US v. Joseph M. Brass, et al., Case No. 10-cr-00753-PD (E.D. Pa.)  On September 13, 2012, the SEC announced that Joseph M. Braas and Michael J. Schlager were sentenced in a criminal action in connection with a financial fraud.  Braas and Schlager were senior officers at Equipment Finance, LLC (“EFI”), formerly a commercial lender to the soft pulp logging industry and wholly-owned subsidiary of Sterling Financial Corp. (“Sterling”).  Brass was sentenced to 15 years in federal prison, and Schlager to 20 years.  Braas and Schlager were also each ordered to pay $53 million in restitution.  Braas and Schlager had each previously pleaded guilty to one count of conspiracy to commit mail fraud, and two counts of mail fraud, all affecting a financial institution.

The SEC filed a civil action against Braas and Schlager in January 2011, based on the same conduct alleged in the criminal case. Without admitting or denying the Commission’s allegations, Braas and Schlager agreed to settle the matter, and Final Judgments were entered as to each.  The SEC’s case involved the orchestration of a scheme using fraudulent underwriting and reporting practices to hide mounting losses and defaults within EFI’s commercial loan portfolio from Sterling’s senior management and auditors.  Braas and Schlager, inter alia, created fake loans for the purpose of making monthly payments on delinquent loans, altered loan documents to hide delinquent and fictitious loans, and used aliases for borrowers to avoid EFI’s maximum lending limitations.  They also lied to the internal and independent auditors using fraudulent accounting entries, fake collateral descriptions and appraisals, and fabricated UCC filings.  Because of the fraud, Sterling had to write off $281 million in receivables.