Two former executives of a Pennsylvania commercial lender have been sentenced to federal prison terms and ordered to pay $53 million each in restitution for orchestrating a financial scam over a five-year period, Securities and Exchange officials reported today.

Joseph M. Braas, 45, of Lititz, Pa., and Michael J. Schlager 49, of Lancaster, Pa. were senior officers at Equipment Finance LLC, formerly a commercial lender to the soft pulp logging industry and a wholly-owned subsidiary of Sterling Financial Corp., a publicly traded bank holding company based in Lancaster.

Judge Paul S. Diamond of U.S. District Court for the Eastern District of Pennsylvania sentenced Braas to 15 years in federal prison and Schlager to 20 years in prison, each followed by five years of supervised release. Braas and Schlager were also each ordered to pay $53 million in restitution for money stolen in the scam.

Braas and Schlager had each pleaded guilty to one count of conspiracy to commit mail fraud, and two counts of mail fraud, all affecting a financial institution.

The SEC originally filed a civil action against Braas and Schlager on Jan. 6, 2011, based on the same scam as in the criminal case. Without admitting or denying the SEC's allegations, Braas and Schlager agreed to settle the matter.

The SEC's complaint said that, from at least February 2002 until April 2007, Braas, EFI's vice president and COO, and Schlager, EFI's executive vice president, orchestrated a wide-ranging 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 were able to subvert essentially every aspect of EFI's loan process and internal controls by creating fictitious loans to make monthly payments on delinquent loans and altering loan documents to hide delinquent and fictitious loans, according to the SEC. The executives granted excessive deferrals and resets of delinquent loans to make them appear current, reassigned loan payments to unrelated accounts to fund payments on delinquent loans, and used aliases for borrowers to circumvent EFI's maximum lending limitations, the SEC said.

The SEC said  the two executives also deceived Sterling's internal and independent auditors through fraudulent accounting entries, false collateral descriptions and appraisals, fabricated UCC filings and by recruiting vendors to assist in the circumvention of loan confirmation procedures. Braas and Schlager caused EFI to report false financial information to Sterling, which from 2002 through 2006 filed quarterly and annual reports with the SEC containing false and misleading financial statements, the SEC said.

As a result of the fraud, Sterling ultimately charged off $281 million of EFI finance receivables, which represented a large majority of EFI's loan portfolio, and about 13 percent of Sterling's total loan portfolio during the period of the fraud.

-Jim McConville