(FORTUNE Magazine) – The atmosphere was crackling last April 28 in a conference room at the Hilton hotel in Jackson, Miss. The assembled group, which included a well-known New York lawyer (and Reagan Administration adviser) named Thomas Bolan and two prominent Catholic priests who had flown in from Rome, was trying to sort out what to say to the state's insurance commissioner at an emergency hearing the following day. The commissioner wanted answers as to why $600 million had seemingly moved from a Vatican-linked foundation in Italy to a Catholic charity in the British Virgin Islands, and then into a trust that had long controlled a group of Mississippi insurance companies. "Tomorrow is a critical day for Monitor Ecclesiasticus and Saint Francis of Assisi throughout the whole country," announced attorney Nicholas Monaco, referring to the two overseas foundations. "The commissioner and his staff are very, very concerned."

Monaco, a former insurance regulator, had been hired to spend the day walking the group through the questions they could expect to face. Chief among them: "Where did you get this kind of money? Is it a tax gimmick? Is it a dodge? What is this? How did this money get from here to there? He [the commissioner] will want a paper trail, bank deposit slips." As the meeting wore on, Monaco even resorted to role playing. Adopting the part of the commissioner, he grilled Bolan, who was serving as a trustee for Saint Francis. Suddenly a pasty, wiry figure looked up from his laptop. "Don't use Bolan as a witness," he snapped, according to one of the priests in the room. "If you use him as a witness, we're lost. It's all over." Monaco quickly cut the speaker off: "You don't have any part here, David. Just shut up!"

"David" was none other than Martin Frankel, who was using the alias David Rosse and who is now the target of a global manhunt. As it turned out, Frankel opted not to attend the insurance commissioner's hearing the next day; instead he flew on a chartered jet back to his mansion in Greenwich, Conn., where he made preparations for his now famous departure from the country. On May 5, police responding to a fire alarm discovered shredded and smoldering documents at his mansion. Among them, a to-do list. Item one: "Launder money." That's a skill which, as you'll see, he'd been trying to perfect for some time. Before vanishing, Frankel bought $10 million in diamonds.

In what may be the biggest--it is certainly the strangest--scandal in the history of the insurance industry, this high school dropout from Ohio now stands accused of siphoning off at least $200 million (and perhaps far more) from seven insurance companies in five states and squirreling away much of the money in Swiss and Italian bank accounts. Frankel, it appears, controlled the trust that owned the insurers, even as he was engaged, under a different alias, to manage their assets through a brokerage firm he also controlled. News stories are revealing details about Frankel's complex scam--and the sordid life that went with it--on an almost daily basis: the trading floor in the Greenwich house, with its network of 80 computer terminals hooked to satellite dishes; his dream of building a billion-dollar insurance empire; his various aliases; his banishment from the securities industry seven years ago; his obsession with astrology and kinky sex; and his virtual harem of female assistants, culled from the Internet and personal ads in newspapers. The blowup has touched everyone from U.S. insurance executives to retired newsman Walter Cronkite to former ambassador Robert Strauss and his bigfoot Washington, D.C., law firm, Akin Gump.

It may take months, perhaps years, before all the facts are known. Meanwhile, almost all those associated with Frankel have been trying to run for cover, minimize their role in the scandal, or pass themselves off as complete dupes. In a statement released July 1, the Vatican insisted that it does not have "any relationship" with Father Peter Jacobs, a sympathetic but controversial New York priest, now living in Rome, who was Frankel's confidant (and, it seems, his unwitting tool) for the past year. The Holy See also disavowed any connection with the two foundations at the heart of the scam, Monitor Ecclesiasticus Foundation and Saint Francis of Assisi Foundation to Serve and Help the Poor and Alleviate Suffering.

The reality is far more complex and disturbing. FORTUNE has conducted lengthy interviews with Father Jacobs, who took extensive shorthand notes of meetings (including the one in Mississippi) and of his endless late-night conversations with Frankel, whom he knew only as David Rosse. The magazine has also obtained hundreds of documents, private letters, and even one of Frankel's computer disks. They show that many characters in this sad, twisted tale--from Tom Bolan, the attorney, right on up to senior Vatican officials--have plenty of things to hide.

Our portion of the story begins in August 1998, with a phone call from Bolan to Father Jacobs. The two men, who knew each other only slightly, were certainly an odd match. Bolan, a fervent establishment Catholic whose entry in Who's Who runs four inches long, is a former bank chairman, prosecutor (specializing in fraud), and law partner of the late Communist baiter Roy Cohn. Bolan was also a founder of New York's Conservative Party, as well as an adviser to President Ronald Reagan and Senator Alfonse D'Amato on judicial appointments. In contrast, Father Jake is a liberal priest who, while well connected in Rome, has often been at odds with the Irish Catholics who run the New York and Washington archdioceses. A longtime friend of Gloria Steinem's and Norman Mailer's, Jacobs served for many years as a chaplain to minority kids in a Harlem high school and to the firefighters of New York City. He is the first to admit he knows next to nothing about money; in fact, his most remarkable financial move, personally, was to give away his assets--nearly $1 million, most of it inherited--to charity a few years ago. He now lives "as a houseguest" in Rome and cruises the streets on a little blue scooter, hearing confessions in hallways and restaurants and visiting orphans and the sick. It's been said that calling Father Jake is "like dialing 911."

But none of their differences seemed to matter last August, as Bolan explained to Jacobs that he had discovered a wealthy Jewish "genius" named David Rosse (that is, Frankel) who wanted to set up a Vatican foundation in order to give "hundreds of millions" of dollars to Catholic causes. Jacobs was willing to help. As a priest living in Rome, he has built up close ties to the Vatican over the years and enjoys the use of an identification card that bears the Vatican stamp. On Aug. 6, Bolan arrived in Rome, where he stayed in a $2,000 suite at the Hassler Villa Medici (courtesy of Rosse), and Jacobs began taking him to meet various Vatican officials. Among them: Monsignor Emilio Colagiovanni, an emeritus judge of the Roman Rota, an important church tribunal; Monsignor Gianfranco Piovano, an official at the Vatican's Secretariat of State; and Bishop Francesco Salerno, then a leading Vatican economic official and now the secretary of the Holy See's supreme court.

In a recent interview with FORTUNE, Salerno said, "I don't know who Bolan is." But Jacobs recalls waiting nearly an hour outside the bishop's Vatican office while the bishop and Bolan discussed Rosse's proposed foundation. In addition, an Aug. 18 letter from Bolan to Salerno states, "Confirming our telephone conversation, attached is a list of suggested charities for consideration.... Please [tell me] what our next step should be. Mr. David Rosse is prepared to immediately transfer the promised funds." Salerno says he never received the letter.

On the surface, it all sounds almost harmless. After all, why should the Vatican turn down millions from anyone, Jewish or not, who wants to open his checkbook? But the shape the deal began to take was another thing altogether. Jacobs has provided FORTUNE with a six-page letter that "Dave Rosse" wrote to Bolan on Aug. 22 laying out the terms of the deal: Frankel/Rosse stated that the new foundation would be based in Liechtenstein and would have a "secret set of bylaws" spelling out that Rosse would be the original grantor of $55 million in funds, to be wired from a Swiss bank. Of that $55 million, $50 million would then be forwarded to a U.S. brokerage account set up in the foundation's name. "I will control this account exclusively," Rosse explained to Bolan. The additional $5 million would be diverted to an account controlled by the Vatican. And here's where the proposition gets even dicier: "Our agreement will include the Vatican's promise that the Vatican will aid me in my effort to acquire insurance companies," wrote Rosse, by allowing a Vatican official "to certify to the authorities, if necessary, that the source of the funds...is the Vatican." In return, the Vatican could expect further contributions.

In short, Frankel/Rosse appears to be requesting that the Vatican front for him as a money launderer in return for a 10% cut of the funds (looted from his U.S. insurance companies). Frankel would use part of the remaining 90%, it seems, to buy progressively larger insurers. (If so, it would have been only the most spectacular of many dodges he had in place around the U.S. and Europe.) Given Bolan's extensive credentials as a prosecutor and judicial adviser, Rosse's August letter should have set off all kinds of alarms. The letter is addressed to Bolan at his fax machine number. Jacobs says he received his own copy from Rosse; Bolan, through an attorney, says he "doesn't remember that fax."

Perhaps, but things certainly seemed to move forward as if he had received it. On Sept. 1, Bolan faxed Jacobs a letter that he'd been sent by Colagiovanni stating, "I have talked this morning with Salerno and Piovano.... [They] reaffirmed the willingness of the Holy See to erect a new foundation in the Vatican whose president should be Mr. David." (Colagiovanni often refers to Rosse that way.) The letter went on to say that "an account in U.S. dollars in the IOR [Vatican Bank] can be opened by Mr. David."

By October the shape of Frankel's deal had evolved. Vatican officials decided they were uncomfortable letting "Mr. David" control his own foundation within the Vatican, preferring instead to add a layer of insulation between them. Under the new model Rosse would establish his own charity, the Saint Francis of Assisi Foundation, which was not conspicuously connected with the Vatican. But Saint Francis would be linked to a second entity that did have close ties to the Vatican--Monitor Ecclesiasticus, which Colagiovanni controlled. Jacobs agreed to serve as Saint Francis' president and as one of three trustees. (The others were Bolan and Edward Collins, a former executive with Britain's Hanson conglomerate.) Jacobs recalls visiting the home of his friend Walter Cronkite, who, he says, agreed to be an informal adviser to help select charities worthy of funding. (Cronkite has denied being involved.)

Despite the shift in structure, certain elements of Frankel/Rosse's arrangement remained constant throughout: the $55 million total, the $5 million payment to a charitable foundation (with the promise of more), and the guarantee of anonymity to the "donor," Rosse, by virtue of the foundation's connection with the Vatican. On Oct. 19, Colagiovanni wrote Jacobs to tell him the Vatican Bank would be issuing a declaration affirming its link to Monitor Ecclesiasticus, "as suggested by David," but wanted to know more details about Rosse.

Frankel wasted no time. That same day he fired off 20 pages to Colagiovanni laying out Rosse's life story--his work as a licensed private eye, his Swiss bank reference, his "phenomenal success" as a trader and money manager, and his having been "in charge of all security for the nuclear missile site" at Key Largo, Fla., where he said he'd served two years in the Army. In fact, Frankel had merely adopted and embroidered on the identity of a real David Rosse, a private investigator who worked for him. A Vatican representative was quick to verify the existence of the Swiss bank account but apparently didn't bother with the rest of the bogus story. Consequently, the Vatican Bank's director general issued a declaration on Nov. 3 that was furnished to Frankel, noting its "uninterrupted relation" with Monitor Ecclesiasticus (ME). Frankel went on to use that declaration to legitimize the trust he secretly controlled as it looked to acquire new insurance companies.

What, exactly, is ME? It is a foundation that publishes a canon law review distributed to cardinals and bishops worldwide. Despite the Vatican's current contention that it has no ties to ME, a previous Pope (Benedict XV, 1914-1922) once declared that the review was "published with the special authorization of the Holy See." In 1978 one of Pope Paul VI's top deputies wrote to Colagiovanni that the Pontiff's "favor to Monitor Ecclesiasticus is no less than that of his Predecessors" and that "the Holy Father is happy to impart to you...president of the foundation, his apostolic blessing and pledge of continued divine assistance." If the current Pope feels any different, he hasn't made it public. And Colagiovanni has repeatedly explained that as ME's president he was approved by the Vatican's Secretariat of State. What's more, according to Colagiovanni, ME's directors include Salerno, plus three other top Vatican officials, and its bylaws, updated in 1983, are "approved by the Holy Father." Not to mention that, as Colagiovanni wrote to "Dear Mr. David," "any fund or donation given to the Monitor Ecclesiasticus Foundation" falls under the protection of the "very strict confidentiality and secrecy" laws that apply to any entity linked to the Vatican Bank. "Only the Pope personally," he continued, can disclose details of any deposits or donations (emphasis in the original).

Apparently ME would provide the "genius" from Greenwich with just the kind of immaculate connection he needed to cover his tracks; meanwhile, the Church itself could sit back at a safe distance--eyes wide shut--and gather the promised millions skimmed from Frankel's nascent insurance empire. There was just one catch: Doing so would require lies and false affidavits, not only from Frankel but from Rome as well.

Back in the U.S., Frankel/Rosse was in the process of trying to acquire Capitol Life, an insurer based in Colorado. To help the deal along, he retained the legal services of Bob Strauss at Akin Gump, who kicked the project over to a partner named Kay Tatum. On Nov. 24, Tatum conducted a conference call with Rosse, Father Jacobs, and Monsignor Colagiovanni. In preparation for the call, Rosse had faxed a list of likely questions and answers to Colagiovanni. It included the following: "Q: Where did the money come from [for the Capitol deal]. Answer: The Holy See. The Holy See has donated $50,921,686 to the Saint Francis of Assisi Foundation through Monitor Ecclesiasticus."

It wasn't true; no such Vatican money had moved through the foundations. But Colagiovanni parroted Rosse's lies anyway in the conference call with Tatum, who recorded the session in a memo. Colagiovanni stated that ME was a "Vatican foundation," wrote Tatum, and that "the Holy Father gave us the money ($50 million)." That same day, Colagiovanni signed a declaration to the same effect. And two days later, in a letter to Rosse, he described ME as "a channel and instrument in fulfilling the will and wish of the Supreme administrator." That's the Pope.

Unfortunately for Colagiovanni, Frankel/Rosse was slow in delivering on his promises. In a January letter to Bolan (see third page of story), in which Colagiovanni refers cryptically to Rosse as "Mr. D," he complains that the first installment of $5 million--the first of many, according to Bolan and Rosse--was never received. In the letter he also frets about the "declarations" he'd made previously, writing that they "are really worrying us" and wondering whether they could be "remedied." ("Us" may include other Vatican officials or Bolan himself.) Colagiovanni appears to be concerned that his false statements might someday catch up with him. Finally, he asks Bolan to keep his fears confidential, "even with Mr. D, unless he himself realizes the seriousness of my declarations."

Five days later the Vatican received a letter from the parent company of a Spokane, Wash., insurer. "The foundation [Saint Francis] claims to be an agent of the Holy See and desires to engage in a business transaction of $120 million," wrote C. Paul Sandifur, the head of Metropolitan Mortgage & Securities. "The foundation also claims that it was established by the Monitor Ecclesiasticus...which they represented as a Vatican foundation." Sandifur goes on to ask a series of questions about Monitor Ecclesiasticus and Saint Francis, and about their links to each other and to the Vatican. Twelve days later Archbishop Giovanni Battista Re, the Vatican's third-highest official, sent Sandifur a carefully worded one-sentence response ignoring all his questions about ME. The letter referred only to Saint Francis (SF) and stated: "No such foundation has the approval of the Holy See or exists in the Vatican."

Immediately Metropolitan Mortgage brought the letter to the attention of Kay Tatum at Akin Gump. That led to another false affidavit signed by Colagiovanni on Feb. 13. This time Colagiovanni stated that ME was the grantor of a billion dollars to SF and that the funds had actually come not from the "Holy Father" but from "various Roman Catholic tribunals and charities." Father Jake signed a similar affidavit on the same day. He says that, as president of SF, he'd been asked constantly by Rosse and his assistants to sign papers that he either didn't read or didn't understand; at one point he even faxed Rosse several of his signatures so that they could simply be affixed to documents. "I don't understand business," says Jacobs, "and I don't like business. But the presence of Bolan and Akin Gump on the scene gave me comfort." Where Bolan and Akin Gump found comfort is another story.

By spring of this year, Frankel's creation was apparently being discussed at the highest levels of the Vatican. According to Jacobs, both Bolan and Colagiovanni revealed to him that they had met with Archbishop Agostino Cacciavillan, who oversees investments for the Vatican, sometime in March or April. How much Cacciavillan knew about the details of the deal and the financial maneuvers at that stage is unknown. Cacciavillan acknowledges a "short meeting" with the men but denies helping them.

On April 15, Jacobs sent Walter Cronkite a letter announcing that the Saint Francis Foundation "will have assets of over $1 billion." Whether the money ever really existed is a question that federal investigators are now trying to determine. But Jacobs was basing his information on a certified audit of SF by a Tennessee accounting firm, Leuty & Heath. That audit stated that SF owned the rights to the trust that controlled the seven life insurance companies (they were actually controlled by Martin Frankel). Moreover, the audit states that the assets stood at $2.1 billion, that the money came from "a foundation [later identified by Leuty as Monitor Ecclesiasticus] formed by an established church," and that most of the money was parked in something called the Jupiter Capital Growth fund (yet another British Virgin Islands concern also set up by Frankel). The accountants went even further: They stated that the investments were monitored on an ongoing basis by "an investment committee of the board of trustees." Jacobs, SF's president and one of the three trustees on that board, says he's unaware of any such committee.

Indeed, if such a committee really existed, it might have discovered that Frankel was engaged in a fast and furious game of financial musical chairs. One document provided by Rosse to Jacobs, perhaps inadvertently, shows "money movements" for Jupiter from 1996 to 1998. Assuming the document is accurate, it reveals that $51 million was wired into a Jupiter account at Merrill Lynch in December 1997. One month later $40.34 million was wired out. Next, $40.38 million was wired in on Feb. 5, 1998, followed by $48.3 million moving out 19 days later. Similarly, in April, $90 million was wired in, and then, two days later, the same amount was taken out. Finally, on April 28, $50 million was wired in; ten days later, it was gone.

Frankel's Roman adventure has a distinctly familiar smell, one that can't help but evoke earlier scandals at the Vatican Bank. In 1984 the bank agreed to pay a "voluntary contribution" of $250 million toward the $1.3 billion in bad debts left behind by the collapse of Banco Ambrosiano, Italy's largest private bank--whose president, Roberto Calvi (known as "God's banker"), was found hanging under a London bridge. In that affair, the Vatican Bank's involvement stemmed from its alleged direct or indirect ownership of Panamanian shell companies used to funnel the missing $1.3 billion; the archbishop running the Vatican Bank was found to have written dubious "letters of patronage" that appeared to back the loans, prompting a Milan prosecutor to accuse the bank of giving "systematic support to Calvi in many of his illicit operations." A decade earlier another embarrassment surfaced after financier Michele Sindona exploited his close ties to the Vatican to bilk investors out of millions of dollars. Bolan's law firm (but not Bolan himself, he says) represented Sindona in the case.

As for Frankel, it was his Vatican charade that ultimately brought him down. On April 29, as he was flying home to Greenwich to start packing, his associates were in the midst of their meeting with Mississippi's insurance commissioner, George Dale. An assistant U.S. attorney was also present. So was Bolan. But Father Jake says it was clear that the commissioner and the prosecutor "were not supposed to know that Rosse had been in Jackson the previous day."

During the meeting Colagiovanni, in keeping with his false affidavit (and contrary to later public statements), babbled about how Saint Francis possessed approximately $1 billion and that the money had originated from Catholic institutions. Father Jake's primary contribution was to quote a cardinal, who once told him, "Priests in business either fool people or get fooled." After the disastrous meeting, Bolan flew to New York and wrote a letter to Dale requesting the withdrawal of "any petition" that Saint Francis' trustees had submitted at the hearing. Whatever else Bolan may have done at that time, it didn't prevent Frankel from fleeing the country within the next few days.

People who know Jacobs say it's completely conceivable that, because of his trusting nature, he could get swept up in a mess like this one. Moreover, Jacobs long ago established himself as a link to charities for wealthy, anonymous Jewish donors--most notably the late retail king Milton Petrie. But in Frankel's case Jacobs says that he told Bolan as early as last September that "something is not quite right.... I wanted to get out. He persuaded me to stay." (Bolan denies having the conversation.) Already poor by choice, Jacobs now worries that his legal expenses may leave him in need of charity.

Since the scandal broke, the Vatican's chief spokesman, Joaquin Navarro-Valls, saw fit to label Jacobs an "ex-Jew," according to the New York Times. (Jacobs' father was Jewish.) Another Church official has announced that the marriages Jacobs has performed since 1983 are invalid. The dispute stems from the numerous mixed marriages Jacobs performed or blessed--Mailer's and Edgar Bronfman Jr.'s among them--as well as his brief suspension as a priest for having once owned a liquor-licensed Manhattan restaurant whose profits went to charity. In fact, says Jacobs, a Harlem bishop had helped him obtain that liquor license. Moreover, he has shown FORTUNE a 1974 letter from Pope Paul VI's private secretary praising his work on mixed marriages. Says Jacobs today: "Priests can be very uncharitable toward one another."

One of the most remarkable aspects of the Frankel meltdown is the intense relationship forged between Father Jacobs and the con man. Over the past year Frankel took to calling Jacobs in the dark of night to pour out his heart, rambling for hours about his fears, his sex life, his perceived enemies, and his desire to help the needy. Jacobs recorded dozens of the sessions in shorthand notes, many of which show Frankel coming unhinged.

"People who worked for him said I was the only one who gave him peace," says Jacobs. "I may have been kind of a psychiatrist for David [Rosse]. If he winds up in prison, I would certainly go and try to help him. As a priest, I can't let him down."

Jacobs says that Bolan is now "crushed" by the whole affair. That's understandable. Putting the top-shelf legal expert in the most charitable light, Bolan was probably blinded by his own Catholic enthusiasm--not to mention the $75,000 in fees Frankel paid him (most of which the feds have seized), as well as the round-the-clock medical care for one of his sons that Frankel had covered. In any case, as late as May 23, nearly three weeks after Frankel took off, Bolan seemed to be battening down the hatches: On that date his attorney, Maurice Nessen, wrote a letter to Akin Gump, which had just announced it had withdrawn from representing Saint Francis, Frankel's phantom foundation. The letter, citing attorney-client privilege, reads, in part: "We will honor, as I'm sure you have, the commitment that we made on both sides not to tell the U.S. Attorney how it was and why it was you resigned."

The answer to that question is one we'd all like to hear.