U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21797 / January 6, 2011
Accounting and Auditing Enforcement Release No. 3223 / January 6, 2011
Securities and Exchange Commission v. Joseph M. Braas and Michael J. Schlager, Case No. 11-cv-0087-PD (E.D. Pa.)
SEC CHARGES FORMER OFFICERS OF STERLING FINANCIAL CORP. SUBSIDIARY FOR CONDUCTING FINANCIAL FRAUD
The Securities and Exchange Commission announced that, on January 6, 2011, it filed a civil action in the United States District Court for the Eastern District of Pennsylvania against Joseph M. Braas, of Lititz, Pennsylvania, and Michael J. Schlager, of Lancaster, Pennsylvania. The Commission’s complaint alleges that Braas and Schlager, two senior officers at Equipment Finance, LLC (“EFI”), formerly a commercial lender to the soft pulp logging industry and wholly-owned subsidiary of Sterling Financial Corp. (“Sterling”), conducted a financial fraud that lasted over five years. Sterling was a publicly traded bank holding company based in Lancaster, Pennsylvania. Without admitting or denying the Commission’s allegations, Braas and Schlager have agreed to settle the matter. The settlements are pending final approval by the court.
The Commission’s complaint alleges that, from at least February 2002 until April 2007, Braas, EFI’s Vice President and Chief Operating Officer, and Schlager, EFI’s Executive Vice President, orchestrated a pervasive and wide-ranging scheme using fraudulent underwriting and reporting practices to hide mounting losses and defaults within EFI’s commercial loan portfolio from Sterling’s senior management and auditors.
The Commission further alleges that Braas and Schlager were able to subvert virtually every aspect of EFI’s loan process and internal controls. They created fictitious loans for the purpose of making monthly payments on delinquent loans, altered loan documents to hide delinquent and fictitious loans, granted excessive deferrals and resets of delinquent loans to make them appear current, reassigned loan payments to unrelated accounts to fund payments on delinquent loans, and used aliases for borrowers to circumvent EFI’s maximum lending limitations. They also deceived Sterling’s internal and independent auditors through fraudulent accounting entries, false collateral descriptions and appraisals, fabricated UCC filings, and by recruiting vendors to assist in the circumvention of loan confirmation procedures.
As alleged in the complaint, Braas and Schlager caused EFI to report false financial information to Sterling which, in turn, from 2002 through 2006, filed quarterly and annual reports with the Commission containing materially false and misleading financial statements. As a result of the fraud, Sterling ultimately charged off $281 million of EFI finance receivables, which represented a large majority of EFI’s loan portfolio, and approximately 13 percent of Sterling’s total loan portfolio during the period of the fraud.
Braas and Schlager have consented to the entry of orders permanently enjoining them from violating Section 17(a) of the Securities Act of 1933; Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5 and 13b2-1 thereunder; and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13 thereunder. The orders will bar Braas and Schlager from serving as officers or directors of a public reporting company. Braas will also be ordered to pay disgorgement and prejudgment interest of $1,489,024, and Schlager ordered to pay disgorgement and prejudgment interest of $1,121,302. In view of each defendant’s agreement to pay restitution in conjunction with his guilty plea in a related criminal case filed by the U.S. Attorney’s Office for the Eastern District of Pennsylvania [USA v. Braas, et al., Crim. No. 10-cr-00753-PD (E.D. Pa. Nov. 18, 2010)], the ordered amounts shall be deemed satisfied upon the entry of a restitution order in the criminal case that is equal to or greater than the amounts ordered in the Commission’s case.
The Commission acknowledges the assistance and cooperation of the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the Federal Bureau of Investigation.