Credit Union Failed a Year Ago Saturday Franklin Figures Working and Waiting - Nov 5, 1989 - Omaha World-Herald
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Nov 5, 1989 Credit Union Failed a Year Ago Saturday Franklin Figures Working and Waiting; [Sunrise Edition] Robert Dorr.Â Omaha World - Herald.Â Omaha, Neb.Â pg.Â 1.B
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(Copyright 1989 Omaha World-Herald Company)
Franklin Failure: One Year Later
A year after Franklin Community Federal Credit Union failed, the lifestyle of its chief executive is more modest, and the phone at his food catering concern has been disconnected.
The one-year anniversary of the Omaha credit union's closing by federal authorities passed quietly Saturday.
The trial of Lawrence E. King Jr., Franklin's manager and treasurer, and his wife, Alice, is scheduled to start April 1.
King was indicted last May on 40 counts charging him with conspiracy, fraud and income tax evasion. His wife was indicted on 12 counts of conspiracy and fraud. They have pleaded innocent.
Altogether, $39 million in Franklin funds disappeared, officials say. The federal grand jury's indictment charges that $10.2 million went to support the lifestyle of the King family from 1984 until last Nov. 4.
The Kings have been forced to move from their spacious home in a wooded area north of Omaha into a two-story frame house at 2021 Wirt St. that housed the King catering business.
King, 45, who once drove a Mercedes Benz and rode in rented limousines, now drives an old Chevrolet.
He has lost his businesses, one by one.
King, former co-owner of Akasaka Restaurant in the ParkFair shopping mall downtown, has been out of that operation since last November, the other owner said.
The former Cafe Carnavale, 7555 Pacific St., has closed and reopened under a new name and new owner.
The Showcase Lounge, 2229 Lake St., closed and was reopened under an operator who has an agreement with the court-appointed receiver of King's assets.
King continued to run the King Co., his food and beverage catering concern, for several months. However, persons acquainted with him say he has done little, if any, catering recently.
King has been doing various tasks at Ames Florist & Landscaping, at 3929 Ames Ave. and 2526 Cuming St., owner Otha Council said last week.
"Larry helps out on a volunteer basis," Council said.
The National Credit Union Administration, the federal agency that regulates and insures credit unions, has put the former King house on North River Road on the market for $295,000.
The credit union got its money by selling certificates of deposit over the phone to investors around the nation. The investors were paid high rates of interest, and they were told they couldn't lose because Franklin had federal deposit insurance.
The CDs were sold by independent brokers and by in-house "boiler room" salesmen, federal officials said.
Franklin required $9 million in new money simply to pay interest on existing CDs from 1984 through 1988 and to pay off CDs that weren't renewed, the indictment says.
Robert Fenner of Washington, D.C., NCUA general counsel, said in Omaha last week that he has become convinced the missing $39 million in Franklin money is mostly spent.
Fenner said he bases that conclusion on:
- The results of an item-by-item analysis of Franklin's income and outgo from 1984 through 1988. That analysis didn't leave any large, unexplained amount that might have been hidden.
- A pattern at Franklin through the years of money coming in barely fast enough to meet immediate spending needs.
The NCUA probably won't extend its financial study to cover any years before 1984 because the chances of learning anything significant are small and wouldn't justify the cost, Fenner said.
Franklin's chief accountant, E. Thomas Harvey Jr., who became the credit union's computer mastermind, and his mother, Mary Jane Harvey, have pleaded guilty to bank fraud and tax evasion.
Mrs. Harvey, a retired staff member in the Presbyterian Church's Omaha office, was a friend of the Kings and an early volunteer helper at Franklin.
The Harveys admitted embezzling $1 million from Franklin between 1984 and the time the credit union was closed. They have cooperated with prosecutors and are expected to testify at the Kings' trial.Face Prison Terms
The Harveys might not be sentenced until after the Kings' trial, some persons close to the case said.
The Harveys are expected to be sentenced under federal sentencing guidelines, and both face prison terms. Depending on several variables in the sentencing formula, Harvey could receive from 41 months to 87 months in prison. Mrs. Harvey could face from 33 months to 71 months.
The federal grand jury also indicted three former Franklin employees who sold CDs: Robert Morley of Ashland, Neb., Noel Seltzer of 3806 Patterson St. and Larry J. Murray of 4001 N. 42nd St.
Morley pleaded guilty to filing two false tax returns and is to be sentenced Dec. 1. Seltzer and Murray pleaded innocent to tax evasion charges.
Franklin was begun in 1968 as a way to help low-income people who had trouble establishing credit elsewhere. At first, it struggled to stay afloat. King took over management in 1970 and seemed to be the miracle worker the credit union needed.
Opinions differ about how King ran Franklin in those early days.
Mrs. Harvey began doing volunteer tasks at Franklin in 1970, when the work force consisted of King and one other person.
Very Sincere Person'
"I still believe that Larry, in those days, was a very sincere person operating on a shoestring," Mrs. Harvey has said.
Richard Deppe, who did volunteer bookkeeping for Franklin in the early 1970s, said he never saw anything that made him question King's honesty.
"He was very personable, very persuasive," Deppe said, adding that he believes that King "was honest at that point in time."
But accountant H.C. "Harry" Hall said last week that he discovered questionable practices when he did a partial audit of the credit union in 1972.
Franklin funds were used to buy groceries, Hall said. He was told the food went for events intended to attract donations and deposits. But food was bought too often to be explained by an occasional public relations event, he said.
Also, Hall said, documentation was inadequate for writing off as uncollectible 22 loans totaling $20,000. The loans were shown individually by number but not by name. He said he asked King for names and was given a couple of names but not all.
Hall noted in his report that Franklin wasn't following proper loan procedures. He turned over his report to King and isn't certain what happened to it, he said.
Took Concerns to Member
Hall said he took his concerns to one Franklin board member, but he doesn't believe that had any results.
The people running Franklin needed Hall's audit because they were seeking federal depositors' insurance, Hall said.
"I remember thinking, 'They're never going to get it,' " he said.
But Franklin did get federal insurance in 1973. Hall said he never again was asked to do an audit of Franklin.
The NCUA has said the fraud at Franklin began in the mid-1970s, when funds in dormant accounts were used to pay expenses that couldn't be covered otherwise.
How did King get prominent business and political leaders to lend their names and their time as volunteers on behalf of Franklin?
Fenner and Rep. Peter Hoagland, D-Neb., said King was persuasive, he appeared successful and Omahans wanted to help a worthy cause.
"He fooled a lot of people," Fenner said.
Among the Omahans who did volunteer tasks were former Mayor Walt Calinger, a member of Franklin's board of directors for several months; World-Herald Publisher Harold W. Andersen, who headed a Franklin volunteer advisory board several years ago and led Franklin's building fund drive; and former Rep. Hal Daub, who served on the advisory board for a year.
NCUA Regional Director J. Leonard Skiles of Austin, Texas, has said that no one ever asked NCUA officials to go easy on Franklin, but the agency's examiners were aware that top political and business leaders supported King and Franklin.
Fenner and Hoagland said that perhaps the most important lesson of the Franklin failure is that the NCUA must never again relax its supervision, even if a credit union seems to merit special consideration.
The NCUA was criticized for allowing four years to pass without demanding that an audit be completed.
Hoagland said the prime duty of federal regulators is to be sure a credit union "is fully audited and on the level."
The congressman added: "They can't confuse that with a sentimental desire to keep a low-income credit union functioning. If Franklin had been a bank, the FDIC (Federal Deposit Insurance Corp.) would have padlocked its doors three years earlier."
Hoagland, a U.S. House oversight subcommittee member, initiated legislation passed by Congress to correct perceived weaknesses in credit union regulation.
- Require a credit union to obtain an audit from a certified public accountant if it is having "persistent and serious record-keeping deficiencies" or if it has not conducted a satisfactory internal audit.
- Give the NCUA additional powers to more quickly close a credit union that is close to insolvency.Tightened Procedures
Rep. Doug Bereuter, R-Neb., was a co-sponsor of the credit union provisions, which were passed as amendments to the savings and loan bailout bill.
The nation's low-income credit unions - a class that included Franklin - formerly had special permission to solicit deposits from persons living outside their defined area.
After the Franklin failure, the NCUA's board restricted low-income credit unions to having no more than 20 percent of their total assets in outside accounts.
The NCUA also tightened its procedures for examining credit unions.
"We don't think anything like this ever will go undetected again," Fenner said.
The National Credit Union Administration has put the Kings' former North River Road home on the market for $295,000. . . The Kings currently are living in a house at 2021 Wirt St., shown at right. Activity has slowed at the Franklin Building, once a financial hub of the north Omaha community . . . The building's sign shows damage.
Jim Burnett/World-Herald World-Herald
Credit: World-Herald Staff Writer