Recurring Tales of Sunken Yachts and Pirates

The Italian coast guard cutter Zara was skimming through calm seas off Salerno one afternoon in November 1992 when it came across a surprising sight: a brand-new, 76-foot luxury yacht slowly slipping beneath the waves, stern first.

Bobbing in two inflatable rafts nearby were three American men. Hauled aboard the cutter, they recounted a harrowing tale. They said their Italian-built yacht, the Principe di Pictor (Prince of Pictures) was on its maiden voyage out of Viareggio when it was seized by pirates intent on using the craft to smuggle drugs.

The pirates eventually became concerned that the boat was too slow to avoid capture, so they opted to saw three large holes in its hull and flee in their speedboat toward the Libyan coast.

The Italians were skeptical. First, the Americans didn’t appear noticeably happy to be rescued, nor were they particularly disheveled. Then, after the coast guardsmen boarded the sinking yacht, they found that its radio was still operational. The Americans had not bothered to use it to summon help.

Pumps were put aboard to keep the yacht afloat and it was towed to Salerno. Suspecting that the Americans might be smugglers in a deal gone sour, the Italians placed them under house arrest at the Jolly Hotel, a seaside resort.

The next day, with the coast guard pumps removed, the Principe sank at the dock. Down to the bottom went one of the best examples of luxury outfitting: Mercedes-Benz engines, a state-of-the-art satellite navigation system, Italian marble in the “his” and “hers” bathrooms of the owner’s cabin. Even when it was raised, the yacht was a total loss.

At the Jolly Hotel, the Americans were impatient. Their leader was Rex DeGeorge, a prominent attorney and self-described movie executive from Beverly Hills. DeGeorge said he had planned to use the boat to ferry movie stars and moguls to such film festivals as Cannes. Now, he said, he needed to pursue a $3.6-million insurance claim on his ruined boat.

The Italians eventually released DeGeorge and his companions for lack of evidence. But what DeGeorge did next resulted in one of the most wide-ranging claim probes ever mounted in the U.S., one that investigators say led to the arrest of the king of insurance fraud.

Los Angeles attorney Neil S. Lerner was in his West Los Angeles office when the phone call came from Gary Boyer, a senior claims manager at Cigna Property & Casualty Insurance Co. in Woodland Hills. Cigna was in a jam.

Boyer told Lerner that one of Cigna’s insureds, Polaris Pictures Corp., a company tied to DeGeorge, had sent an unusual fax from a hotel in Italy demanding to know why the insurer hadn’t responded to a claim letter sent a month earlier. That letter, which Cigna said it never received, supposedly informed the insurer that pirates overtook DeGeorge’s $3.6-million yacht and eventually scuttled the vessel “to avoid interception by the [Italian] military.”

Cigna officials were no less suspicious than the Italians. But they knew that the “second” letter put the company on the defensive. California law requires insurers to respond to customers’ claims within 30 days, and failure to do so can ultimately result in hefty punitive damages.

Cigna needed Lerner to investigate. Lerner, then 32, was a self-described “cocky young lawyer.” He grew up on Long Island, N.Y., and dreamed of becoming a marine biologist. He settled on a career in maritime law. Seven years out of George Washington Law School, he was already a full partner with Sands, Narwitz, Leonard & Lerner, a boutique firm that defends insurance companies.

Going to court on behalf of insurance companies used to be a pretty good business. Next to tax evasion, insurance fraud is the most pervasive white-collar crime. An often-cited study suggests that insurance fraud costs the U.S. economy $120 billion a year.

In recent years, insurance companies have cut back on the phalanx of outside attorneys that used to represent them, opting for cheaper in-house counsel and tactics that minimize court time, including mediation and arbitration. The less time in court, the smaller the legal bill, of course, and that approach also minimizes the risk that a jury will hit an insurer with a big judgment.

Cigna wasn’t looking for a court fight with DeGeorge, at least not yet. But the company needed to know quickly what to make of his claim, and Lerner and his partner Donald Sands had a reputation for getting to the bottom of things. Lerner set out to find out as much as possible about Rex DeGeorge.

Learning How the Business Works

DeGeorge was born Angelos Michael Karageorge, named for Michael the Archangel. He grew up on Rhodes, the Greek Aegean island on which maritime law was born in 900 BC. He moved to the United States at 17 to attend school.

Later, he anglicized Karageorge to DeGeorge. He said in court papers that Angelos had to go because it “was attacking my masculinity. People would call me Ange, and Angie, Angelo. Nobody could get the name straight so I made it Rex,” as in king.

After earning a degree from San Francisco’s Hastings School of Law in 1964, DeGeorge was hired as an adjuster by Allstate Insurance, where he learned how to handle claims. He would later say that the insurance company taught him “how to avoid paying, as much as possible, moneys to the insureds.”

DeGeorge left Allstate after about a year and built a law practice representing foreign corporations, injured people suing insurance companies, and Hollywood executives in trouble with the Internal Revenue Service. DeGeorge’s bank accounts swelled from his practice and from investments in real estate in Iran, Greece and Beverly Hills.

He owned a $2-million Italianate villa in Beverly Hills and a fleet of luxury autos. During one period in the ‘70s, he owned 14 Ferraris.

By poring over court records, including DeGeorge’s two contested divorces, and corresponding with other insurers, Lerner discovered that the Principe was not the only yacht on which DeGeorge had filed a claim.

It was the fourth.

DeGeorge reported in 1970 that his first yacht, the 43-foot Tutania, named after “a very beautiful, blond, blue-eyed German stewardess from Pan Am,” was stolen off the Los Angeles coast by “Peruvian coffee merchant bandits.” Hartford Insurance paid him $43,000 for that loss.

Records showed that just before the Tutania vanished, DeGeorge had rented a wider slip in Marina del Rey to accommodate a larger vessel. DeGeorge used the proceeds from the Tutania claim to buy a 57-foot racer.

That yacht, named Epinicia for a Homeric poem, sank six years later off the coast of Italy after striking what DeGeorge called a “low-profile, dark object.” Lloyd’s of London paid $194,000.

In 1983, DeGeorge told investigators for Fireman’s Fund Insurance Co. that he and his wife, Franziska, were sailing off the Los Angeles coast when explosions rocked Sea Crest II, their 47-foot Gulfstar. (DeGeorge said the boat was blown up by either hit men or an Iranian repairman.) The DeGeorges ran out of their stateroom and jumped into a dinghy.

He and his wife came ashore at Marina del Rey, got into their car and drove home. DeGeorge never contacted the police. He waited four days to report the loss to Fireman’s Fund. Investigators combed ports in California, Mexico, Panama, and Hawaii for the yacht but came up empty. Fireman’s nevertheless classified his claim as suspicious and declined to pay. When DeGeorge threatened to sue, Fireman’s capitulated and wrote a check for $250,000.

“The crux of the matter is we never came close to developing any hard evidence to show that the explosions were deliberate or that the Gulfstar did not sink,” wrote an attorney who investigated the claim for Fireman’s. “Without any specific evidence of wrongdoing, we would not have stood a chance in court.”

DeGeorge, now 63, has insisted that all his claims were bona fide, and that he has done nothing wrong. He said sophisticated insurers thoroughly investigated his claims before paying him. “None of the accidents . . . I have ever suffered were wrongful or untruthful,” he said in court records.

In every case, DeGeorge’s account of a sinking was corroborated by at least one witness associated with him. With the exception of the Principe, which authorities found before it sank, the boats disappeared, leaving no debris or physical evidence to disprove DeGeorge’s story.

Lerner suspected that DeGeorge, the former claims handler, knew well how insurers play the odds. They seldom run the risk of being exposed to uncertain amounts of damages. Even on a suspicious claim, they will generally weigh whether the cost to fight it will exceed the cost of the claim.

Further, insurance companies rarely share information with each other about their customers. People in a claims department seldom discuss their suspicions with their company’s own underwriters. So one insurer would not necessarily know of another insurer’s loss. More important, marine insurance is a highly competitive business requiring almost instant quotes from an underwriter. If an insurer asks too many questions, it is likely to lose business to less intrusive firms.

In Lerner’s eyes, a familiar pattern emerged: DeGeorge would buy a yacht, then lose the vessel at sea when it lost value. He would then use the insurance proceeds to buy a more expensive yacht, only to repeat the cycle.

As Lerner continued his probe through other lawyers, public records and Cigna’s own database, he found a mountain of additional DeGeorge losses. Between 1976 and 1990, DeGeorge filed 29 insurance disability claims. In a 1990 claim, DeGeorge sought $11,000 per month from Monarch Insurance, saying he suffered from bipolar personality disorder. Monarch sued to cancel the policy, alleging that DeGeorge had misrepresented and concealed important information in his application. When DeGeorge countersued, Monarch paid $550,000 to settle.

A separate disability policy with Provident Life & Accident Insurance Co. has paid DeGeorge more than $400,000 over the past 12 years for a similar claim of personality disorder.

DeGeorge claimed that burglars invaded his home in May 1992 and took four dozen paintings by ‘60s pop artist Peter Max, among other possessions. When Home Insurance rejected his claim as fraudulent, DeGeorge sued for $1 million. A judge agreed with Home, but an appeals court in Los Angeles reinstated DeGeorge’s suit. Fearing a huge jury award, Home paid $700,000 to settle.

In 1995, DeGeorge received an undisclosed amount from a second insurer, Transamerica Insurance Co., which he had sued for other losses arising from the same burglary claim.

Lerner also discovered that DeGeorge had received settlements--on at least six occasions--from insurance firms for items lost on trips abroad.

In 1992, American Express paid DeGeorge nearly $10,000 for two suitcases he lost on a trip to Rhodes. American Express had paid DeGeorge nearly $8,000 for an identical claim only a year earlier. The credit card company, suspecting fraud, initially denied both claims. But DeGeorge threatened again to sue and the company capitulated.

Lerner had seen enough, and so had Cigna. DeGeorge’s total take on insurance claims topped $2 million, leading Cigna to conclude that DeGeorge was the nation’s No. 1 perpetrator of insurance fraud. He has “an insurance loss history second to none,” Lerner said.

Cigna officials met with Lerner in February 1993 and instructed him to do “whatever it takes” to fight DeGeorge’s claim. That April, Lerner sued DeGeorge in federal court in Los Angeles on behalf of Cigna to void the policy on the Principe.

In the suit, Lerner took a different strategy than lawyers for the other marine insurers had done. He was not going to try to disprove DeGeorge’s story. Instead, his lawsuit accused DeGeorge of violating a centuries-old marine law principle known as “utmost good faith” by not disclosing his prior losses when he applied for insurance. Had Cigna known about DeGeorge’s losses, the suit stated, it would not have insured the yacht.

DeGeorge countersued for bad faith, and the legal battle intensified. He wrote to Lerner, demanding that Cigna pay up.

“My father risked his life to help his Jewish friends escape from the German lines,” DeGeorge wrote. “While we were fighting such evils, you and your family were profiting comfortably on Long Island and [enjoying] lunches at the Bull and Bear at the Waldorf Astoria.”

That letter in 1995 “awoke a sleeping giant inside of me,” Lerner said, “because DeGeorge had brought my family and my religion into this case.” The personal attack caused him to redouble his efforts, he said.

Piecing together the evidence he collected, Lerner determined that DeGeorge had crafted a scheme that virtually guaranteed an inflated Cigna payout for the Principe. DeGeorge had paid the manufacturer $1.9 million for the yacht, then transferred the contract to his Continental Pictures Corp., a Panamanian-registered firm located in Switzerland. To pump up the price of the yacht, Continental “sold” it for $3.6 million to Polaris Pictures Corp. At the time of the sale, DeGeorge was president, CEO, secretary, chairman of the board, sole director, and sole shareholder of Polaris.

Judge Discerns an ‘Unlikely’ Story

DeGeorge’s countersuit against Cigna was dismissed before trial. Cigna’s suit was assigned to U.S. District Judge J. Spencer Letts, who presided without a jury. (By suing DeGeorge in federal court under maritime law, Lerner had seized a tactical advantage. Under maritime law, parties don’t always have a right to a jury.)

From the beginning in April 1996, Letts was skeptical of DeGeorge’s story about how the Principe sank. When DeGeorge’s lawyers called a former federal drug agent to testify that the sinking of the Principe was consistent with Sicilian Mafia smuggling deals, Letts exclaimed in disbelief: “You must be kidding!”

Noting the Principe’s tangled ownership, Letts told DeGeorge’s lawyers: “You’re asking me to put together unlikely plus unlikely plus unlikely plus unlikely plus unlikely plus unlikely plus unlikely, and then say the net result of all those unlikelys is likely.”

DeGeorge took the stand and repeated his story about the pirates boarding the Principe. He vigorously denied scuttling the boat for insurance money.

At the end of the monthlong trial, Letts ruled for Cigna. The judge referred to DeGeorge as the “lawyer-conspirator,” saying he was “without any credibility as a witness.”

“This was a very sophisticated fraud,” Letts said. “The people who set up the fraud set it up with a deliberate view of making it almost impossible to prove without spending at least as much money as was involved in the loss.

“Only a very determined, large organization could have fought this lawsuit,” the judge said.

Letts ordered DeGeorge to pay Cigna’s $2.7-million legal bill. But the judge did not stop there. He also referred the case to prosecutors in the U.S. attorney’s office, who called in the FBI.

Acting to Avoid Any Collection

In 1997, DeGeorge moved to his seaside home in Rhodes. Last March he filed for bankruptcy in the U.S., effectively blocking Cigna from collecting its $2.7-million judgment. In bankruptcy papers, DeGeorge claimed only $15,000 in assets.

Meanwhile, one of his former shipmates on the Principe, New York cameraman Gabriel Falco, began cooperating with federal authorities. Prosecutors say that in telephone conversations with Falco, DeGeorge said he was aware that FBI agents had traveled to Italy to investigate the Principe’s sinking, but DeGeorge gloated that the statute of limitations on any crimes had expired. He had nothing to worry about. And DeGeorge went further. He said he would mail a gun that Falco should use to kill Lerner and Judge Letts, according to court records.

In April, DeGeorge left Greece for the United States to attend a hearing in his bankruptcy case, unaware that prosecutors had gone to court to get a statute extension on the criminal counts being assembled against him. Moments after he disembarked at John F. Kennedy International Airport, a federal agent arrested him, charging him with conspiracy to destroy a vessel, mail fraud, wire fraud and perjury.

A similar indictment was brought against the other Principe shipmate, Paul Ebeling, who is a high-tech toupee developer in Beverly Hills and chief executive of Polaris Pictures. Both DeGeorge and Ebeling face up to life in prison.

Executive Assistant U.S. Atty. David C. Marcus, the lead prosecutor in the case, outlined in court papers how Falco told the FBI that he, Ebeling and DeGeorge destroyed the Principe.

DeGeorge and Ebeling, both being held at the downtown federal detention center in Los Angeles, have pleaded not guilty.

DeGeorge’s attorneys denied that he threatened to kill Letts and Lerner, and they asked that DeGeorge be released on bail. A judge denied the request, saying DeGeorge was a flight risk.

Three months ago, DeGeorge asked to withdraw his bankruptcy petition, a move that would free him to hire his own private counsel rather than rely on court-appointed attorneys.

He claimed that he was being treated with “various experimental psychotropic medications” and couldn’t “fully understand and appreciate the meaning of the bankruptcy filing.” In support, DeGeorge released medical records revealing that during the last decade a half-dozen psychiatrists and psychologists have diagnosed him with “irreversible brain damage,” for which he has collected hundreds of thousands of dollars in disability payments.

After a judge dismissed DeGeorge’s bankruptcy petition, DeGeorge hired well-known Los Angeles lawyer Richard Marmaro to defend him on the criminal charges.

Marmaro, a former federal prosecutor who specializes in complex white-collar criminal cases, said DeGeorge denies all the allegations against him.

“The government’s allegations are just that,” Marmaro said. “They are yet to prove anything in court. My client looks forward to his day in court.”

Meanwhile, Falco signed an agreement with prosecutors several weeks ago, agreeing to plead guilty for his role in the scheme and to cooperate in the cases against DeGeorge and Ebeling. Their trial is scheduled to begin April 10.

At a recent hearing, DeGeorge shuffled into court, chains locked tightly around his ankles and manacles gripping the cuffs of his navy blue sport coat. As he entered the courtroom, DeGeorge nodded to his fourth wife, Kathryn Palmer, who is seven months pregnant.

Sitting in a corner of the courtroom was Lerner, who wondered if DeGeorge had finally outsmarted himself. DeGeorge had declared bankruptcy to avoid paying Cigna, but that brought him back to the United States where criminal charges awaited him.

But he also wondered if Cigna would ever collect its judgment. Although the bankruptcy has been lifted, DeGeorge’s assets are nowhere to be found. The $2-million mansion, for example, has been transferred to a Panamanian corporation, out of reach of U.S. courts.

Cigna, which has hired a separate law firm to try to collect its debt, has so far spent more than $3.6 million in legal fees battling DeGeorge.

Lerner is often invited to speak about the case to insurance groups in cities across the country.

He laments that little has changed since the DeGeorge case unfolded. Insurance companies still don’t have a central clearinghouse, or any effective way to check records of insurance applicants against claims made against other insurers.

“The truth is that nothing much has changed since DeGeorge’s machinations have been made public,” Lerner said. “There are others out there, right now, planning to do the same thing, and plenty of other insurers willing to gamble that it won’t happen to them.”

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Times librarian Maloy Moore provided research for this article.