MINNEAPOLIS - John Morken built a massive cattle trading empire that stretched across the Midwest, touching the lives of thousands of ranchers and the books of dozens of banks.

But Firstar Bank of Milwaukee, his principal bank, alleges that the empire was nothing more than a house of cards. In June 1994, Firstar pulled the plug on Mr. Morken, charging that he was running one of the biggest and most elaborate check-kiting schemes ever.

Within days of Firstar's action, banks and cattlemen were left holding millions in bad checks drawn on Mr. Morken's personal and corporate accounts. Lawsuits were filed in three states, and the FBI, the Comptroller of the Currency, and the Packers and Stockyards Administration launched investigations.

The lawsuits amount to a "huge mess that has resulted in full employment for the bankruptcy bar in the Twin Cities," said one attorney.

But they also raise some interesting questions about the relationship between the bank and Mr. Morken.

Was the cattleman a criminal mastermind who manipulated his arrangement with Firstar for his own gain? Or was he merely acting under what he believed were the terms of his agreement with the bank?

And if, as Firstar alleges, Mr. Morken was running a check kiting scheme, why was it not discovered for more than a year? Firstar did make hundreds of thousands of dollars on overdraft check fees associated with Mr. Morken's accounts.

"Was it outright fraud or a failure in the system?" asked Steven Schroll, a banking analyst with Piper Jaffray Inc. "You have to wonder where the oversight was."

Mr. Morken - who faces a possible criminal indictment - has gone to bankruptcy court, where more than 200 claims, totaling more than $100 million, have been filed. The bankruptcy trial is slated to begin Oct. 16.

Firstar, wishing to put the matter behind it, took a pretax charge of $22 million, or 20 cents per share, in the second quarter of 1994 to cover its losses.

Mr. Schroll said he doesn't expect Firstar - which posted a loss of $23.2 million in June 1994 - to suffer any more damage as a result of the case. And bank officials say they have a chance to recoup some of their losses.

Last month, Mr. Morken agreed not to have his debt to Firstar discharged. That means that Firstar will be able to recover all or part of its losses if Mr. Morken goes back into business. Firstar officials say the agreement amounts to an admission of guilt and supports their claims of fraud. But the cattleman's attorney said that Mr. Morken cut the deal "to get on with his life," and was admitting nothing.

If bankruptcy trustees for Mr. Morken and his company, Spring Grove Livestock Exchange, have their way, Firstar could take a more severe hit. They have filed separate suits against Firstar, for more than $100 million each, claiming that by juggling money in the accounts the bank bettered its own position at the expense of other creditors.

"These are major claims against Firstar, and we believe they are valid," said Gary Koch, an attorney for Farm Credit Services of Southern Minnesota, which was left holding $16 million in dishonored checks from the Firstar accounts.

Firstar general counsel William Schulz said the trustee claims are without merit. "They stand in the shoes of the bankrupts, and it is wrong for them to get the benefit of the fraud," he said.

Charles Ries, bankruptcy trustee for Mr. Morken's company, said the parties share the blame. "In my mind, it clearly wasn't a loan agreement ... He thought he could sell cattle back and forth between himself and the company, and shift money where it was needed.

"But," Mr. Ries added, "it's hard to believe that the bank didn't know that things weren't kosher."

Firstar adamantly claims that it was duped by Mr. Morken. In affidavits filed in U.S. bankruptcy court in Minneapolis and U.S. district court in Milwaukee, bank officials charge that the 50-year-old cattleman wrote checks totaling as much as $54.5 million a day between his corporate and personal accounts.

"Firstar has been the victim of a massive kite," said John Goodnow, vice president of the special loan department responsible for Mr. Morken's business, in an affidavit. "In my 20 years as a banker I have never encountered a more massive fraud."

In an interview, Firstar's Mr. Schulz seconded the fraud assertion, saying the situation "is obviously embarrassing" to the bank. But he said the bank was not negligent in its oversight.

"This was a guy with a huge cattle operation, and that large volume of legitimate business masked the kite," Mr. Schulz said. "Firstar took action to shut down the kite immediately after its discovery."

But lawyers on Mr. Morken's bankruptcy team aren't so sure. They claim to have documents that prove Firstar kept daily tabs on both Morken accounts, and knew how much was moving between them.

In court filings, Mr. Morken states that Firstar told him that he could have unlimited tallies of uncollected funds in his accounts, and located his corporate account in Firstar's Wausau, Wis., subsidiary to maximize the float.

"According to Firstar, the accounts were to be located at different branches to maximize the benefit of the float," he stated in an affidavit. A suit filed by trustees in U.S. district court here states: "The advances made on uncollected funds constituted unsecured loans ... pursuant to bank policy."

Indeed, Firstar made a killing off the overdraft fees associated with the accounts. In April 1994 alone, it collected $132,000 in fees, up from $11,000 two years earlier.

Mr. Schulz said that Firstar merely agreed to provide the standard cash management service of covering uncollected checks from Morken customers, not to allow use of those facilities as a high-priced loan arrangement.

But if that is the case, chided one lawyer familiar with Mr. Morken's side, "then Firstar's best defense is to say, We're incompetent. We've been stuck for $23 million by someone who was using a cash management system we sold them... I wouldn't want to make that argument."

A 31-year cattle veteran from Spring Grove, Minn., Mr. Morken controlled about 75,000 head of cattle through his business, when Firstar shut down his accounts.

Basically the business involved purchasing cattle at the low weight of about 500 pounds, fattening them up, and selling them when they reached about 1,300 pounds.

He also ran an operation called Adventure Cattle, which promised returns of 25% to investors who put up $100 a head and financed the rest of the purchase through their own lenders. That is how banks besides Firstar became involved.

The cattle broker linked up with Firstar in 1992, when he outgrew his relationship with Sprague National Bank in nearby Caledonia, Minn. Firstar had a correspondent relationship with $27 million-asset Sprague, so the referral of Mr. Morken was natural.

When cattle prices slid from $85 per hundred weight to the low 60s in 1993, the floor dropped out from under his business. Mr. Morken lost $1.8 million in Adventure Cattle that year, but continued to buy cattle, in the hopes that the market would again rise. It didn't.

At the same time, Mr. Morken began writing checks between his two accounts at a rapidly increasing rate. In the first five months of 1994, he wrote checks of $1.5 billion from his personal account, and $1.9 billion from his corporate account - with about 80% of the total moving between the two.

By May 24, court records show, Mr. Morken had a negative balance of $38.6 million in the two accounts. But a week later, an internal Firstar credit report recommended extending the rancher loans for another year.

Two days later everything ground to a halt, when a Firstar employee not involved directly with the Morken accounts alerted company officials to the high volume of overdrafts.

The accounts were shut down immediately, and the next day checks drawn on them began bouncing across the countryside. A week later, Mr. Morken was in bankruptcy court, with a trail of creditors desperate to get a piece of what was left.

Several Firstar employees connected with the accounts were fired.

Farm Credit Services of Southern Minnesota, which managed its own $5 million revolving credit line for Mr. Morken, sued both Mr. Morken and Firstar in a county court, and is seeking $19 million through the trustee suits.

Adventure Cattle investors sued Firstar in federal court in Iowa. Firstar sued Mr. Morken in Milwaukee federal court.

The bankruptcy also has sparked a flurry of smaller suits between banks and customers, as they scrap to get a piece of what's left.

In one case, Sprague National has sued for $562,000 deposited in First National Bank of Hoxie (Kan.) by Adventure Cattle participant Hoxie Feeders Inc. Sprague claims it had an overriding security interest on the Morken business, and is entitled to the money. But so far, the bankruptcy court has sided with the Kansas bank.

"We're just innocent bystanders who had no clue as to what was happening," said attorney Thomas Johnson, who is representing First National of Hoxie. "We took the money in good faith."

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