An Ontario Securities Commission (OSC) hearing panel has approved a $12.5-million settlement with troubled lender Home Capital Group Inc. (HCG) and a trio of its former executives on Wednesday to resolve allegations that they didn’t properly disclose the reasons behind a decline in mortgage originations, including suspected fraud among certain mortgage brokers.
Under the terms of the settlement, HCG will pay $10 million, its former CEO Gerald Soloway will pay an administrative penalty of $1 million, and former chief financial officer, Robert Morton and Martin Reid, the firm’s former president, will each pay an administrative penalty of $500,000. The firm will also pay $500,000 in costs.
The OSC indicates that the $10 million paid by HCG will go to investors as will half of the $2 million ordered against the three executives. In total, investors will receive $11 million.
Along with the monetary sanctions, HCG also agreed to conduct a review of its continuous disclosure practices and to report to both its board and OSC staff within one year; Soloway is prohibited from serving as an officer or director for four years; and Morton and Reid are prohibited to do the same for two years each.
The settlement resolves allegations that the company failed to comply with its continuous disclosure obligations, including making misleading statements to investors about the causes of a decline in new mortgage originations in its financial statements and in an earnings call in 2015. In settling the case, the company and the executives admitted to violations of securities rules.
“From May 2015 until July 2015, HCG misled its shareholders as to the immediate and ongoing causes of the decline in originations,” the settlement states. “Internally, HCG knew it had terminated three underwriters, two brokerages and 30 brokers because it had discovered falsified loan applications in its broker channels… The termination of brokerages and brokers caused an immediate drop in originations because certain of these brokers had historically referred significant volumes of business to HCG.”
In addition, the settlement says the firm knew that changes to its internal control structure were required due to the broker fraud and that these changes led to some brokers using other lenders because of increased processing times at HCG.
Yet, the firm, in both its filings and on an earnings call, attributed the decline in originations to other factors, such as seasonality, a harsh winter, macroeconomic conditions, along with an ongoing review of its business.
“If public companies are aware of events that impact the performance of their business, they must disclose that information to investors, and they must do so in a manner that is not misleading,” says Huston Loke, director of corporate finance at the OSC, in a statement. “Disclosure requirements are a cornerstone of our investor protection regime and are essential to fair and efficient markets. When companies or their management fail to comply, we will take action.”
The OSC also notes that HCG has also entered into a settlement agreement in a related class-action lawsuit and that both deals are conditional upon the approval of the other.
The hearing to consider approval of the class-action settlement is scheduled for Aug. 21.
“Pursuant to the terms of the settlement agreement with the OSC, Home Capital will not be making any further statements on this matter outside of the approval proceedings,” HCG says in a statement.
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