The Ontario Securities Commission has approved a settlement with Home Capital Group Inc. and three former senior executives that the watchdog says will send a strong message regarding the importance of timely and accurate disclosure.
Investors will be paid a total of $11-million as a result of the deal. Home Capital will pay $10-million of that total, plus an additional $500,000 in costs to the securities commission. The remaining $1-million will come from administrative penalties levied against Gerald Soloway, Robert Morton and Martin Reid.
During a hearing Wednesday, OSC staff called disclosure the "cornerstone" of securities regulation and emphasized its importance in allowing investors to make informed decisions. The approval of the settlement marks a step forward for the alternative mortgage lender, which has shaken up its leadership and governance ranks in a bid to restore market confidence following a scandal involving falsified loan applications.
Home Capital said the order approving the OSC settlement depends on the final court approval of a related class action lawsuit. A hearing to consider that 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," the company said in a statement.
Huston Loke, the OSC's director of corporate finance, said public companies have an obligation to disclose to investors all events that can affect the performance of their business in a manner that is not misleading.
"When companies or their management fail to comply, we will take action," Mr. Loke said in a statement.
Home Capital suffered a run on its deposits and saw its share price tumble after the OSC alleged in April that the lender misled investors by failing to disclose in a timely fashion that it had terminated relationships with dozens of brokers following a mortgage fraud investigation.
During a May 7, 2015, conference call, the company misattributed a drop in its mortgage originations to factors such as cold weather, macroeconomic conditions and a more cautious approach to lending, according to agreed facts in the settlement agreement. It only revealed the termination of about 45 mortgage brokers – who had generated a high volume of business for the company – roughly two months later.
A class action lawsuit filed in the Ontario Superior Court of Justice by Siskinds LLP alleges that public disclosures made by the company between Nov. 5, 2014, and July 10, 2015, were materially misleading. Home Capital – which settled the class action lawsuit in June, at the same time as it settled the OSC matter – will pay $29.5-million to investors, minus legal fees and other administrative expenses. That includes the $11-million being paid under the agreement with the OSC.
An independent report by KPMG commissioned by Home Capital's board in 2015 found that the company's managers ignored warnings from regulators and industry partners about the risks of mortgage fraud, even as brokers were submitting falsified loan applications to the lender. A draft copy of the KPMG report, which was obtained by The Globe and Mail, outlines the deep internal problems that nearly led to the company's collapse.
Under the agreement with the OSC, Mr. Soloway, the company founder, will be reprimanded, banned from serving as a director or officer of a reporting issuer for four years and pay a penalty of $1-million. Mr. Morton, the former CFO, and Mr. Reid, the former CEO, will also be reprimanded and face two-year officer and director bans. Mr. Morton and Mr. Reid will each pay $500,000. Half of the $2-million collected from the former senior executives will go to investors, while the other half will be paid to the OSC.
Ratings agency DBRS revised its ratings of Home Capital Group and its primary subsidiary, Home Trust Co., to "under review with positive implications" from "under review with negative implications." The agency said in a statement Wednesday that the alternative lender has made "solid progress in restoring market confidence."