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Official Says Franklin Credit Loss Could Have Been Much Larger- Jan 11, 1989 - Omaha World-Herald

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Jan 11, 1989 Official Says Franklin Credit Loss Could Have Been Much Larger; [Metro Edition] Paul Goodsell. Omaha World - Herald. Omaha, Neb. pg. 1

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(Copyright 1989 Omaha World-Herald Company)

Money was flowing into the Franklin Community Federal Credit Union so rapidly just before it was closed that a few more months of operation with funds allegedly being diverted would have resulted in much larger losses, a National Credit Union Administration official said Wednesday.

"We were fortunate to have flushed this thing out," said Michael D. Riley, director of the NCUA's office of insurance and examinations. "They were pyramiding it so quickly. If we hadn't caught it, it would be $50 million by now."

The NCUA closed Franklin Nov. 4 when it had about $40.8 million in total deposits. The NCUA has said that Franklin sold about $39.5 million in certificates of deposit but did not record $38.5 million of those CDs on the credit union's official books.

Riley estimated that about one-third of the unrecorded money was used to pay interest and repay depositors who wanted to redeem their CDs.

The NCUA also has alleged in U.S. District Court that unrecorded CD money was diverted for personal and business spending by Franklin's chief executive, Lawrence E. King Jr. King has denied the allegation.

Internal Reports

Despite the accelerating deposits, Riley said, only a handful of Franklin employees were in a position to know how much money the credit union was receiving.

Internal Franklin reports seen by The World-Herald indicate that staff members at Franklin handled more CDs in three weeks last fall than the credit union was supposed to have in all.

During those weeks, employees sold or renewed certificates of deposit worth more than $1.9 million, and repaid $435,000 to investors, the documents show.

In comparison, only about $1 million in CD money was reported on Franklin's books, which purported to list all deposits to the credit union - not just three weeks' worth.

The Franklin memos, some of them addressed to King, were used as exhibits in King's deposition in the $34 million civil lawsuit filed against him by the NCUA.

King said in the deposition that he did not remember seeing the reports.

"I'm saying I don't recall seeing it," he said. "I don't recall any of them."

Outside Brokers

The memos show investments handled by the three full-time employees in the credit union's development office, The memos also show a few CDs handled by other employees. The NCUA also has said that outside brokers were responsible for selling some of Franklin's CDs, but the memos do not refer to any brokered deposits.

The Franklin internal reports list deposits going into Franklin and CD renewals, as well as money going out to depositors through redemptions.

The three periods covered:

- Week ending Sept. 23: $471,000 in deposits and renewals; $124,000 returned to depositors.

- Week ending Sept. 30: $509,000 in deposits; $105,000 back to investors.

- Week ending Oct. 14: $954,500 in deposits; $206,000 back to investors.

A fourth report, covering about two weeks in early September, shows $1,008,291 in deposits and renewals. The report has a different format and does not list any CD redemptions.

The three "development office" employees - Robert Morley, Larry Murray and Noel Seltzer - reported their week's activity to William L. Hansen, another Franklin employee. Hansen compiled the reports and addressed them to King or to "administration."

Harvey's Role Unclear

It was not clear whether the reports also went to E. Thomas Harvey Jr., Franklin's director of accounting. Employees have said that Harvey was in charge of Franklin's computer and financial records, including CD information.

Hansen declined to discuss the reports, saying that he has been called to testify in a hearing on King's lawsuit.

Some of the Franklin employees have said they believed Franklin had $10 million to $15 million in deposits, based on the number of CDs they were selling, even while Franklin was claiming to have about $2.5 million in assets.

The NCUA has said employees did not take their suspicions to authorities.

"After the fact, it's always easy to say, 'I knew something was going on,' " Riley said.

In fact, he said, the credit union's employees were "compartmentalized" - hired for a specific job and kept away from other information about the institution.

"One guy was selling CDs, one guy adds up the sales," Riley said. "Only a couple of people in the credit union were privy to all of that information."

Although it now seems obvious that Franklin was bigger than it claimed to be, Franklin's CD sellers were not familiar with the credit union's balance sheet of assets and liabilities, he said.

"To the best of our knowledge, I'd say that most of the people had no idea of what the credit union was supposed to look like."

Credit: World-Herald Staff Writer

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