(CN) - A pair of insurance executives must pay more than $1.3 million in disgorgement and civil penalties for securities fraud, a Kansas federal judge ruled.
The Securities and Exchange Commission sued Robert and Leland Orr in May, along with four other senior managers with Kansas-bases Brooke Corp. and subsidiaries Brooke Capital Corp., an insurance agency franchiser, and Aleritas Corp., a company that financed loans to Brooke's franchisees.
Regulators spelled out 15 different sections of alleged misrepresentations and misconduct, and obtained injunctions against the Orrs in July. The executives consented to the orders and agreed to pay disgorgement and civil penalties.
In its motion for disgorgement, the SEC attributed $4.5 million in profits to the Orrs' holding company from the last quarter of 2007 up to the company's 2008 bankruptcy filing.
"Robert Orr received at least $771,147.27, and Leland Orr received at least $270,000, in dividends and other payments from Brooke Holdings, Inc.," the SEC said. "During this time period, Robert Orr and Leland Orr knew that the Brooke Companies' financial condition had been materially misstated in the 2007 Forms 10-K for Brooke Capital and Brooke Corporation, the first and second quarter 2008 Forms 10-Q for Brooke Capital, Aleritas, and Brooke Corporation, and other public statements as alleged herein."
Though the Orrs claimed that the withdrawals were used to pay taxes on behalf of their family's company income, precedent dictates that "the manner in which [the defendant] chose to spend the illegally obtained funds has no relevance to the disgorgement calculation," according to the court.
U.S. District Judge Sam Crow also refused to reduce the amount of disgorgement "based on the value of collateral released by BHI, their personal guarantees, the subsequent personal judgments against them, and the legal fees incurred as officers and directors of Brooke Corporation in dealing with the failed Brooke Capital and Aleritas."
The Orrs failed to tie these amounts to direct transaction costs, Crow said.
The court also "wholly and summarily rejects" the Orrs' claims that they acted in good faith to challenge the civil penalties calculation.
"Accepted as true, the allegations of the complaint are more than sufficient to establish that the Orrs violated securities laws with deceit and with a deliberate or reckless disregard of regulatory requirements," Crow wrote. "Because the defendants also agreed they could not argue their actions did not violate the securities law as alleged in the complaint, this court will not recognize any argument running amiss of that agreement."
Several insurance agencies filed a 2009 federal complaint against Aleritas in Kansas City, claiming the company took kickbacks and inflated commissions in selling and reselling insurance franchises for Brooke Corp.
"Unlike a traditional franchise network, the Brooke entities did not want their franchise agents to succeed," the complaint stated. "Instead, the success of the Brooke entities, including defendant, relied on the failure of its franchise agents such as plaintiffs."
Bank of New York Mellon also accused Robert Orr and several Brooke entities of misappropriating "millions of dollars" from trust accounts in a 2008 federal complaint in the same court.
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