George and Andrew Franz

Date:

May 14, 2014

Type of alert:

SEC Cease-and-Desist  

The Securities and Exchange Commission (SEC) announced cease-and-desist proceedings against George Franz, sole owner Ruby Corporation, a Beachwood, Ohio investment advisory firm. George’s son, Andrew Franz, pled guilty to numerous counts of fraud, misrepresentation, tax evasion, wire fraud, securities fraud, and more. According to the SEC, George Franz knew of his son’s fraudulent activities but failed to take the necessary steps to prevent it.

George Franz, 71, is a resident of Moreland Hills, Ohio. As of December 2012, George’s company, Ruby Corporation, had 99 clients with assets under management of 21 million. Ruby’s clients are typically middle-aged and retirement-aged individuals in the Cleveland, Youngstown, and Dayton, Ohio areas. Andrew Franz, 42, formally resided in Aurora, Ohio but is now serving a 57 month sentence at the Federal Correctional Institution in Ashland, Kentucky. In March of 2012, Andrew Franz misappropriated funds from Ruby clients by issuing fraudulent management fee requests and bilked more than $490,000 from Ruby clients.

The majority of Andrew’s fraudulently withdrawn funds were initially deposited into his personal bank accounts. Ruby clients’ funds were primarily invested in variable annuities or mutual funds. Most Ruby clients signed limited powers of attorney permitting Ruby to request management fees directly from their securities accounts. Thus, Andrew’s role in the fee request process allowed him to easily misappropriate client funds.

According to the SEC, Andrew provided false client account balances to the Ruby office manager who calculated fees. Sometimes, after the office manager calculated the appropriate management fees and prepared the fee request, he changed the amounts before submitting the request to the annuity or Mutual Fund Company. In other instances, after the office manager prepared and submitted the legitimate management fee request, Andrew submitted additional fraudulent management fee requests days or weeks later. For his crimes, Andrew Franz must pay $357,069 in restitution and an additional $245,352 (plus penalties and interest) to the IRS for his income tax violations as well as 57 months in jail.

According to the SEC, Andrew’s father, George Franz, did nothing to prevent Andrew from stealing thousands from unknowing investors. Somewhere around January of 2007, George Franz became aware of the fraudulent activity when the company accountant alluded to shady business activities stemming from written checks. George instructed Ruby’s tax preparer to issue an IRS form 1099 from the company to Andrew for the stolen funds. George went as far as assuring Ruby’s accountant that he would personally perform an analysis on the diverted checks withdrawn from client accounts, but failed to do so.

On April 29, 2011, George informed Andrew that he was terminated from Ruby Incorporated. Between April 29, 2011 and May 31, 2011, Andrew misappropriated another $15,000 from Ruby clients. George told other Ruby personnel about Andrew’s termination; however, Andrew continued to come into the office and conduct Ruby business until the SEC took action. George is charged with numerous counts including failure to supervise his employees, making misrepresentations to the company accountant, and misleading Ruby clients.

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