Option One Charged with ‘Misleading Investors’
The Securities and Exchange Commission has sued H&R Block subsidiary Option One Mortgage Corporation for hiding the ailing condition of its offerings of subprime residential mortgage-backed securities (RMBS).
Option One, which is now known as Sand Canyon Corporation, agreed to pay $28.2 million to settle the SEC’s charges.
The SEC alleges that Option One promised investors in more than $4 billion worth of RMBS offerings that it sponsored in early 2007 that it would repurchase or replace mortgages that breached representations and warranties. But Option One hid its deteriorating financial condition from investors, including its incapability to meet its repurchase obligations on its own.
“Option One’s financial condition deteriorated significantly as its large subprime mortgage lending business suffered from the collapse of the U.S. housing market,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
“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.”
According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Option One was one of the nation’s largest subprime mortgage lenders with originations of $40 billion in its 2006 fiscal year. Option One originated subprime loans and sold them in the secondary market through RMBS securitizations or whole loan pool sales.
According to the SEC’s complaint, Option One was generally profitable prior to its 2007 fiscal year. However, when the subprime mortgage market started to decline in the summer of 2006, Option One experienced a decline in revenues and significant losses, and faced hundreds of millions of dollars in margin calls from its creditors.
In 2008, Option One was sold to Wilbur Ross for an estimated $1 billion. Option One, the fourth largest mortgage servicer in USA, services about $53 billion of subprime mortgages, which combined with the American Home Mortgage Investment acquisition, giving Ross the second largest subprime servicing portfolio in the nation after Countrywide Financial.
At the time Option One offered and sold the RMBS, it needed H&R Block, through a subsidiary, to provide it with financing under a line of credit in order to meet its margin calls and repurchase obligations. But Block was under no obligation to provide that funding. Option One did not disclose this information to investors.
The SEC further alleges that Block never guaranteed Option One’s loan repurchase obligations and that Option One’s mounting losses threatened Block’s credit rating at a time when Block was negotiating a sale of Option One.
Without admitting or denying the SEC’s allegations, Option One consented to the entry of an order requiring it to pay disgorgement of $14,250,558, prejudgment interest of $3,982,027, and a penalty of $10 million. The proposed settlement is subject to court approval.
The SEC has now charged 102 individuals and entities in financial crisis-related enforcement actions, including 55 CEOs, CFOs, and other senior corporate officers. These enforcement actions have resulted in more than $1.98 billion in penalties, disgorgement, and other monetary relief for investors.
The SEC also is a co-chair of the Residential Mortgage-Backed Securities Working Group formed under the Financial Fraud Enforcement Task Force in January 2012. The Working Group is marshaling parallel efforts on the state and federal levels to collaborate on current and future investigations, pooling resources and streamlining processes to investigate in a comprehensive way those responsible for misconduct in the RMBS market.
In addition to the SEC, other co-chairs of the Working Group include representatives from the Civil and Criminal Divisions of the U.S. Department of Justice, the Attorney General of the State of New York, and the United States Attorney’s Office.
The SEC’s investigation of Option One was conducted by the Enforcement Division’s Structured and New Products Unit led by Kenneth Lench and Reid Muoio and 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.