Regulator OK’s $12.5-million settlement in HCG case

Alternative lender and then-executives agree to pay penalties for violating law

An Ontario Securities Commission panel on Wednesday approved a $12.5-million settlement in which Home Capital Group Inc. and three of its former executives admitted the alternative lender failed to properly disclose the discovery of fraud within its residential mortgage business.

The three executives — company founder and then-chief executive Gerald Soloway, then-CFO Robert Morton and then-president Martin Reid — were all present at Wednesday’s hearing and were personally reprimanded by the three-member commission panel, chaired by Grant Vingoe.

“Disclosure of material changes by a reporting issuer is not a discretionary decision for management, but a regulatory requirement,” Vingoe said, adding that delayed disclosure “poses a fundamental risk that management will postpone the release of the information in the hopes it can manage itself out of the hole.”

According to the agreed facts, Home Capital learned something was amiss in its residential mortgage business in mid-June 2014 and launched an internal investigation. While that inquiry unearthed fraudulent income documentation on numerous mortgages, Home Capital and its then-senior leadership admitted they violated Ontario securities law by waiting too long to disclose the investigation and its outcome.

As part of the settlement, Home Capital agreed to pay $10 million as a penalty and $500,000 in costs. Soloway agreed to a $1-million penalty and a ban on serving as an officer or director of an Ontario company regulated by the OSC for four years. Morton and Reid each agreed to a $500,000 penalty and two-year bans on serving as an officer or director.

The settlement requires that $11 million of the proceeds be used to fund part of a proposed $29.5-million settlement in a related class action lawsuit, with all those funds destined for class members, and not lawyers fees.

The class action settlement also requires the approval of an Ontario Superior Court judge. A hearing in that matter is slated for Aug. 21.

The OSC confirmed that all the funds connected with the regulatory settlement reached Wednesday have been collected.

The problems at Home Capital came to the attention of the company’s senior leadership in mid-2014. In August 2014, the lender launched a private, internal investigation. It wrapped up in February 2015, and concluded that some Home Capital underwriters were falsely documenting that they had verified the income of mortgage applicants. It found that this was so widespread that it was a “learned” or systemic practice within Home Capital.

As a result of the investigation, Home Capital terminated its relationship with dozens of brokers who had accounted for $881.4 million in new mortgages or 10 per cent of the lender’s 2014 originations. Home Capital also put internal procedures in place to increase accountability.

According to the settlement agreement, Home Capital and its executives understood that these changes would have a material impact on the lender’s business.

In fact, Morton and Reid each stated in internal company documents that the delisting of the brokers and the “remediation” of Home Capital’s mortgage approval process should be disclosed in the company’s first quarter 2015 results, which were to be released on May 6, 2015. That didn’t happen. Instead, the firm’s public disclosure blamed a first-quarter decrease in business on seasonality, a harsh winter, macroeconomics, and a review of business partners.

Home Capital did not publicly disclose the problems until two months later in July 2015. Even then, its disclosures were, according to the agreed facts, insufficient for investors to understand the significance of the problems.

Vingoe said Wednesday the panel was approving the settlement in part because of some steps Home Capital has taken since the problems surfaced, such as the shakeup in leadership.

Disclosure of material changes by a reporting issuer is not a discretionary decision for management, but a regulatory requirement.