Five executives of Brooke Corp., a failed Kansas-based insurance agency franchise firm, have agreed to settle charges of financial fraud brought against them by the Securities and Exchange Commission. At press time, the charges against a sixth Brooke executive hadn’t been settled. The SEC charged the six executives with hiding critical information from investors and conducting a financial fraud. Each of the executives who pled guilty consented to orders of permanent injunction and permanent officer and director bars. They also agreed to pay penalties and disgorgement.
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. The executives were engaged in various undisclosed schemes to meet almost weekly liquidity crises, but failed to disclose any of this. The reports that were filed were false reports and described accounting maneuvers used to conceal the rapid deterioration of the loan portfolio. It should be noted that the Brooke companies are no longer in business. Robert Khuzami, director of the SEC’s Division of Enforcement, had this to say:
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. The fallout from their fraud had a devastating impact on the livelihood of hundreds of insurance franchisees that depended on Brooke and on the balance sheets of regional banks and other lenders, all of whom mistakenly relied on the good faith and honesty of these executives.
In October 2008, Brooke Corp. declared Chapter 11 bankruptcy and suspended most of its operations. But the companies were unable to reorganize in bankruptcy. According to the SEC, the rapid collapse of the Brooke Companies had a “devastating regional impact as hundreds of its franchisees failed.” As a result of losses suffered on Aleritas loans, several regional banks also failed. The SEC’s complaint charges violations of, among other things, the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws. The government’s complaint sought permanent injunctions, officer and director bars, and monetary remedies against the Brooke executives.
Source: Insurance Journal
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