said Knox, who served for a time in the 1990s as a deputy mayor under then-Mayor Edward G. Rendell. Knox's faith in Frank was also bolstered by the knowledge that Frank received a $40 million line of credit from Prudential Insurance Co. of America, which was represented by Morgan Lewis & Bockius LLP.
"I got a payment out of him in March, after he went bankrupt. I can't figure that out," Knox said in an interview last week.
Leaving aside Prudential, a financial giant with $832 billion in assets, Knox was far from alone in falling victim to what appears to have been a long-running Ponzi scheme, though one that relied on lenders rather than investors.
Legal Coverage Group claimed in a bankruptcy document that it had $378 million in revenue last year, $42 million in profit, and three million people enrolled in its legal services benefit program.
In reality, it had less than $2 million in revenue last year and fewer than 10,000 people enrolled in its benefit program, according to an FBI affidavit filed in the criminal case against Frank in U.S. District Court.
The Jan. 26 bankruptcy filing showed that Frank, to keep his company afloat, had borrowed a total of $2.9 million from at least four businessmen in addition to Knox.
It's not entirely clear what Frank did with all of the $30 million he borrowed against his line of credit from Prudential. He used some to pay interest to Prudential, the indictment said. Some is believed to have been used to purchase units in the condo building at 101 Walnut St. in Old City, where he lives, according to a bankruptcy document Friday.
A search of court records found that some earlier lenders had taken Frank to court when they didn't get paid on time. The cases also illustrate how Frank's credit demands exploded.
Wilmington Trust of Pennsylvania, now part of M&T Bank, filed a claim in January 2009 for $638,180 against Frank in the Philadelphia Court of Common Pleas after he failed to repay a line of credit. The case was dismissed after a settlement.
In late January 2014, Legal Coverage Group opened a Bank of America commercial credit card account with a $1.6 million limit. In the first month, Frank and an employee, Anne McKee, used the card to borrow $320,000 in cash. In March and April, McKee used the card to infuse $925,675 in Legal Coverage Group. As of May 1, the card was maxed out.
Three months of credit card statements filed in the U.S. District Court for the Eastern District of Pennsylvania provide a glimpse into Frank's spending habits.
Name a top Center City restaurant, and Frank was there: Barclay Prime ($342.58), Buddakan ($330.78), Morimoto ($227.22), Rosa Blanca ($53.64), Bar Ferdinand ($102.98), Sam's Oyster House ($314.56), Rouge ($304.71), Sbraga ($271.10), and Vetri ($845.40).
The card paid for trips to Cancun, Bermuda, and Miami, where thousands were spent on accommodations at such places as the Reefs in Bermuda ($1,300) and St. Regis Hotel in Bal Harbour, Fla. ($1,125.54).
Favorite shopping destinations included Saks Fifth Avenue in New York and Bal Harbour, Fla.; and Barneys New York, where Frank charged $17,000 on Feb. 28, 2014.
Meanwhile, Frank, a 1995 graduate of Villanova University's law school, was securing himself a place in Philadelphia society, joining the boards of the Philly Pops and the Philadelphia Orchestra. He resigned from those boards on March 1, the day his business was raided by federal agents.
Frank let his law license go to inactive status in 2002. Despite that, he continued to represent a client in a divorce case through late 2006. That infraction resulted in the suspension of his licence for a year in 2011.
Opposing council in that case, F. Harry Spiess Jr., remembered Frank Thursday as "a very fierce advocate for his client."
Even in bankruptcy, Frank had a deal in the works. Among the filings is a Feb. 12 commitment letter from BC Partners Advisors LP, a large private equity firm based in London, for a $55 million term loan.
"Smart dude," said Knox, who about two weeks ago hosted Frank and his fiancée at a dinner party at Knox's apartment atop the Residences at Two Liberty Place. "He wanted to see my apartment," said Knox, in explaining the invitation.