Two EFI Officials Sued Over Financial Fraud
A complaint filed by the Securities and Exchange Commission (SEC) in US district court for the Eastern District of Pennsylvania has charged two senior officers of Equipment Finance, LLC (EFI) with perpetrating “a pervasive and wide-ranging scheme.”
SEC’s lawsuit alleged that from 2002 to 2007, Joseph M. Braas of Lititz, Pennsylvania, and Michael J. Schlager of Lancaster, Pennsylvania, have fraudulently underwritten and reported several loan processes of EFI, ruining internal controls of the company and hiding compounded losses of EFI’s loan portfolio from the auditors.
Braas, EFI’s Vice President and Chief Operating Officer, and Schlager, its Executive Vice President, allegedly made monthly payments on delinquent loans through false documents that appeared current with excessive deferrals of delinquent loans. Braas and Schlager succeeded in circumventing EFI’s limitations on lending by using aliases for borrowers, the SEC said.
The SEC further alleged that EFI’s auditors were misled by Braas and Schlager through falsified accounting entries, collateral descriptions, appraisals, and UCC filings. The EFI officils also hired vendors to circumvent loan confirmation procedures of Sterling, the SEC added.
EFI, a Lancaster-based subsidiary of Sterling Financial Corp. and formerly a lender to the soft pulp logging industry, has reported a false financial statement to Sterling as a consequence of the financial fraud. Sterling subsequently wrote off $281 million of EFI finance receivables that represented 85 percent of EFI’s loan portfolio and nearly 13 percent of Sterling’s overall loan portfolio as the fraud went on, the SEC said, referring to the reports submitted by Sterling from 2002 to 2006.
The financial fraud in EFI earned for Braas $1.1 million and for Schlager at least $822,000, according to the lawsuit of SEC.
Braas and Schlager, pleading guilty to one count of conspiracy and two counts of mail fraud, conceded to SEC’s settlements. SEC’s lawsuit sought to bar Braas and Schlager from practicing their profession in any public reporting companies. Braas would pay a total of $1,489,024 while Schlager would pay $1,121,302, all in disgorgement and prejudgment interest.