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Home capital settles with OSC over fraudulent mortgages

International

Toronto - Home Capital Group and three former executives agreed to pay more than C$30 million ($23 million) to reach settlements with regulators and investors over allegations the Canadian lender misled shareholders about mortgage fraud. The stock posted its biggest gain in five weeks.

Home Capital and the executives will pay C$12 million and cover C$500,000 in costs to the Ontario Securities Commission, the Toronto-based lender said in a statement after market hours. The firm is also making a C$29.5 million payment to settle a class-action lawsuit filed after the shares plunged, which includes C$11 million paid in the proposed OSC deal, according to the statement. Home Capital expects to fund almost all of this through available liability insurance.

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As part of the settlement, founder and former Chief Executive Officer Gerald Soloway is barred from acting as a company director for four years and will pay a penalty of C$1 million. Former executives Martin Reid and Robert Morton will pay C$500,000 each to the commission and are barred from being directors for two years.

“These settlements will enable us to move forward with regaining the confidence of our depositors and shareholders and creating value for all our stakeholders," said Chair Brenda Eprile. “Home Capital will accept full responsibility for failing to meet its disclosure obligations to the marketplace and appreciates the importance of the serious concerns raised by the commission with respect to continuous and timely disclosure.”

The settlements remove a legal cloud that has hung over the embattled company for almost two months. Home Capital shares plunged in April after the OSC alleged the company misled investors over the extent of fraudulent mortgage applications brought in by outside brokers. The lender since then has been in a fight for its life as clients pulled cash from savings accounts, brokers cut ties, and analysts issued a series of downgrades and revised profit forecasts.

Home Capital surged 17 percent to C$14.14 at 9:38 a.m. in Toronto, its biggest gain since May 11. The stock has almost tripled from its lows last month, though is still down 55 percent this year.

OSC Hearing

The OSC, which issued a separate statement about 30 minutes after Home Capital, scheduled a hearing to approve the settlement on Aug. 9 in Toronto. Staff received approval to make the terms of the proposed settlement public before the hearing to prevent speculation in the market, according to OSC spokeswoman Kristen Rose.

Allegations from the regulator in April included that Home Capital and its executives had failed to satisfy disclosure requirements, made “materially misleading statements” and failed to comply with other securities rules.

RBC Capital Markets analyst Geoffrey Kwan upgraded Home Capital to sector perform from underperform and raised the target price to C$14 from C$8. The target is 18 percent above the consensus average of C$11.89.

Replacement Loan

“This removes a huge stumbling block to the company," said David Taylor, chief investment officer of Taylor Asset Management, who holds about 4 million Home Capital shares. “Banks wanted to see this go away. There were too many unknowns."

Taylor said he’s expecting the lender will receive a credit line to replace a punitive C$2 billion loan from Healthcare of Ontario Pension Plan.

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The alternative mortgage lender, which primarily lends to borrowers turned away from the traditional banks, is in talks with banks for a loan to replace the credit line from HOOPP. Royal Bank of Canada and Credit Suisse Group are among the firms interested in lending, according to people familiar with the discussions who declined to be identified describing confidential information.

Home Capital reiterated it is "pursuing additional financing and strategic options" while declining to comment further in a statement. The regulator declined further comment.

“This is one step forward in the right direction, but the company still has a lot of issues to address, including their long-term strategy," Marc Charbin, an analyst at Laurentian Bank Securities , said by phone. They need to see inflows into guaranteed investment certificate deposits and appoint a permanent CEO, he said.

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