Questions remain following Home Capital deal

Release of terms before settlement OK’d raises eyebrows in financial circles

Home Capital Group Inc.’s settlement of regulatory allegations of misleading disclosure and a proposed class-action lawsuit — which will see the company and three former executives pay a total of $30.5 million — has clear benefits for the company, the regulator and investors. But some hurdles remain, including final approval of the deals, while the process itself is raising questions.

One element that has raised eyebrows among regulatory experts was the release of the terms before the settlement has even been approved, something the OSC itself acknowledges is “unusual.”

Kristen Rose, a spokesperson for the regulator, said OSC staff sought advance approval from a panel of commissioners to prerelease certain details ahead of a settlement approval hearing, which isn’t scheduled to take place until Aug. 9.

“While this approach is unusual, it is intended to prevent speculation in the market,” Rose said in an emailed statement, noting that there would be nearly two months between news a settlement had been reached and the approval hearing, after which the details would ordinarily be made public.

News of the pair of settlements indeed moved the market, along with speculation the company is close to setting up longer-term and less-expensive financing. Home Capital shares climbed nearly 13 per cent to close at $13.67 Thursday.

Any further information about the settlement, including agreed facts and admissions, will “remain confidential” until after the hearing at the commission’s headquarters in August, according to the OSC’s Rose.

Another complicating factor is that the regulatory and legal settlements are each conditional on the approval of the other. However, a veteran securities lawyer said such arrangements are not uncommon.

For example, a settlement between the OSC and former Sino-Forest Corp. chief financial officer David Horsley in July of 2014 was conditional on court approval of a class-action settlement in the case.

A key reason to bind one settlement to another is that firms and individuals don’t want to open themselves up to potential civil liability after making admissions in a regulatory settlement of an enforcement action, securities lawyer say.

Though such settlements usually contain language specifying that the admissions only apply within that particular settlement agreement, there is concern that class-action lawyers will use the facts laid out in them as road maps to pursue their cases in court.

The amounts to be collected from Home Capital through the pair of settlements, if approved, would be “in line” with prior regulatory and civil settlements, according to a Toronto-based securities lawyer who has had extensive dealings with the OSC.

In a note to clients on Thursday, analyst Marc Charbin at Laurentian Bank Securities said he expects the company’s costs to be recovered through its liability insurance.

For Home Capital, the benefits of resolving both the regulator’s allegations and the proposed class-action lawsuit are obvious: a clean regulatory and legal slate and a stronger negotiating position for refinancing an expensive $2 billion emergency line-ofcredit and possible asset sales. This will buy time as it seeks to fill executive vacancies, and formulate a long-term strategy.

For investors, there’s money in their pockets, provided both proposed settlements receive court and regulatory approval later this summer.

For the OSC, delivering all but $1 million of the combined settlement to investors helps dispel criticism of its record in the past, when, more often than not, funds collected were instead earmarked for the benefit of third parties and spent on things such as investor education.

“The OSC is concerned about the protection of investors, and achieving a return for investors through the class action helps achieve that purpose,” said the veteran securities lawyer.

A news release issued Wednesday night by Home Capital disclosing the settlement agreements directly addressed the OSC: Board chair Brenda Eprile said Home Capital “acknowledges that the (Ontario Securities) Commission is not to blame for the events of recent months involving its liquidity position.” that of British Columbia, which introduced a 15 per cent additional property transfer tax on foreign buyers in August, 2016.

In the closely watched Vancouver market, sales were up by 22.8 per cent month-over-month.

CREA raised its forecast for sales in B.C. in 2017, which is expected to offset declines in Ontario. B.C. is still expected to see a nine per cent decline in sales in 2017. Nationally, CREA now forecasts sales to decline 1.5 per cent in 2017 to 527,400. By 2018, sales are expected to decline another 0.8 per cent.