The infamous Bernard L. Madoff stands accused of making off with $50 billion from some presumably very savvy investors. How he managed to dupe them and the Securities and Exchange Commission remains a mystery, subject to much speculation, and certainly some interesting congressional committee hearings down the road.

While investigators try to unravel how he managed to bilk so many in one of the largest Ponzi schemes in history, there appears to be little doubt that the people who were assigned to uncover those schemes before they got too far, failed miserably.

The failure falls squarely on the shoulders of the SEC, which indeed did look at Mr. Madoff's books. It appears he somehow sweet-talked his way through the audit, allowing him to continue to allegedly embezzle and ruin many, including charitable institutions.

Whether it was greed or ego, or a combination of the two, a lot of innocent people got hurt. One investor--Rene-Thierry Magon de la Villehuchet, a French aristocrat and investor who lost his life savings, as well as those of his family, friends and other investors--took his own life in late December.

One can question whether Mr. Madoff is feeling much remorse. Federal prosecutors tried to put him behind bars for allegedly attempting to hide some assets, without success. There remains strong sentiment among a few he allegedly swindled that he should sit in jail and rot.

However, at this time of economic distress, it appears the investment world is not alone in finding ways of bilking people.

Take, for instance, the demise of Brooke Corp., an insurance agency franchising outfit that seemed to have its hands in a lot of different cookie jars, which in the end left its franchisees empty-handed. The FBI is looking into the now failed company--not so much for bilking its franchise investor partners but for not transmitting premium funds to insurers, implied one regulator.

Brooke Corp. was founded in 1986 with the objective of helping producers set up their own franchise agency under the Brooke Insurance banner.

Besides operating the franchise business (primarily personal lines, property-casualty agencies) the corporation also dabbled in a life insurance company and owned a few funeral homes, with the idea that this would make a perfect conduit from its life business.

It also ran a financing unit to help agents secure the money they needed to get their businesses going. In turn, those loans were bundled and securitized--and we know what that did for the housing market.

According to several sources that are familiar with Brooke and several news accounts, the major problem with the company was its compensation scheme for its agent franchises. All fees and commissions were paid into Brooke in return for a monthly payment meant to cover the agent's costs and level out their earnings.

Sources, blog postings and other reports all seem to agree that the payments were far from adequate and never came close to paying the agencies what they earned.

The company was publicly traded on the American Stock Exchange, and its securities filings detailed a business that was heavily dependent on new franchise accounts (agents paid a franchise fee of $165,000). The house of cards fell apart when the hundreds of new agents coming into the business dwindled down to two during the first six months of last year.

The Overland Park, Kan.-based Brooke claimed it had 882 franchises as of December 2007, the bulk of which were in Texas, California, Florida and Kansas.

Its founder, Robert Orr, who retired, came back to save the firm he said he still believed in. He said in a statement that he and his family invested $12 million in the company, and he is on the hook for another $25 million he says he guaranteed. He has filed for personal bankruptcy.

Brooke Corp. may have been doomed to fail, one regulator opined. Unlike Mr. Madoff, Brooke's founder, Mr. Orr, got caught up in the scheme's failure and is paying a price. Like Mr. Madoff, however, his business scheme has engulfed and victimized hundreds of others.

Mr. Madoff is being prosecuted for a crime. Brooke Corp. is being investigated. Will the company be held criminally accountable? That remains to be seen.

Since we are talking about insurance agencies, one would think insurance regulators would have an interest. Unfortunately, they don't. A franchise is considered an internal contract matter and doesn't fall under their jurisdiction, explained one regulator.

Several regulators sent out notices to make consumers aware of problems at Brooke when they went bankrupt, but as for agent franchisees, they were on their own.

As one former Brooke agent put it, he should have looked more closely at the contract before signing it, but didn't. It's his fault, he said, adding that he should have known better. This again echoes the laments of Mr. Madoff's victims.

Which leaves one with this question to ponder: While the debate rages over state versus federal regulation of insurers, as to which would better serve consumers and carriers, who is looking out for agents?

The moral to the story is, I guess, that like Mr. Madoff's investors, you're on your own, kid.

Special Reports /

When It Comes To Frauds, Agents Are On Their Own

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