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NASHVILLE, Tenn.-Tennessee regulators are moving to liquidate an insurance holding company whose financial statements include more than $100 million in questionable assets and whose officers and business associates comprise a virtual club of convicted felons and securities law violators.
More than a year after launching an investigation, state regulators earlier this month obtained a liquidation order against Genesis International Financial Services Inc., the publicly traded parent of Congress Re-Insurance Corp., an unlicensed surety underwriter.
Genesis had issued a stream of press releases in recent months touting its rising earnings. Regulators, however, found that the company had virtually no income and was surviving on the proceeds of possibly illegal sales of unregistered Genesis stock.
Tennessee Department of Commerce and Insurance officials say they will close the company's Chattanooga office by May 30 and go ahead with an immediate liquidation unless Genesis officials come up with cash to maintain the company under state conservatorship during any appeal of the liquidation order.
A hearing on the order is scheduled for Thursday in Chancery Court for Davidson County in Nashville.
Genesis is unrelated to a General Re Corp. unit with a similar name.
Meanwhile, a federal grand jury in Chattanooga is investigating Genesis' operations, as is the Securities and Exchange Commission, which suspended trading of Genesis stock May 1. Federal prosecutors and the SEC earlier this month subpoenaed Genesis documents from the Tennessee department, court filings show.
Paul Jennings, a Murfreesboro, Tenn., lawyer representing Genesis, said the company has not decided on how to respond to the liquidation order. He declined to comment on regulators' allegations.
Mohamed K.M. Zayed II, Genesis' 33-year-old president and chief executive officer, and Michael W. Rehtorik, its director of investor relations, could not be reached.
Mr. Zayed is no stranger to trouble: He was convicted in the early 1980s of conspiring to manufacture amphetamines and later served four years in prison on a 1986 federal counterfeiting and weapons possession conviction (BI, March 25, 1996).
He was paroled in 1990, and in a recent Genesis press release described the episodes as a "youthful indiscretion."
Mr. Rehtorik consented to a 1989 SEC order banning him for life from the securities business. The SEC had charged that Mr. Rehtorik-former president of a now-defunct stockbrokerage-defrauded investors of money supposedly being used to buy government securities.
In 1994, he also agreed to an injunction barring him from violating securities laws after he allegedly failed to pay for an order of $4.7 million worth of stock in Pantheon Industries Inc. Pantheon was the parent company of Tiberian Insurance Co. Ltd. and Avalon Insurance Co. Ltd., two offshore insurers used by convicted con man Arthur A. Blumeyer III.
Genesis' short history-featuring several other businessmen with records of legal trouble-has been punctuated by repeated corporate name changes and run-ins with regulators.
The company's main operating unit, Congress Re, was incorporated in three states between 1992 and 1995 but was not licensed as an insurance company anywhere.
In a series of 1995 deals, Mr. Zayed acquired control of a publicly traded Florida company, which adopted the name Guardian Insurance & Financial Services Inc. and became the holding company for Congress Re.
Guardian was then hit with a trademark infringement suit by New York-based Guardian Life Insurance Co. of America and changed its name to Genesis Insurance & Financial Services Inc.
General Re quickly filed its own trademark action, and Mr. Zayed's company last year altered its name slightly to Genesis International.
The unlicensed Congress Re began attracting regulatory attention in 1995 and was the subject of cease and desist orders, injunction actions or investigations in several states, including Delaware, Florida, Georgia, Kentucky and Tennessee.
Responding to Delaware regulators, Mr. Zayed claimed that Congress Re did not need an insurance license because it was "not an insurance company but a private holding company with various assets available to be used for additional indemnification for third parties who may wish to accept our company as it is."
Regulators, however, expressed concern about the quality of some of these assets. Most were not actually owned by Congress Re but instead were "assigned" to it under agreements with third parties.
In a 1995 financial statement, for example, Congress Re reported its largest asset as a "yen bond" purportedly issued by the Japanese government in the face amount of $80 million.
Mr. Zayed was assigned rights to this bond by Southeastern Financial Acceptance Corp., a company headed by Crossville, Tenn., lawyer Donald Jake Gamble.
Earlier this month, Mr. Gamble pleaded guilty to an unrelated federal charge that he helped launder stolen money through Southeastern and an Antigua bank account he controlled. Federal prosecutors allege that Mr. Gamble and several others-including a convicted murderer-defrauded several businessmen of $3.4 million by charging advance fees for loans that they never intended to arrange.
Mr. Gamble could not be reached for comment.
Genesis dropped the yen bond in a Sept. 30, 1996, financial statement, but the statement includes several other assets that regulators have questioned. The assets include:
192,000 carats of the mineral corundum, which in crystal form can be rubies or sapphires. "Perpetual use" of this asset, valued at $2.3 million, was assigned to Genesis by MYCO Investment Group Inc. of Miami. MYCO and its president, Dario Jaramillo, were convicted in 1994 of running a loan fraud scheme in which federal prosecutors named Mr. Zayed as an unindicted co-conspirator.
Mr. Jaramillo, previously jailed on a cocaine smuggling conviction, is now serving a 188-month prison term. Mr. Zayed has denied wrongdoing in the case.
$100 million in certificates of deposit issued in Mexico and purportedly backed by the "full faith and credit of the issuing corporations and/or Mexican government agencies."
The "CDs," however, "appear to be nothing more than warehouse receipts" issued by a Mexican company called Dinamica de Almacenaje and reflecting an apparent deposit of deeds to real estate, according to a report by Jeanne Barnes Bryant, Tennessee special deputy insurance commissioner.
The CDs were made in favor of Global Funding Corp.-a company that shared office space in Chattanooga with one of Mr. Zayed's companies-and were assigned to Genesis under a joint venture agreement.
Ms. Bryant said the CDs cannot be considered an asset of Genesis because of their questionable value. Among other things, she noted that BDO Binder S.C., a Mexico City accounting firm hired to review the instruments, found that Dinamica was not authorized to issue CDs and that a purported Mexican government document regarding their validity was a fake.
Robert Washko, an assistant U.S. attorney in Nashville involved in prosecuting Messrs. Jaramillo and Gamble, was more pointed: "It's just paper," Mr. Washko said. "The paper is too rough to be used as toilet paper and isn't absorbent enough to be used as paper towels."
A "first security" interest in $8.5 million worth of unrefined gold bars obtained from First American Cos. Inc. of Hilton Head, S.C.
First American's corporate charters in Delaware and South Carolina were revoked more than a year ago for failure to make required filings and pay taxes. Last October, the SEC sued First American and two of its officers, charging that they defrauded investors in the sale of $1.2 million of First American debentures purportedly secured by gold.
$18 million in mining rights on property in the Boise National Forest in Idaho.
"It is believed," Ms. Bryant wrote in her report, "that there is no current activity in this area and. . .that there is no ability or intent on the part of (Genesis) to reopen any mine that may exist."
Shortly before Tennessee regulators took over Genesis on April 28, Mr. Zayed issued a press release announcing that the company had completed a sale of Congress Re to two purported Uruguayan buyers, InterFinance S.A. and Suisse Private Banking Ltd., headed by Nelson Raul G. Xavier de Aquino, according to Ms. Bryant's report.
Mr. Aquino, meanwhile, put out his own press release saying the sale was to take place on the afternoon of April 28.
Tennessee officials, though, found no records concerning the sale at Genesis' office other than correspondence with BDO Binder, which had performed a due diligence review of the $100 million in CDs as part of the deal. In one of these letters, BDO resigned over alleged misrepresentations of its findings in a press release by Mr. Zayed.
Mr. Aquino, a resident of Brazil, was named with Mr. Zayed as an unindicted co-conspirator in the Jaramillo loan fraud case.
Ms. Bryant's report said that Genesis may have violated federal and state securities laws in selling nearly $900,000 in unregistered stock between February and August 1996.
Press releases touting Genesis' earnings and viability "appear to be false," according to the report. While Congress Re took in $902,575 in bond premiums from its inception, it wrote little business last year, and Genesis appears to have operated mainly on funds from its stock sales, the report says.
Genesis documents, for example, show that when the company needed operating funds, it would use a Costa Rican front company to fax stock sale instructions to a broker in Vancouver, British Columbia. The proceeds then would be wired through other companies back to Genesis, the report says, describing the transactions as an effort to avoid federal securities laws.
Genesis stock also was touted in an Internet stock forum, and Messrs. Zayed and Rehtorik last December led a Genesis sales presentation to stock analysts in New York.