FBI investigating bankrupt Brooke

The collapse of Brooke, a once high-flying insurance and finance enterprise, has caused economic ripples nationwide. The company’s demise has left thousands of insurance agents in the lurch — many have been forced to close their doors — and dozens of lenders with soured Brooke loans or securities on their books. Until its finances started unraveling earlier this year, publicly owned Brooke was one of the biggest franchisers of property and casualty insurance agencies in the United States, with about 900 locations.

The Kansas City Star
December 11, 2008

FBI investigating bankrupt Brooke

Dan Margolies

As allegations of fraud swirl around bankrupt Brooke Corp., the FBI has launched an investigation of the once-booming Overland Park-based franchiser and financier of insurance agencies.

FBI agents recently carted away “a substantial number of banker’s boxes” worth of documents, according to Albert Riederer, the court-appointed special master charged with untangling Brooke’s complicated finances.

Riederer, a former Jackson County prosecuting attorney and appeals court judge, said that the bureau had made an informal request for documents generated before his appointment as special master. He said that he and the lawyers and accountants helping him sort out the Brooke debacle were cooperating fully.

“I can tell you that they’ve asked for access to virtually all the records of the company,” Riederer said.

Bridget Patton, a spokeswoman for the FBI, confirmed that the FBI had begun an investigation but said it was in a preliminary stage and declined to comment further.

The collapse of Brooke, a once high-flying insurance and finance enterprise, has caused economic ripples nationwide. The company’s demise has left thousands of insurance agents in the lurch — many have been forced to close their doors — and dozens of lenders with soured Brooke loans or securities on their books.

Until its finances started unraveling earlier this year, publicly owned Brooke was one of the biggest franchisers of property and casualty insurance agencies in the United States, with about 900 locations.

At one time, the burgeoning Brooke empire boasted nearly 600 employees. The company’s payroll has been reduced by Riederer to a bare-bones crew of a dozen or so as the company winds down.

Founded in Phillipsburg, Kan., in 1986 by Robert Orr, Brooke originally aimed to provide small-town banks with competitive insurance services to sell to their customers.

It expanded a decade later, setting up a lending arm to finance the sale of Brooke agency franchises to aspiring entrepreneurs. In 1998, it moved its headquarters to Corporate Woods in Overland Park. In 2003 it went public.

Brooke and affiliate Brooke Capital Corp. filed for Chapter 11 bankruptcy in late October, hoping to conduct an orderly wind-down of operations while completing the sale of the insurance business to two Kansas businessmen. The would-be buyers, however, withdrew their offer shortly after they made it.

The FBI investigation comes amid a cascade of lawsuits by banks and other lenders against Brooke charging that the company and Orr fraudulently diverted funds for their own benefit.

Leading the charge has been The Bank of New York Mellon, which set off the chain of events leading to Riederer’s appointment as special master when it sued Brooke and Orr in September.

The suit charged that Brooke, at Orr’s direction, had misappropriated millions of dollars and then destroyed evidence to conceal its actions.

Orr, through his attorneys, Kansas City lawyers Brian Gaddy and Matt Geiger, has denied wrongdoing, saying that he personally pledged and lost millions of dollars — and his ownership of Brooke — trying to save the companies.

“The notion he somehow profited from the fall of Brooke is misguided, to say the least,” Geiger said.

The Bank of New York Mellon served as the so-called indenture trustee for promissory notes that Brooke franchisees executed in return for loans they received from Brooke.

Brooke then bundled the notes into “securitizations” that were sold to investors, who were secured by the income and assets of the franchisee borrowers.

Among the investors and lenders were United Bank and Trust of Marysville, Kan., which claims to have lost $5 million; Citizens Bank & Trust Co. of Chillicothe, Mo., which claims to have lost $9.5 million; First United Bank of Crete, Ill., which claims to have lost nearly $13 million; and a host of small banks in Kansas that bought participation interests in Brooke loans.

On Wednesday, The Bank of New York Mellon upped the ante when it filed an amended complaint fleshing out its original complaint with details about the extent of the alleged misappropriations.

According to the amended complaint, Aleritas Capital Corp., the Brooke financing arm formerly known as Brooke Capital Corp., diverted at least $3 million beginning in January 2008 that was supposed to be deposited with The Bank of New York Mellon.

The complaint lists more than half a dozen such incidents, with one of them occurring as recently as Aug. 29. Some of the money was allegedly diverted to Brooke Savings Bank, now Generations Bank, in Phillipsburg. Other funds were allegedly appropriated by Aleritas.

At a meeting on Sept. 3 in Overland Park with representatives of two investor banks, “Orr admitted misappropriation of funds properly directed to the securitizations,” the amended complaint states. It cites Orr as saying that he did it “with aforethought.”

“Orr’s justification was that he and the Brooke Parties were owed the money and would take it by any means,” the complaint states.

Some Brooke employees apparently were concerned with what was happening.

On Aug. 27, an Aleritas employee sent an e-mail to several top company officials asking why the proceeds from one loan were being sent to an entity that wasn’t involved in the loan payoff process. According to the complaint, Aleritas Vice President Mick Lowry, Orr’s nephew, responded that the misapplication of the proceeds was “a confidential and internal matter.”

Lowry’s lawyer, Austin, Texas, attorney Dan Byrne, said his client had nothing to hide and was “cooperating fully with all affected parties,” including the FBI.

He said Lowry, while not denying making the statement attributed to him by the complaint, was merely following instructions from Aleritas’ CEO to refer inquiries about the loan to the company’s lawyers.

The bank says that it learned of the alleged diversion of an additional $273,750 on Aug. 29 when a Brooke employee, “who became concerned at the propriety and legality of Brooke Capital’s dealings,” provided it with internal e-mails purporting to show Orr directing the misappropriations.

Attorneys for the bank on Thursday declined to identify the employee or to comment on the complaint, which they said spoke for itself.

It’s unclear whether the alleged diversions of money are the focus of the FBI’s inquiry, which encompasses both the company’s Overland Park headquarters and its processing center in Phillipsburg.

J. Dale Youngs, one of the lawyers working with Riederer, said that Riederer’s team had given the FBI “consensual access” to documents and records of various Brooke entities, including Aleritas.

“We did it in conjunction with what we understand is an investigation,” said Youngs, an attorney with Husch Blackwell Sanders. “And they’ve told us nothing more than that.”

To reach Dan Margolies, call 816-234-4481 or send e-mail to moc.ratsck|seilogramd#moc.ratsck|seilogramd.


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Risks: Federal Bureau of Investigation, FBI, Chapter 11, Fraud, Raining litigation, Banks, Securitization, Theft, United States, 20081211 FBI investigating

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