Brooke Insurance Franchise Executives Settle SEC Fraud Charges

May 16, 2011

Five executives of the failed Kansas-based insurance agency franchise firm Brooke Corp. have agreed to settle charges of financial fraud brought against them by the Securities and Exchange Commission.

Charges against a sixth Brooke executive have not been settled.

The SEC alleges that senior executives at Brooke Corp. and its franchising and lending subsidiaries misrepresented their deteriorating financial condition in filings to investors and other public statements in 2007 and 2008. Meanwhile, behind the scenes they engaged in various undisclosed schemes to meet almost weekly liquidity crises, and falsified reports and made accounting maneuvers to conceal the rapid deterioration of the loan portfolio.

“The unscrupulous senior corporate executives at Brooke Corp. orchestrated a massive scheme to conceal the company’s deteriorating financial condition through virtually any means necessary, including reporting inflated asset values, double-pledging collateral, and diverting funds for improper uses,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “The fallout from their fraud had a devastating impact on the livelihood of hundreds of insurance franchisees … and on the balance sheets of regional banks and other lenders.”

The SEC’s complaint, filed in federal court in Kansas, named six executives at Brooke Corp. and its two publicly traded subsidiaries – Brooke Capital Corp. (franchisor) and Aleritas Capital Corp. (lender):

  • Robert D. Orr – founder and former chairman of the board of Brooke Corp., former CEO and chairman of Brooke Capital, former CFO of Aleritas.
  • Leland G. Orr – former CEO, CFO, and vice chairman of Brooke Corp., and former CFO of Brooke Capital.
  • Kyle L. Garst – former CEO, president, and member of the board of Brooke Capital.
  • Michael S. Hess – former CEO and member of the board of Aleritas.
  • Michael S. Lowry – former CEO and member of the board of Aleritas.
  • Travis W. Vrbas – former CFO of Brooke Corp. and Brooke Capital.

According to the SEC, Brooke Capital’s former management inflated the number of franchise locations, and concealed that the financial assistance to franchisees was so burdensome that Robert and Leland Orr secretly borrowed funds received from Brooke insurance customers to pay operating expenses. That money was supposed to be held in trust for payment of insurance premiums. They also hid Brooke Capital’s inability to timely pay funds owed to profitable franchisees and creditors.

Aleritas’ former management hid its inability to repurchase millions of dollars of short-term loans sold to a network of regional lenders, according to the SEC’s complaint. They sold or pledged the same loans as collateral to multiple lenders and improperly diverted payments from borrowers for operating expenses. The former executives also falsified loan performance reports to lenders, understated loan loss reserves, and failed to write-down residual interests in securitization and credit facility assets, the SEC said.

In October 2008, the now-defunct Brooke Corp. declared Chapter 11 bankruptcy and suspended most operations. Reorganization failed, causing hundreds of franchisees and several regional banks to go under.

Robert Orr, Leland Orr, Hess, Lowry and Vrbas agreed to settle the charges of violating federal securities laws without admitting or denying the allegations. The settlements are subject to the approval of the U.S. District Court for the District of Kansas.

The executives each consented to orders of permanent injunction and permanent officer and director bars.

Lowry agreed to pay a disgorgement of $214,500, prejudgment interest of $24,004, and a $175,000 penalty. Hess agreed to pay a $250,000 penalty, and Vrbas agreed to pay a $130,000 penalty. Robert Orr and Leland Orr agreed to penalties and disgorgement in amounts to be determined by the court.

The SEC’s case against Garst continues.

Topics Fraud Abuse Molestation Kansas

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