Ex-Sterling Lenders Receive Long Prison Terms for Fraud Scheme

Two former loan officers at Sterling Financial in Lancaster, Pa., have been sentenced to lengthy prison terms and ordered to pay $53 million in restitution for their role in a multi-year fraud scheme that led to massive losses at Sterling and ultimately forced the bank to sell itself.

The Securities and Exchange Commission said last week that a Pennsylvania court has sentenced Joseph M. Braas of Lititz, Pa., to 15 years in federal prison and sentenced Michael J. Schlager to 20 years after both pleaded guilty to orchestrating the fraud.

Braas and Schlager were loan officers at Equipment Finance LLC, a specialty lender to the logging industry that had been wholly owned by Sterling. In 2007, Sterling uncovered a fraud scheme at the lending unit that was designed to hide problem loans and had been going on for roughly five years. The scheme led to $281 million of charges that wound up wiping out half of Sterling's equity and erased three years of earnings. Soon after the scheme was discovered, Sterling was sold to PNC Financial Services Group (PNC).

The SEC filed the criminal case against Braas and Schlager in the U.S. District Court for the Eastern District of Pennsylvania. In January 2011, the SEC had settled a civil suit filed against Braas and Schlager in which the ex-lenders agreed to pay a combined $2.6 million in fines and were barred from ever serving as officers or directors of a publicly traded company.