Two former executives of the now defunct insurance agency franchising firm, Brooke Corp., have been indicted on federal financial fraud charges, according to the U.S. Attorney’s Office in Kansas.
A federal grand jury in mid-November charged Robert D. Orr of Denver, Colo., and Leland G. Orr, Phillipsburg, Kan., with one count of conspiracy to defraud the Securities and Exchange Commission and three counts of making false statements in filings to the SEC, federal officials announced.
Robert Orr has also been charged with two more counts of making false statements in SEC filings and one count of bankruptcy fraud.
The Orrs were executives of Brooke Corp., a holding company headquartered in Overland Park and Phillipsburg, Kan., that was engaged primarily in insurance franchising, insurance agency financing and banking. Brooke Corp. owned a majority interest in Brooke Capital, Aleritas and Brooke’s Savings Bank.
Brooke Capital sold insurance agency franchises and provided bookkeeping and other support services for franchises. Aleritas sold the majority of loans it made to franchisees and typically remained responsible for loan servicing. The companies were known collectively as the Brooke Companies.
The current indictment alleges that in 2007 and 2008 the Brooke Companies experienced increasingly dire liquidity conditions and rapidly declining franchise financial health. In attempting to conceal financial problems, Brooke Companies’ management misrepresented the number of viable franchises, the health of Aleritas’ loan portfolio and other material financial information to the SEC, investors and lenders. They conspired to present a false aggregate picture of the Brooke Companies’ financial condition and thereby to obtain money, dividend payments and cash transfers for themselves, the indictment alleges.
If convicted, they face a maximum penalty of 20 years in federal prison and a fine up to $5 million on each count of making a false statement in SEC filings; and a maximum of five years and a fine up to $250,000 on each of the other counts.
The FBI investigated; Assistant U.S. Attorney Mike Warner is prosecuting.
The November 2012 indictment is the latest in a long line of actions against the company, which declared Chapter 11 bankruptcy and suspended most of its operations in October 2008. The companies were unable to reorganize in bankruptcy. The rapid collapse of the Brooke Companies had a “devastating regional impact as hundreds of its franchisees failed,” the SEC said. As a result of losses suffered on Aleritas loans, several regional banks also failed.
In May 2011, five Brooke Corp. executives, including the Orrs, agreed to settle previous charges of financial fraud brought against them by the SEC. Those charges related to hiding critical information from investors and conducting a financial fraud.
The SEC’s complaint charged violations of, among other things, the antifraud, reporting, record-keeping and internal controls provisions of the federal securities laws.
The SEC alleged that senior executives at Brooke Corp. and two subsidiaries – whose line of business was insurance agency franchising and providing loans to franchisees – 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.
In September 2007 Brooke Corp. was named in a lawsuit that alleged the company participated in fraud, negligence and violated the federal RICO Act (Racketeer Influenced and Corrupt Organizations Act). At that time, 12 franchise-related lawsuits had been filed against the company.
After Brooke declared bankruptcy in late 2008, hundreds of insurance franchises failed.
Topics Fraud
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