H & R Block (HRB) subsidiary Option One Mortgage Corporation has agreed to pay $28.2 million to settle Securities and Exchange Commission charges that it misled investors in over $4B in residential mortgage-backed securities when it failed to let them know that the company’s financial health was deteriorating. According to the SEC, Option One, which is now called Sand Canyon Corporation, promised these investors that it would replace or buy back mortgages that breached warranties or misrepresentations, even though it was unlikely that the mortgage lender would be able to fulfill these obligations.
Leading up to the 2007 fiscal year, Option One had originations of $40 billion during the year prior and was among the country’s largest mortgage lenders, originating and selling subprime loans through whole loan pool sales and market securitization in the secondary market. During this period, to be able to fulfill its buyback commitments and margin calls, it needed for H & R Block to give it financing under a credit line. However, Block wasn’t obligated to give Option One this funding, which is a fact that the mortgage lender neglected to tell its RMBS investors. When its revenues started to drop and it sustained substantial losses as the subprime mortgage market began to fail during the summer of 2006, Option One’s creditors started to ask for hundreds of millions of dollars in margin calls. (The SEC also claims that the mortgage lender’s losses were a threat to H & R Block’s credit rating while the tax service provider was negotiating its sale. Option One was sold by H & R Block to Wilbur Ross for about $1 billion.)
To settle the SEC allegations over RMBS fraud, Option One will not only pay the $28.2 million (A $10 million penalty, $14,250,558 in disgorgement, and $3,982,027 in prejudgment interest), but also, it has consented to a permanent order entry enjoining it from Securities Act of 1933 Sections 17(a)(2) and 17(a)(3) violations. The mortgage lender isn’t, however, denying or admitting to the charges.
Commenting on this RMBS case, SEC Division of Enforcement’s Structured and New Products Unit Chief Kenneth Lench spoke about the Commission’s commitment to act against parties that neglect to reveal pertinent facts that up an investment’s risk, even if the risks never becomes a reality. The SEC has been pursuing those believed to engaged in misconduct related to RMBS and other complex financial instruments.
The SEC isn’t the only one to sue Option One. In 2011, the mortgage lender settled Massachusetts securities charges against it by agreeing to pay $9.8 million in restitution and $115 million in loan modifications.
Read the SEC’s complaint (PDF)
Ex-H&R Block Unit Agrees To Pay $28.2 Mln To Settle SEC Charges, The Wall Street Journal, April 24, 2012
More Blog Posts:
Residential Mortgage-Backed Securities Working Group Brings Federal Investigators and State Law Enforcement Officials Together to Investigate How MBS Abuses Contributed to 2008 Financial Crisis, Institutional Investor Securities Blog, January 30, 2012
Federal Home Loan Banks Say Countrywide Financial Corp Mortgage Bond Investors May Be Owed Way More than What $8.5B Securities Settlement with Bank of America Corp. is Offering, Institutional Investor Securities Blog, July 22, 2011
FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011
If you are a RMBS investor who has sustained losses that you believe were a result of a financial firm/representative’s misconduct or error, our institutional investment fraud law firm wants to talk to you. Contact Shepherd Smith Edwards and Kantas, LTD, LLP today.