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Aleritas Capital Accused of Massive Fraud|Selling & Reselling Insurance Franchises

KANSAS CITY, Kan. (CN) - More than 100 plaintiffs, many of them insurance agencies, say Aleritas Capital Corp. defrauded them by taking kickbacks and inflated commissions in selling and reselling insurance franchises for its corporate parent, Brooke Corp. "Unlike a traditional franchise network, the Brooke entities did not want their franchise agents to succeed. Instead, the success of the Brooke entities, including Defendant, relied on the failure of its franchise agents such as plaintiffs," according to the federal complaint.

Aleritas, fka Brooke Credit Corp., "is a subsidiary of Brooke Corporation," according to the complaint. "Its sole purpose is to lend money to individuals and businesses such as Plaintiffs for the purchase of insurance agencies from Brooke Corporation or one of its affiliates or subsidiaries. ...

"Over 50% of the Brooke entities revenue was earned from transaction fees related to the purchase of agencies from third parties and the sale of the same agencies to franchise agents such as Plaintiffs. The largest portion of the transaction fees came from Consulting Agreements and BAPs [Buyers Assistance Plan]. In order to increase transaction fees, the Brooke entities including Defendant, artificially inflated the value of the agencies sold to Plaintiffs. The higher the value of the agencies, the higher the Franchise Fees, Consulting Fees, BAPs and other fees they could charge Plaintiffs. Moreover, the more franchise failures meant the more times the Brooke entities could resell the same agencies and generate additional transaction fees. Some agencies were sold multiple times by the Brooke entities.

"The Brooke entities fraud in overstating the value of the agencies and taking kickbacks from the sellers of the agencies ensured that Plaintiffs would rarely, if ever, cash flow. As a result, Plaintiffs either lost their agencies back to the Brooke entities or went deeper into debt to Defendant.

"At the height of its success, the Brooke franchise network had over 750 franchise locations in more than 30 states. In order to perpetuate the fraud, the Brooke entities had to continue to generate transaction fees. This meant continuing sell or re-sell agencies to franchise agents such as Plaintiffs. By 2006, suspicions about Brooke's fraud began to grow and the pace of selling agencies began to slow down."

The complaint continues: "Start up agents were required to sign a Franchise Agreement similar to existing agents and pay a franchise fee in excess of $150,000. Defendant provided the start up agents with financing for the franchise fees and operating expenses. After getting the start up agents to sign the documents and borrow the funds, the Brooke entities never provided the services they promised. Office locations were delayed or never provided. The Brooke entities did not provide support services, insurance company appointments and training. As a result, the startup agents went into debt to Defendant and had no chance to succeed.

"By 2008, the sale of agencies by the Brooke entities essentially ended and Brooke imploded. On October 28, 2008, Brooke Corporation and Brooke Capital Corporation filed bankruptcy in the United States District Court of the District of Kansas. Defendant was suspiciously kept out of bankruptcy.

"By early to mid 2008, the Brooke entities' fraud began to be uncovered by multiple parties, including the FBI and SEC. Around this time, Plaintiffs learned information that indicated that Defendant had sold, transferred or assigned all or portions of their loans to undisclosed third parties through various transactions including loan participation and securitization agreements. The Agreements for Advancement of Loan state that Aleritas 'may assign or delegate all or any part of its rights, title, interest or obligations in and to this agreement or under any loan document to one or more persons without the consent of the borrower.'

"However, no one ever informed Plaintiffs that their loans had been sold before Brooke's downfall. Up until the summer of 2008, Plaintiffs continued to get monthly reports from the Brooke entities indicating loan payments were being made to Defendant. Despite any sale, transfer or assignment of Plaintiffs' loans by Aleritas, any entity that holds Plaintiffs' loans are subject to Plaintiffs' claims and defenses against Defendant and the other Brooke entities.

"Plaintiffs' primary source of revenue is insurance commissions. By August 2008, the Brooke entities stopped paying commissions. However, Plaintiffs were still charged for their fraudulent loans. In late October 2008, the Special Master appointed to operate the Brooke entities, Albert Reiderer, released Plaintiffs from their Franchise Agreements. However, since that time Plaintiffs have not received the majority of their commissions. Moreover, Plaintiffs have continued to be charged for the fraudulent loans made by Defendant.

"Since Brooke's implosion, Plaintiffs have been contacted by various lending institutions who claim to own their loans. These institutions have attempted to collect on the loans that they knew or should have known were fraudulent. The collection efforts have included, but are not limited to, interference with Plaintiffs' agreements with various insurance companies for commissions. Specifically, the lending institutions have attempted to have the insurance companies send Plaintiffs' commissions to them."

Plaintiffs seek damages for fraud, concealment, misrepresentation and civil RICO violations. They are represented by Matthew Pearson of Gravely & Pearson of San Antonio, Texas.

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