H&R Block Subsidiary Settles With SEC
H&R Block Subsidiary Settles With SEC
By DEE MOORE
By DEE MOORE
(CN) - H&R Block agreed to pay a fine of $28.2 million to settle SEC charges against its subsidiary Option One Mortgage Company for misleading investors and failing to disclose the severe financial condition of many subprime residential mortgage backed securities offerings.
According to the commission, "Option One was one of the country's largest subprime lenders. In its fiscal year 2006, Option One originated nearly $40 billion in subprime mortgage loans."
Located in Irvine, Calif., the company is now known as Sand Canyon Corp. It is an indirect, wholly owned mortgage banking subsidiary of H&R Block. From 1993 until 2008 the company was in the business of originating, sponsoring, selling and servicing subprime mortgage loans. It changed its name in 2008 and sold its servicing business.
Option One had promised investors that it would repurchase or replace mortgages that became a liability to its investors, according to the SEC.
"The offering documents for the RMBS represented to investors that Option One was obligated to repurchase or replace any mortgage loan in the pools collateralizing the RMBS for which there was a breach of a representation or warranty that materially and adversely affected the value of the loan or the RMBS investors' interest in the loan," the complaint states.
"The offering documents also contained risk disclosures that omitted important information about Option One's financial condition. The offering documents misled investors about Option One's precarious financial condition," the complaint adds.
"Option One's financial condition deteriorated significantly as its large subprime mortgage lending business suffered from the collapse of the U.S. housing market. The company nonetheless concealed from investors that its perilous finances created risk that it would not be able to fulfill its duties to repurchase or replace faulty mortgages in its RMBS portfolios," said Director of the SEC's Division of Enforcement, Robert Khuzami in a press release.
According to the SEC, when the market started failing the company experienced a decline in revenues as well as significant losses and was facing hundreds of millions of dollars in margin calls from its creditors.
At the time Option One offered and sold the securities, the company depended on H&R Block to provide it with financing to be able to meet these calls and repurchase obligations. But the company failed to tell its investors that H&R Block was under no obligation to provide that funding.
The SEC further alleged that H&R Block never guaranteed Option One's loan repurchase obligations and that Option One's mounting losses threatened H&R Block's credit rating at a time when it was negotiating a sale of Option One.
Though the company appeared to be stable, and represented itself as such, in reality the company executives knew they were in hot water. the SEC alleges.
"Option One and its senior officers knew or should have known" that the company was "experiencing financial difficulties as a result of the decline in the subprime mortgage market, could not meet its loan repurchase obligations on its own due to its deteriorating financial condition, and needed its parent company . . . to continue providing voluntary financial support to maintain its operations and meet its escalating loan repurchase obligations," the complaint states.
Option One didn't admit or deny the commission's allegations when it agreed to disgorge more than $14 million, pay more than $3 million in prejudgment interest and pay a pentalty of $10 million, according to an SEC press release.
The investigation was conducted by the SEC's Enforcement Division's Structured and New Products Unit and was led by Kenneth Lench and Reid Muoio of the Chicago Regional Office.
The investigative attorneys were Daniel Ryan, Michael Wells, Anne McKinley, and Robert Burson along with litigation counsel Jonathan Polish and John Birkenheier in the Chicago Regional Office.
The complaint was filed in the Western Division of the U.S. District Court Central District of California.
According to the commission, "Option One was one of the country's largest subprime lenders. In its fiscal year 2006, Option One originated nearly $40 billion in subprime mortgage loans."
Located in Irvine, Calif., the company is now known as Sand Canyon Corp. It is an indirect, wholly owned mortgage banking subsidiary of H&R Block. From 1993 until 2008 the company was in the business of originating, sponsoring, selling and servicing subprime mortgage loans. It changed its name in 2008 and sold its servicing business.
Option One had promised investors that it would repurchase or replace mortgages that became a liability to its investors, according to the SEC.
"The offering documents for the RMBS represented to investors that Option One was obligated to repurchase or replace any mortgage loan in the pools collateralizing the RMBS for which there was a breach of a representation or warranty that materially and adversely affected the value of the loan or the RMBS investors' interest in the loan," the complaint states.
"The offering documents also contained risk disclosures that omitted important information about Option One's financial condition. The offering documents misled investors about Option One's precarious financial condition," the complaint adds.
"Option One's financial condition deteriorated significantly as its large subprime mortgage lending business suffered from the collapse of the U.S. housing market. The company nonetheless concealed from investors that its perilous finances created risk that it would not be able to fulfill its duties to repurchase or replace faulty mortgages in its RMBS portfolios," said Director of the SEC's Division of Enforcement, Robert Khuzami in a press release.
According to the SEC, when the market started failing the company experienced a decline in revenues as well as significant losses and was facing hundreds of millions of dollars in margin calls from its creditors.
At the time Option One offered and sold the securities, the company depended on H&R Block to provide it with financing to be able to meet these calls and repurchase obligations. But the company failed to tell its investors that H&R Block was under no obligation to provide that funding.
The SEC further alleged that H&R Block never guaranteed Option One's loan repurchase obligations and that Option One's mounting losses threatened H&R Block's credit rating at a time when it was negotiating a sale of Option One.
Though the company appeared to be stable, and represented itself as such, in reality the company executives knew they were in hot water. the SEC alleges.
"Option One and its senior officers knew or should have known" that the company was "experiencing financial difficulties as a result of the decline in the subprime mortgage market, could not meet its loan repurchase obligations on its own due to its deteriorating financial condition, and needed its parent company . . . to continue providing voluntary financial support to maintain its operations and meet its escalating loan repurchase obligations," the complaint states.
Option One didn't admit or deny the commission's allegations when it agreed to disgorge more than $14 million, pay more than $3 million in prejudgment interest and pay a pentalty of $10 million, according to an SEC press release.
The investigation was conducted by the SEC's Enforcement Division's Structured and New Products Unit and was led by Kenneth Lench and Reid Muoio of the Chicago Regional Office.
The investigative attorneys were Daniel Ryan, Michael Wells, Anne McKinley, and Robert Burson along with litigation counsel Jonathan Polish and John Birkenheier in the Chicago Regional Office.
The complaint was filed in the Western Division of the U.S. District Court Central District of California.
Copyright Courthouse News Service 2012
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