U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22046 / July 18, 2011
Accounting and Auditing Enforcement
Release No. 3304 / July 18, 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)
Judgments Entered Against Five Former Executives of the Brooke Companies for Financial and Disclosure Fraud
The Securities and Exchange Commission announced today that the United States District Court for the District of Kansas entered judgments, dated July 13, 2011, against five 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. Robert D. Orr, Leland G. Orr, Michael S. Lowry, Michael S. Hess, and Travis W. Vrbas, without admitting or denying the Commission's allegations, consented to judgments enjoining them from future violations of the federal securities laws, barring them from serving as officers or directors of public companies, and requiring the payment of disgorgement and penalties. The SEC 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, 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 positions held by the former Brooke executives were:
Robert D. Orr, founder and former chairman of the board of Brooke Corporation, former chief executive officer and chairman of the board of Brooke Capital, and former chief financial officer of Aleritas
Leland G. Orr, former chief executive officer, chief financial officer, and vice-chairman of the board of Brooke Corporation, and former chief financial officer of Brooke Capital
Michael S. Lowry, former chief executive officer and member of the board of Aleritas
Michael S. Hess, former chief executive officer and member of the board of Aleritas
Travis W. Vrbas, former chief financial officer of Brooke Corporation and Brooke Capital
The judgments enjoin each of the defendants from violating 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 from aiding and abetting violations 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 judgments further enjoin Robert Orr, Leland Orr, Lowry, and Hess from violating Exchange Act Rule 13b2-2; Robert Orr, Leland Orr, Hess, and Vrbas from violating Exchange Act Rule 13a-14 and from aiding and abetting violations of Rule 13a-1; Robert Orr and Hess from aiding and abetting violations of Exchange Act Rule 13a-11; and Robert Orr from violating Exchange Act Section 16(a) and Rule 16a-3 thereunder.
In addition to the injunctions, the judgments bar the defendants from serving as an officer or director of a public company. Lowry's judgment requires him to pay a $175,000 civil penalty and disgorgement of $214,500, with prejudgment interest of $24,004.91. Hess' judgment requires him to pay a $250,000 civil penalty, and Vrbas' judgment requires him to pay a $130,000 civil penalty. The judgments against Robert Orr and Leland Orr require them to pay civil penalties and disgorgement in amounts to be determined by the Court.