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Records Show Franklin Probe Began in March - Dec 9, 1988 - Omaha World-Herald

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Dec 9, 1988 Records Show Franklin Probe Began in March; [Metro Edition] Paul Goodsell. Omaha World - Herald. Omaha, Neb. pg. 1

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(Copyright 1988 Omaha World-Herald Company)

Federal grand jury subpoenas involving Franklin Community Federal Credit Union were issued more than nine months ago, according to documents filed in U.S. District Court.

The subpoenas were forerunners of a more recent round of grand jury subpoenas requesting information from the City of Omaha, national church denominations and the credit union itself.

In addition, the Internal Revenue Service was auditing and conducting a criminal investigation of the 1982 and 1983 tax returns for Lawrence E. King Jr., Franklin's chief executive, and his wife, Alice, the documents show.

Copies of bills to King from the Erickson & Sederstrom law firm were filed in U.S. District Court, along with a copy of an Oct. 27 subpoena asking for Franklin's certificate of deposit records.

Conflict Alleged

The documents were filed with a motion by the National Credit Union Administration to disqualify Erickson & Sederstrom from representing King. The NCUA, which is liquidating the credit union, contends that the law firm has a conflict of interest because it did work for Franklin.

The billing records show that the firm's attorneys met in March 1988 with King and Tom Harvey, Franklin's director of accounting, to discuss the grand jury sbpoenas.

Howard Kaplan, then an Erickson & Sederstrom attorney, also discussed the subpoenas with First Assistant U.S. Attorney Tom Thalken - at one point asking for more time to comply with the request, according to the bills.

The records also show that Kaplan and Thalken discussed the "current non-enforcement" of the subpoenas, suggesting that the subpoenas, while not withdrawn, were postponed.

Kaplan declined to comment on the case, saying that he no longer is with the Erickson & Sederstrom firm.

'Very Secretive'

Attorney William Morrow referred questions about the subpoenas to federal authorities.

"You'd have to ask the government," he said. "They're very secretive about what they're investigating."

Federal officials are prohibited from discussing grand jury proceedings.

After March, the billing records do not list any other discussions about the grand jury until Sept. 2, when an unspecified Erickson & Sederstrom attorney wrote an in-house memo about the "status of grand jury."

By that time Omaha city officials had received a grand jury subpoena requesting information about city dealings with King, Franklin and two credit union affiliates, Consumer Services Organization and Franklin U.S.A.

At the city's request, CSO also had hired an accounting firm to conduct an audit. Several discussions about subpoenaed documents were held in September with Thalken and with accountant Leonard Sommer, the bills show.

Court records also include a Nov. 2 letter from Morrow to King about a new grand jury subpoena to Franklin.

Records Sought

The subpoena dated Oct. 27 called for "all records and documents pertaining to telephone solicitations of prospective depositors" dating back to January 1984.

The subpoena asked for "index cards, handwritten or typewritten memos, logs, typewritten lists, handwritten lists, computer lists" related to the solicitations.

In addition, the subpoena asked for lists of certificates of deposit and copies of interest payment records, also from 1984 to the present.

Morrow's letter to King referred to an Oct. 31 meeting with King about the subpoena and King's apparent concern that federal authorities would then use the information being subpoenaed to contact credit union customers.

Morrow wrote that King was concerned about "the adverse impact that will have upon the affairs of Franklin," but noted that King could not refuse to provide the information.

"We suggest, therefore, that you collect the information required by the subpoena and deliver it to us," Morrow wrote. "We will review it to be certain that it complies with the subpoena but does not over comply, and make appropriate copies of it to be retained in your records."

Cover Letter

Morrow also sent King a draft of a cover letter to the U.S. Attorney's Office and suggested that he have it typed on Franklin's letterhead. King was to sign the letter and give it to Morrow for use in sending the subpoenaed information.

Morrow said in the letter that he planned to deliver the information to the U.S. Attorney's Office Nov. 11. The subpoena said that Franklin had to respond by Nov. 14, and said no one had to appear in court if the information were delivered in advance.

Instead, however, federal credit union regulators closed Franklin Nov. 4 - the same day FBI and IRS agents served search warrants on Franklin and CSO offices.

Morrow has declined to say whether the grand jury investigation was tied to the earlier IRS review of King's 1982 and 1983 tax records.

In 1986, court records show, the IRS investigated King's finances for those years. An IRS special agent requested records from Franklin concerning $46,000 in credit union checks deposited in King's checking account at Omaha National Bank, as well as records of Franklin loans that were written off as bad debts.

Motion Denied

King filed a motion in U.S. District Court to quash the summons. The motion was denied in September 1987.

IRS officials indicated that the Franklin summons was part of a criminal investigation.

"Special agents only investigate criminal matters," special agent Joe Breazier said.

Billing records show that on Nov. 13, 1987, attorneys reviewed and analyzed information given to the IRS by the credit union.

In December, King's attorneys also conferred with IRS auditors about the "civil audit" and conducted legal research on how settlement of the civil case would affect the "pending criminal investigation."

IRS auditors presented the Kings' "proposed civil tax liability" and notified the Kings that they had 90 days to appeal the decision to U.S. Tax Court. That appeal was filed in March 1988, the records indicate.

In July and August, King's attorneys talked to Joe Schilmoeller, an IRS employee who handles appeals, about a "1982-1983 final tax and penalty determination" and sent the IRS settlement proposal to the Kings for their approval.

The records do not indicate that an agreement was signed, but Morrow said the civil tax case has been settled.

Breazier said he could not comment on whether the related criminal investigation continues.

Credit: World-Herald Staff Writer

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