U.S. Securities and Exchange Commission
Litigation Release No. 21957 / May 4, 2011
Accounting and Auditing Enforcement Release No. 3276 / May 4, 2011
SEC v. Robert D. Orr, Leland G. Orr, Michael S. Lowry, Michael S. Hess, Kyle L. Garst, and Travis W. Vrbas, Case No. 11-CV-2251 WEB/KGG (D. Kansas May 4, 2011)
SEC CHARGES SIX FORMER EXECUTIVES OF THE BROOKE COMPANIES WITH FINANCIAL AND DISCLOSURE FRAUD
The Securities and Exchange Commission today charged six former senior executives of Kansas-based Brooke Corporation and its other, publicly-traded subsidiaries, Brooke Capital Corporation, an insurance agency franchisor, and Aleritas Capital Corporation, a lender to insurance agency franchises and other businesses, with conducting an extensive financial and disclosure fraud. The Complaint alleges that in SEC filings and other public statements for year-end 2007 and the first and second quarters of 2008, senior executives at the Brooke companies misrepresented, among other things, the number of Brooke Capital franchisees and their financial health, the deterioration of Aleritas’ corresponding loan portfolio, and the increasingly dire liquidity and financial condition of the Brooke companies.
According to the SEC’s Complaint filed in federal court in Kansas, Brooke Capital’s former management inflated the number of franchise locations by including failed and abandoned locations in totals. They also concealed the nature and extent of Brooke Capital’s financial assistance to its franchisees, which included making franchise loan payments on behalf of struggling franchisees. Aleritas’ former management hid the company’s inability to repurchase millions of dollars of short-term loans sold to its network of regional lenders. They also sold or pledged the same loans as collateral to more than one lender, and improperly diverted payments from borrowers for the company’s operating expenses. Aleritas’ former management also concealed the rapid deterioration of the company’s loan portfolio by falsifying loan performance reports to lenders, understating loan loss reserves, and by failing to write-down its residual interests in securitization and credit facility assets.
The SEC’s Complaint charges the following former Brooke executives:
As alleged in the Commission’s Complaint, each of the defendants violated Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, and 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 aided and abetted violations by Brooke Corporation, Brooke Capital, and/or Aleritas of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. The Complaint also alleges that Robert Orr violated Exchange Act Section 16(a) and Rule 16a-3 thereunder; Robert Orr, Leland Orr, Lowry, Hess, and Garst violated Exchange Act Rule 13b2-2; Robert Orr, Leland Orr, Hess, Garst, and Vrbas violated Exchange Act Rule 13a-14 and aided and abetted violations by Brooke Corporation and Brooke Capital of Rule 13a-1; and Robert Orr and Hess aided and abetted violations by Aleritas of Exchange Act Rule 13a-11.
The Commission seeks permanent injunctions, civil penalties, and officers and director bars against each defendant, and disgorgement with prejudgment interest against Robert Orr, Leland Orr, and Lowry.
Robert Orr, Leland Orr, Lowry, Hess, and Vrbas agreed to settle the SEC’s charges without admitting or denying the allegations in the Complaint. These settlements are subject to approval by the Court. Each of the defendants consented to be permanently enjoined from violating or aiding and abetting all of the provisions that the Commission alleges they violated, and to officer and director bars. Lowry also consented to pay a $175,000 civil penalty and disgorgement of $214,500, with prejudgment interest of $24,004.91, Hess consented to pay a $250,000 civil penalty, and Vrbas consented to pay a $130,000 civil penalty. Robert Orr and Leland Orr consented to pay civil penalties and disgorgement in amounts to be determined by the Court.