Malpractice, aiding in fraud alleged in suit against Brooke Corp. auditors

Look up the PowerRating of BXXXQ and see how it has performed over the past week as well as the current proprietary PowerRating.

Nov 27, 2008 (The Kansas City Star - McClatchy-Tribune Information Services via COMTEX) -- BXXXQ | Quote | Chart | News | PowerRating -- In what appears to be the first lawsuit against Brooke Corp.'s auditors, an Iowa financing group alleges that a Kansas accounting firm committed professional malpractice and aided and abetted fraud.

NCMIC Finance Corp. contends that it relied on unqualified audit opinions issued by Summers, Spencer & Callison, a Topeka-based CPA firm with an office in Overland Park, when it bought pieces of loans that Brooke made to its insurance franchisees.

The suit, filed Tuesday in Johnson County District Court, alleges that Summers, Spencer knew or should have known that "Brooke's deteriorating financial condition, fraudulent loan practices and substandard loan servicing practices relating to loans which it sold to third parties ... had existed for years."

"Although (NCMIC) was unaware of the problems within Brooke, (Summers, Spencer), as Brooke's auditors, had substantial access to information concerning Brooke's true financial condition, its internal controls, and its lending practices," the suit states.

"Nevertheless, (Summers, Spencer) repeatedly certified that Brooke's internal controls were sufficient and that Brooke's financial statements truly reflected its financial condition when, in fact, they did not."

Officials of Summers, Spencer on Wednesday declined to comment on the suit.

Brooke, a publicly owned franchisor of insurance agencies, and subsidiary Brooke Capital Corp., in late October sought Chapter 11 protection. Another affiliate, Brooke Investments Inc., declared bankruptcy a few weeks later.

The filings came after months of mounting financial and legal difficulties, the latter beginning when Bank of New York Mellon accused Brooke of fraudulently diverting funds and sued it in September.

Since then, Brooke has faced a rising tide of litigation by banks and other institutions that loaned it money or bought loans made by Brooke to its franchisees.

Following the collapse of a post-bankruptcy deal to sell its insurance business to a pair of Kansas businessmen, Brooke has been in a wind-down mode. The Chapter 11 trustee, Albert Riederer, earlier this month let go of nearly all of its remaining employees in Overland Park and Phillipsburg, Kan.

Until its finances started disintegrating, Brooke was one of the biggest franchisers of property and casualty insurance agencies in the U.S., with about 900 offices. Since the bankruptcy filing, nearly all of the franchise relationships have been terminated.

Brooke also lent money to its franchisees. Many of the loans, or pieces of the loans, were sold directly to investors or bundled into securities and then sold to investors.

NCMIC, an affiliate of the nation's largest insurer of chiropractors, says it bought franchisee loans from Brooke and also made loans directly to various Brooke affiliates. It says it learned only in May 2008 that many of the franchisee loans were delinquent and that Brooke affiliate Aleritas Capital Group had been making up the payment shortfalls.

"Unfortunately," said Rick Lombardo, NCMIC's attorney, "the whole Brooke situation caused a lot of people to lose a lot of money and we're just trying to recover some of it."

To reach Dan Margolies, call 816-234-4481 or send e-mail to dmargolies@kcstar.com.

To see more of The Kansas City Star, or to subscribe to the newspaper, go to http://www.kansascity.com. Copyright (c) 2008, The Kansas City Star, Mo. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index