The Flight Transportation Corporation Litigation

In June 1982, all kinds of litigation erupted in Minnesota’s federal court[1] involving Flight Transportation Corporation (FTC), a Minnesota-based company that purported to provide small-aircraft charter service.

The first case was by the U.S. Securities and Exchange Commission (SEC) against FTC, its subsidiaries, and its CEO and Chairman of the Board, William Rubin. The SEC alleged that the defendants had violated and aided and abetted violations of antifraud, reporting, and record-keeping provisions of the federal securities laws. The SEC sought an injunction prohibiting further violations by the defendants of these provisions, the appointment of a receiver to take possession of and marshal the assets of FTC and its subsidiaries, an accounting of all proceeds of FTC’s allegedly fraudulent securities offerings, and an order of disgorgement of all funds received by FTC as a result of those sales of securities. With respect to Rubin, the SEC sought a temporary freeze of most of his personal assets, an accounting of all funds received from FTC and its subsidiaries, and disgorgement of such funds.[2]

Shortly thereafter, two underwriters of FTC securities, on their own behalf and on behalf of all persons who purchased FTC’s securities in the June 1982 offerings, commenced a class action seeking, among other things, imposition of a constructive trust on the $22 million in proceeds of the offerings.

Thereafter other private lawsuits were also commenced against FTC, its officers and others, including its external auditor and the New York City law firm for the underwriters of the public offerings of FTC securities.[3]

Norwest Bank Minnesota (n/k/a Wells Fargo Bank Minnesota) had been providing working capital financing to FTC and brought a claim against FTC to collect that debt, and I was in charge of the Faegre & Benson team for Norwest. Later some of the other plaintiffs asserted claims against the Bank because its collateral review personnel had discovered certain problems at FTC; later the Bank reached a settlement over all of these claims.

Because there were so many different kinds of claims against FTC and others, the attorneys for the plaintiffs concluded that they needed to stop fighting among themselves and instead focus their collective efforts in prosecuting the claims against the defendants. As a result, the plaintiffs negotiated a complex Sharing Agreement whereby any monetary recoveries would be shared among the plaintiffs. This agreement was approved by the court.[4]

The SEC’s request for the appointment of a receiver was granted. A Minnesota attorney, Thomas Bartsch, was so appointed. I participated in many meetings with him and thought he was doing an excellent job. I, therefore, was shocked later when he was convicted of stealing money from the FTC assets under his control as receiver and then disbarred as an attorney.

At the conclusion of the private litigation, the district court awarded the various plaintiffs’ law firms $7.8 million of attorneys’ fees. The court recognized the superlative work of the lawyers that resulted in recovering $52 million for the various plaintiffs.[5]

I also was the attorney for Norwest Bank in a related case where a co-founder, outside director, shareholder and director of FTC sued the Bank for collecting and paying a check that allegedly had his forged endorsement. The district court entered judgment in favor of the Bank, and the appellate court affirmed.[6]

Finally there were criminal prosecutions of FTC’s principal officers: William Rubin, Janet Karki, Brian Miller and James McGovern. Rubin, the CEO and Chairman of the Board, was convicted on 10 counts of securities fraud and two counts of filing a false securities registration statement with the SEC and sentenced to 35 years in prison plus a $120,000 fine. There also were convictions on similar charges against Karki, the Chief Financial Officer (20 years in prison); Miller, the Financial Controller (three years); and McGovern, a Minnesota lawyer and FTC’s General Counsel (six years).[7]

I still find it difficult to believe that two fellow Minnesota lawyers with whom I had professional dealings ended up in prison as convicted felons.

Two memories of this case stand out.

At a posh Beverly Hills hotel, I participated in the deposition of Michael Milken from a FTC underwriter (Drexel Burnham Lambert). Known in the securities industry at the time as the King of Junk Bonds, Milken later pled guilty to securities fraud and tax violations and was sentenced to imprisonment. After release, he has concentrated his efforts on philanthropy, especially research regarding prostate cancer and melanoma. (Wikipedia, Michael Milken, http://en.wikipedia.org/wiki/Michael_Milken.)

I attended the criminal trial of Rubin and Karki. I was there as an attorney for a Norwest banker who was testifying about the Bank’s relationship with FTC. During her testimony two prominent Minnesota criminal defense attorneys, Ron Meshbesher[8] and Joe Friedberg, objected to the receipt into evidence of certain Bank documents because they were photocopies and thus not the best evidence. While the attorneys had a sidebar conference with the judge regarding this objection, I went to the U.S. Attorney’s table and whispered to an FBI agent that the originals were in my office and were destroyed in the Northwestern National Bank fire on Thanksgiving Day 1982. The FBI agent then went to the sidebar conference and relayed the information to the U.S. Attorney, Tom Hefflefinger.

The judge then asked me to leave the courtroom, presumably while foundation questions were asked of the banker. I assume her examination went something like this: “Do you know Mr. Krohnke? (Yes.) Was he involved in any way with the Bank and FTC? (Yes.) How was he involved? (He was an attorney for the Bank regarding litigation over FTC.) Did he have any original Bank documents in his office? (Yes.)”

I was then readmitted to the courtroom and put on the witness stand. The U.S. Attorney asked me a few questions along the same lines and established that the original documents in question were destroyed in the fire. There was no cross-examination by Meshbesher or Friedberg. The photocopies of the Bank documents were received into evidence.