Frank Morgan, a prominent Kansas City banker and realty developer, was indicted Thursday along with three associates on charges of defrauding the federal government.

Mr. Morgan, I.I. Ozar, and Sherman Dreiseszun allegedly fixed office rental bids submitted to the General Services Administration in a scheme involving another area developer, Larry Bridges.

Stiff Potential Penalties

If convicted on all counts, Mr. Morgan, 65, would face a maximum sentence of 35 years in prison and $3.25 million in fines. A lawyer for Mr. Morgan declined to comment.

The 10-count indictment came as Mr. Morgan, Mr. Dreiseszun, and Mr. Ozar are petitioning regulators for permission to merge their nine banks -- many of them ailing -- into a $4 billion-asset banking company. The proposed holding company would be the third largest headquartered in the Kansas City area.

Mr. Morgan, who is based in Overland Park, Kan., also owned Home Savings Association, a $2.5 billion-asset thrift in Kansas City, Mo., that failed 18 months ago. The failure cost the Resolution Trust Corp. at least $600 million. The fraud charges are unrelated to Mr. Morgan's banking or thrift activities.

The indictment is another strange twist in the career of this publicity-shy entrepreneur, whose exploits made him a Kansas City legend.

Skyline Entrepreneur

Among his trophies are some of the city's tallest skyscrapers, including the million-square-foot AT&T Town Pavilion, the 44-story One Kansas Place, and the 30-story Walnut Building.

"If it hadn't been for Frank Morgan, the skyline of Kansas City would look a lot different," said Jim Maag, executive director of the Kansas Bankers Association.

But behind the glittering edifices is an empire in disarray.

Two Morgan associates have pleaded guilty to fraud charges in connection with the failure of another area thrift.

A Crushing Load of Sour Loans

And a computer study prepared by W.C. Ferguson & Co., Irving, Tex., for the American Banker shows that several banks controlled by him and his associates are in deep trouble. Combined, their nine banks had a crushing 27% ratio of nonperforming assets to gross loans at March 31, according to the Ferguson study. Expert say a 10% ratio often is fatal.

Mr. Morgan has said he wants to create Kansas and Missouri holding companies that in turn would come under a newly formed interstate bank holding company.

The banker-developer and his partners plan to infuse $27 million of capital into the proposed company's Missouri operations, encompassing five banks. It is unclear whether that infusion would be adequate, and it's far from certain whether regulators would approve the transaction.

Collusion Alleged in 3 Bids

"They've got one heck of a job ahead," said Kansas City bank consultant Jerry Swords.

The indictment alleges that Mr. Morgan and his three associates colluded on bids submitted to the GSA three times from June 1991 to February 1992. The charges were announced by the U.S. Attorney's office for the Western District of Missouri.

The four developers, who operated through jointly controlled partnerships, allegedly conspired to fix rents on office space that the GSA was seeking on behalf of the Internal Revenue Service.

While it is not yet clear how the criminal indictments might affect the merger application, some experts believe that regulators won't necessarily bar the door.

"I don't think this will have any negative effect on the merger plan because they resigned as directors and the alleged offenses had nothing to do with financial institutions," said Kansas City bank consultant William Mills.

Trio Quit Bank's Boards

Mr. Morgan, Mr. Dreiseszun, and Mr. Ozar quit their director's posts after filing merger plans Aug. 24 with the Federal Reserve Bank of Kansas City.

The proposed Kansas holding company would comprise Industrial State Bank and Security Bank, both of Kansas City; Mission Bank, Mission; and Valley View State Bank, Overland Park.

The Missouri holding company would comprise Metro North State Bank and Merchants Bank, both of Kansas City; First Bank of Gladstone; Bank of St. Joseph; and Citizens Bank and Trust Co., Smithville.

Some of the banks have extremely high concentrations of problem assets, according to the Ferguson study. At March 31, Metro North had a 41.6% ratio of nonperforming assets to gross loans; Bank of St. Joseph, 39.8%; and First Bank of Gladstone, 31.4%.

John O. Huston, a former Mellon Bank Corp. officer who heads Merchants Bank, said several affiliates lent money to the same borrowers. Merging the banks would ease loan workouts, he said.

Though he would not comment on whether the entrepreneurs who obtained loans from Morgan banks were realty developers, Mr. Huston said: "Those with a burning desire to become financially successful, having started from very little, have made it with our help. That's why our asset quality is less than that of our competitors."

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