The SEC on Wednesday charged the leaders of the financial corporation "with hiding critical information from investors and conducting a financial fraud," according to a press release. See related story.
The firms include Brooke Corp. and two publicly traded subsidiaries, Brooke Capital Corp., an insurance agency franchisor, and Aleritas Capital Corp., a lender to insurance agency franchises and other businesses.
Those charged were:
*Robert D. Orr - founder and former chairman of the board of Brooke Corp., former CEO and chairman of the board of Brooke Capital, former CFO of Aleritas.
*Leland G. Orr - former CEO, CFO and vice chairman of the board of Brooke Corp. and former CFO of Brooke Capital
*Kyle L. Garst - former CEO, president and member of the board of Brooke Capital
*Michael S. Hess - former CEO and member of the board of Aleritas
*Michael S. Lowry - former CEO and member of the board of Aleritas
*Travis W. Vrbas - former CFO of Brooke Corp. and Brooke Capital
Robert Khuzami, director of the SEC's division of enforcement, stated in the release: "The unscrupulous senior corporate executives at Brooke Corporation 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."
The SEC charges include violations of the antifraud, reporting, record-keeping and internal controls provisions of the federal securities laws.
The complaint seeks permanent injunctions, officer and director bars and monetary remedies against the Brooke executives, the release reads.
Robert Orr, Leland Orr, Hess, Lowry and Vrbas agreed to settle the charges against them without admitting or denying the SEC's allegations.
The executives each consented to never serving as CEOs, CFOs or serving on a board of directors for a publicly traded company.
Those settling and what they agreed to pay include: Lowry: a disgorgement of $214,500, prejudgment interest of $24,004 and a $175,000 penalty; Hess: a $250,000 penalty; and Vrbas: a $130,000 penalty. Robert Orr and Leland Orr agreed to pay penalties and disgorgement in amounts to be determined by the U.S. District Court of Kansas.
The case against Garst has not been settled. Garst's attorney, Martin Berliner, of the Denver area, said the 56-page complaint was served to him just before lunch Wednesday.
"It's pretty dense. There are lots of allegations," he said Wednesday afternoon.
"It would be difficult to say what advice I would give him without reviewing the complaint. At this juncture it would be kind of premature," Berliner said. "Mr. Garst gave testimony toward the latter part of 2010, and the SEC has not made any overtures to us suggesting it would be agreeable to a settlement."
Given that the other executives have settled, Berliner suggested the SEC might be more "amenable" to a settlement from Garst, who lives in Overland Park.
"In SEC enforcement actions, offers of settlements must originate with defendants," said Kurt Gottschall, of Denver, the SEC's assistant regional director.
"As of the date of filing, Mr. Garst has not made any offers of settlement to the SEC," Gottschall said.
Berliner said the SEC charges are civil, meaning there is no jail time, unless the U.S. Attorney for Kansas decides to seek criminal charges.
The SEC action is a "civil injunctive proceeding" preventing the executives "from acting as officers or directors of public corporations at any time in the future," Berliner said.
Civil penalties are paid to the government, he said, and the disgorgement "for ill-gotten gains, go back to the people who were harmed."