The Ontario Securities Commission (OSC) issued allegations against Toronto-based mortgage lender Home Capital Group Inc. (HCG) and several of its executives of disclosure violations for not promptly informing investors it had terminated several relationships with mortgage brokers amid concerns about their conduct. None of the allegations have been proven.
The OSC has scheduled a hearing for May 4 that focuses on allegations against HCG, former CEO Gerald Soloway, former president Martin Reid and executive vice president and chief financial officer, Robert Morton, claiming that the firm failed to properly disclose the true cause of a drop in mortgage originations.
According to the OSC, between February and July 2015, “HCG misled its shareholders as to the immediate and ongoing causes of the decline in originations. Internally, HCG knew it had terminated certain brokers because it had discovered fraud in HCG’s broker channels.”
When the firm announced that it had terminated certain brokers in July 2015, “HCG’s stock price fell 18.9%, resulting in an approximate $600 million loss in market capitalization and significant investor harm,” the OSC notes.
However, the firm, in its filings, the firm blamed a drop in originations on “external vagaries such as macroeconomics, seasonality and competitive markets,” the OSC says. “Within HCG, it was known that the decline could not be attributed solely to the external factors HCG outlined in its public disclosures.”
As a result, the OSC alleges that the firm’s financial statements breach securities rules; that Soloway and Morton certified those misleading financials; and that Soloway and Reid made misleading statements in an earnings call with analysts in May 2015.
HCG revealed in March that it had received an enforcement notice from the OSC concerning disclosure issues. At that time, the company said that it “believes that its disclosure satisfied applicable disclosure requirements.”
Since then, HCG terminated Reid, who took over as CEO after Soloway retired in 2016.
HCG issued a statement in response to the OSC’s allegations on Wednesday in which the company says “the allegations are without merit. The allegations will be vigorously defended.”
Photo copyright: belchonock/123RF