NCUA: Silent Lawyers Cost Franklin $20 Million - Feb 20, 1994 - Omaha World-Herald
Not for commercial use. Solely to be used for educational purposes
Feb 20, 1994 NCUA: Silent Lawyers Cost Franklin $20 Million; [Sunrise Edition] Omaha World - Herald.Â Omaha, Neb.Â pg.Â 10.B
Full TextÂ (694 Â words)
(Copyright 1994 Omaha World-Herald Company)
The National Credit Union Administration contends that the Erickson & Sederstrom firm and other lawyers could have prevented $20 million of Franklin's $39 million in total losses by warning the credit union's board of directors.
The NCUA, insurer as well as regulator of federal credit unions, paid off nearly all the losses.
While Erickson & Sederstrom represented Lawrence E. King Jr., it also handled business matters for the credit union and, thus, had a conflict of interest, the federal agency says.
In court documents, the NCUA gave this account of what it says happened during the final 3 1/2 years of Franklin's life:
In June 1985, King hired Erickson & Sederstrom to help him respond to an IRS audit of the 1982 and 1983 personal tax returns of King and his wife, Alice. The IRS contended that the Kings failed to report income of $168,000 in 1982 and 1983. King said his wife's family in Jamaica gave them $145,000 during the two years.
The Kings' returns showed income of $21,600 in 1982 and $14,000 in 1983.
Mrs. King later served two years in prison and in a halfway house for filing a false tax return. She has been released and is living in the Dallas area.
Howard Kaplan, the Erickson & Sederstrom lawyer working closest with King on the tax audit, told King he must provide proof of the gift's source or the IRS might assume the money came from an illegal activity such as drug trafficking.
Kaplan, who has since left Erickson & Sederstrom, told the Kings to have Mrs. King's Jamaican relatives meet with him. Kaplan was put off repeatedly, and he never met with any Jamaican relatives.
The NCUA contends that importing more than $10,000 in cash into the United States without filing reports violated federal law. Furthermore, such a violation also could have affected Franklin, where King said he deposited the Jamaican money.
Two months after King hired Erickson & Sederstrom, the law firm learned the IRS had changed the status of its civil tax audit of the Kings to a criminal investigation. Suspecting the Kings were getting money through Franklin's loan process, the IRS in late 1986 demanded that the credit union turn over its lending records. The IRS delivered its demand to Erickson & Sederstrom and to King as the credit union's top officer.
But Erickson & Sederstrom never advised Franklin's board of directors that the IRS was seeking credit union records. Thus the board never learned about the IRS summons.
"A properly advised board of directors, armed with the knowledge that the U.S. government was aggressively investigating Mr. King for criminal activities which implicated the credit union, would have sought independent professional advice, completed an audit of the institution and considered firing Mr. King and advising the NCUA," NCUA attorneys C.L. Robinson and Thomas White contend in court documents.
Advised Credit Union
Joseph Byrne, the Omaha lawyer who represented Franklin on the IRS summons, advised the credit union to surrender the documents that the IRS wanted.
But Erickson & Sederstrom, as King's attorney, filed a court motion resisting the IRS summons. That delayed the IRS for several months.
The IRS finally got Franklin's lending records in September 1987. The theory that King was getting money through loans made by the credit union turned out to be wrong.
But the federal investigation of King continued.
In March 1988, the U.S. attorney served a grand jury subpoena on Franklin to produce more records. Erickson & Sederstrom worked out arrangements for turning over Franklin records to the federal prosecutor.
In reality, Erickson & Sederstrom represented both Franklin and King all along, the NCUA contends. When Erickson & Sederstrom talked with the U.S. attorney about surrendering Franklin's records, that law firm "dropped the fiction" that Byrne represented Franklin.
Franklin turned over boxes of records to the grand jury that led to indictment of the Kings on criminal charges.
But the credit union's board of directors wasn't told of the grand jury subpoena before Franklin collapsed Nov. 4, 1988.
Erickson & Sederstrom withdrew as King's counsel four months after Franklin failed. Court-appointed attorneys defended King against criminal charges.