Settlement and unsettlement

Home Capital Group’s tentative settlement with the Ontario Securities Commission seemed to satisfy some shareholders, who nudged the company’s stock up over $14 during trading Thursday. The intent behind the settlement is clearly to lift the cloud made by the OSC’s 22,000 pages of documents alleging HCG failed to disclose the fact that some of its brokers were engaged in creating fraudulent mortgage information. If approved by the commission, the decks should be clear for Home Capital to get on with business, especially since former company executives have been formally and somewhat severely punished. They have been hit with big fines, banishments from holding corporate offices, plus a $10-million corporate penalty.

That should be the end of the disclosure issue.

But there are more than a few other messy mysteries still on the table, not the least of which is the role of the OSC in a corporate investment debacle that saw HCG stock drop from $30 to $6 in a few days last April. How did such a market disaster, triggered mostly by a run on deposits, befall a company that to date faces no official allegations of malfeasance beyond the now-settled and relatively minor disclosure issue?

The role of the OSC seems even more at issue in light of the comments contained in Home Capital’s settlement announcement. Brenda Eprile, chair of Home Capital’s board, accepted corporate responsibility for the disclosure failure. Then she said: “The Company also acknowledges that the Commission is not to blame for lawyer told me the OSC absolution statement is without precedent. “Very unusual. I certainly have never seen anything like this before. It’s kind of getting to the integrity of the regulator.” It will be interesting to see how the final statement of facts deals with the OSC’s role in Home Capital’s market breakdown. Whatever the final wording of the settlement agreement between the company and the regulator, it is unlikely to from dropping a regulatory bombshell on a deposit-dependent company already in the cross-hairs of short sellers.

Another odd bit in the settlement is the payment of $29.5 million to be distributed to shareholders who are part of a class-action suit. In effect, the $29.5 million will be paid out of Home Capital’s shareholders’ pockets for the benefit of Home Capital’s shareholders. Such are the mysteries of class action suits launched by shareholders essentially against themselves.

Aside from the OSC’s handling of the allegations, there’s the role of short sellers who portrayed Home Capital as a sinking ship filled with rotting mortgages. They mounted an aggressive campaign over a period of years, culminating in the collapse in Home Capital shares that took the company’s value well below that justified by the disclosure issues raised by the OSC.

One important chapter in the Home Capital saga appears to have been completed. But there is more that needs to be told about how Home Capital — which was, by all and every official and unofficial comment, a healthy enterprise — was driven to near collapse.