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'Unsound Practices' Found at Franklin FBI, IRS Shut Credit Union - Nov 5, 1988 - Omaha World-Herald

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Nov 5, 1988 'Unsound Practices' Found at Franklin FBI, IRS Shut Credit Union; [Sunrise Edition] Paul Goodsell David Thompson. Omaha World - Herald. Omaha, Neb. pg. 1

Full Text (1276 words)
(Copyright 1988 Omaha World-Herald Company)

Federal authorities Friday took control of the Franklin Community Federal Credit Union because of what they said were "unsafe and unsound practices'' and monetary losses.

At the same time, FBI and Internal Revenue Service agents served three search warrants at locations operated by Franklin and its affiliate, Consumer Services Organization Inc.

In addition, The World-Herald learned that a federal grand jury recently subpoenaed City of Omaha records dealing with the credit union, its affiliates and its chief executive, Lawrence E. King Jr.

The grand jury subpoena was requested by First Assistant U.S. Attorney Thomas Thalken. He declined to comment Friday when asked about the purpose of the subpoena.

'Will Take Action'

Nor would Thalken comment on the search warrants - printed court-approved documents that were ordered sealed from the public by U.S. Magistrate Richard Kopf. The magistrate also sealed the applications for the search warrants and the affidavits that investigating agencies file with the court as justification for requesting search warrants.

After the credit union was closed and the search warrants served, King said that the allegations made by federal authorities "come as a complete surprise to me."

At a press conference at his attorney's office, where the credit union board met Friday afternoon, King read a four-paragraph statement and declined to answer questions about the credit union closing.

"We will take immediate action to determine the facts and to decide on the appropriate response," said King, who has headed the credit union since July 1970.

The National Credit Union Administration board, which oversees operations of federally insured credit unions across the nation, appointed itself conservator of Franklin.

"Conservatorship is considered the only viable solution at this time considering the unsafe and unsound practices and the potential losses that have and could occur if they were to continue," said J. Leonard Skiles of Austin, Texas.

Closed at 1 p.m.

Skiles, a regional director of the organization, now is responsible for Franklin's operation.

Franklin, according to a National Credit Union Administration press release, has assets of $.5 million and deposits of $ million. It primarily serves residents and people employed in two areas: Omaha's near north side and South Omaha, the press release said.

Federal agents and Omaha police officers arrived unannounced at the main credit union office at 1723 N. 33rd St. about 1 p.m. They served the search warrants and immediately ordered the office closed.

At least one, and sometimes two, police officers were stationed outside the front door to tell customers that the office was closed for the rest of the day and today.

A team of examiners began reviewing records of the credit union, regulatory officials said.

King was not present in the office when law enforcement officers arrived to close the credit union, said Douglas Gastorf, who heads the criminal investigation division of the Internal Revenue Service in Nebraska.

Inconvenienced

Gastorf said some employees were interviewed by investigators after they arrived and other employees were sent home. Some of the employees congregated in a parking lot north of the credit union office, but they declined to talk to reporters.

The police officers who turned customers away said they were not told the reason for the closing. At least two customers asked whether the credit union had been closed because of a robbery.

"Well, there goes the weekend," said Melvin Grant of 3115 Charles St. Grant said he had gone to the credit union to make a withdrawal Friday afternoon when he was told it was closed.

Several other customers, who declined to give their names, said they would be inconvenienced by the closing.

One off-duty employee stopped by the credit union to pick up her paycheck. When she was turned away, she left in tears.

FBI and IRS agents entered and left the building at intervals throughout the afternoon, but they declined to answer questions.

Search warrants also were served at the Franklin branch office at 2429 M St. and at the Consumer Service Organization office at 2505 N. 24th St.

'Speculation'

The Federal Rules of Criminal Procedure state that a search warrant may be issued to seize any property that constitutes evidence of the commission of a criminal offense; or contraband, the fruits of crime; or property designated for use or intended to be used to commit a crime; or persons for whose arrest there is probable cause.

"It's all speculation," said attorney Sam Jensen, who is in the law firm representing King. "There are no criminal proceedings pending."

Jensen said the fact that the search warrants were "sealed" does not indicate any wrongdoing.

Jensen said he would not discuss whether there is a grand jury probe under way.

"Grand jury proceedings are supposed to be secret," he said. "Certainly we're not going to comment on what is happening."

The August 1988 subpoena served on the city called for all financial records and files relating to city dealings with the credit union, Consumer Services Organization Inc., Franklin USA and King.

The city has had contracts with the credit union and Consumer Services Organization to handle some federal low-income housing programs funded through the city.

Duplicates Made

No city officials were asked to appear before the grand jury.

During early September, stacks of city records and files kept by city employees were piled atop a desk in the City Planning Department. A secretary was assigned to remove duplicate information and make photocopies so that the originals could be given to federal officials.

Assistant City Attorney Tim Kelso and other city officials declined to discuss the subpoena.

One city official, however, said he understood that the request related to an IRS case and did not directly involve city programs.

In 1987, King made an unsuccessful attempt to block a summons during an IRS investigation of King and his wife, Alice. U.S. District Court records show that the IRS had asked Franklin for documents during its probe of King's 1982 and 1983 income tax returns.

Chief U.S. District Judge Lyle Strom denied King's request to block the summons in September 1987.

As previously reported by The World-Herald, Omaha city officials last month rejected the credit union's bid to continue administering a $.3 million loan portfolio for the City Planning Department. The credit union was paid about $1,800 annually to collect mortgage payments and keep records for a program that provides low-interest loans to low-income Omahans to renovate their homes.

In Dispute

A review team for the U.S. Department of Housing and Urban Development criticized Franklin's record-keeping and urged the city to find another institution to handle the loans.

After the city rejected Franklin's bid, the city advertised for other proposals and transferred administration of the program to the Community Bank on a temporary basis.

City officials also have been in a dispute with Consumer Services Organization over the Franklin affiliate's failure to submit an audit report after receiving $00,000 in grants.

Consumer Service Organization representatives have said that the city did not formally request the audit until recently. They said the report is being prepared.

In his statement Friday, King said the National Credit Union Association board did not give notice or hold a hearing before it named itself Franklin's custodian. He said Franklin has 10 days to respond to the action.

King said the board's order forbids him from disclosing its contents.

"But I can state that certain allegations of fact are made which come as a complete surprise to me and to the board of directors of the credit union," he said.

Outside the Franklin office. . . FBI agent James Lovelace, left, and Douglas Gastorf, head of IRS criminal investigation in Nebraska.

King . . . "A complete surprise to me. "

[Illustration]
Jim Burnett/World-Herald Closing Investigation Bank Failure


Credit: World-Herald Staff Writers

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