OSC HEARINGS BEGIN FOR EMBATTLED HOME CAPITAL.

HEARINGS COULD BE ‘MULTI-YEAR PROCESS’

Home Capital Group Inc.’s struggles to shore up its liquidity and restore market confidence will take on a new dimension Thursday as the Ontario Securities Commission launches hearings into allegations of misleading disclosure at the embattled mortgage lender.

The initial hearing, to be held at the OSC’s offices in Toronto, is expected to be largely procedural but marks the first step in what could be a lengthy process.

“Depending on how it plays out from start to finish, it could be a multi-year process,” said Kent Thomson, head of the litigation practice at Toronto law firm Davies Ward Phillips & Vineberg LLP, who is not involved in the Home Capital case.

The OSC has accused Home Capital and some of its current and former executives of misleading shareholders, alleging they knew there was fraud in its mortgage broker channel months before the company made public announcements about the problems in July 2015.

Thursday’s hearing will be one of several appearances needed to set a date for a hearing on the merits, in which OSC staff will argue the case in front of a panel of OSC commissioners.

Thomson said, in his experience, it could take well over a year before a hearing on the merits begins. And the hearing itself could take as many as 10 weeks, depending on the complexity of the case and the number of respondents.

However, Thomson said, it is common for some of the respondents named in a case to either plead guilty or settle with the OSC before a hearing on the merits begins.

On April 19, the OSC submitted formal allegations and a notice of hearing against Home Capital, founder and former president and chief executive Gerald M. Soloway, former president and chief executive Martin K. Reid, and chief financial officer Robert Morton.

The allegations were in connection with the company’s discovery of falsified income information on some loan applications and the subsequent cutting of ties with 45 brokers in 2014 and 2015.

Home Capital has said that it “satisfied applicable disclosure requirements, and the allegations are without merit.”

“We will continue to vigorously defend our approach to disclosure in the Ontario Securities Commission (OSC) proceeding,” Home Capital chairman Kevin Smith said in open letter to shareholders on April 21.

“While the OSC process may take some time, management and the Board are focused on continued profitable growth and industryleading customer service.”

Once the facts of the case are heard, the OSC panel (of typically three commissioners) could take as much as a year or longer to render a decision, added Thomson.

If the panel finds that the respondent did violate the Securities Act, another hearing is needed to determine what disciplinary actions should be applied.

The Commission can impose sanctions such as financial penalties and bans on trading and other activities in the capital markets.

Longtime lawyer and part-time commissioner Janet Leiper will be on Thursday’s panel, according to the OSC, while OSC litigators and staff Jennifer Lynch and Swapna Chandra will be in attendance.

Since the OSC allegations were announced, Home Capital has seen market confidence erode and faced a partial run on its funding, with clients withdrawing their demand deposits from its subsidiary Home Trust. These high-interest savings account balances — which have fallen from $1.4 billion on April 24 to $391 million on Monday — help the company fund its mortgage lending.

As a result, it secured a $2-billion line of credit as an emergency backstop from a syndicate of lenders including a major Ontario pension plan, but at onerous terms. The Toronto company last week retained RBC Capital Markets and BMO Capital Markets to “advise on further financing and strategic options” as analysts suggested a sale was a growing possibility.

If Home Capital finds a buyer or is forced to seek protection under the Companies’ Creditors Arrangement Act, it may complicate proceedings against the company, Thomson said.

But no matter what happens to the firm, the OSC proceedings against the individuals named are likely to go on, said Thomson.

“If there is a sale of the company, it is entirely likely the case would continue against the individuals. It gets more complicated concerning the company depending on how the company is sold.”

If Home Capital does find a buyer, the impact would vary depending on how that sale was completed — whether it is a takeover bid or a plan of arrangement, where a court order authorizes the sale and dictates the terms (which can vary widely), Thomson said.

(FIRM IS) FOCUSED ON CONTINUED PROFITABLE GROWTH.