BMO Nesbitt Burns Inc. has agreed to pay a $3 million penalty and $300,000 in costs to settle the case with the Ontario Securities Commission concerning the investment dealer’s underwriting of failed U.S. mortgage lender FMF Capital Group Ltd.

The OSC approved the settlement agreement on Wednesday. The settlement includes a reprimand for the firm, concerning allegations that its due diligence in the FMF underwriting was inadequate, and therefore, contrary to the public interest.

FMF went public in early 2005, raising $197.5 million for the company, generating $11.3 million in underwriting fees, of which $4.4 million went to Nesbitt as lead underwriter (it also received an additional $659,895 on the sale of the subordinated notes). After the IPO the company’s units never traded above their issue price, and the company soon went out of business.

As part of the settlement, the two sides agree that the firm’s due diligence “did not comply with reasonable underwriting practices”. The settlement says that the firm should have: followed up on the declining premiums and declining gain on sale margins experienced by FMF Capital and its competitors; conducted further testing of the distributable cash flow model prepared by FMF; discussed the results of the regulatory due diligence memorandum with the participating underwriters; ensured that the FMF Capital loan files reviewed by Nesbitt’s agents were not selected solely by FMF Capital; and, contacted institutional loan purchasers who purchased loans from FMF Capital.

In the settlement, Nesbitt says that it proceeded with the FMF offering in good faith, “but nonetheless accepts that some aspects of its conduct were not consistent with reasonable underwriting practices”. Nesbitt maintains that FMF certified its disclosure in the prospectus, and that it relied on the company’s information. It also co-operated fully with the investigation, and revised its underwriting practices following an internal review.

IE