Noah Zivitz

Managing Editor, BNN Bloomberg

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Ontario Securities Commission staff say Home Capital Group — along with its former CEO, Gerald Soloway; former president, Martin Reid; and chief financial officer, Robert Morton — breached the province's securities laws in various disclosures surrounding mortgage originations and falsified loan applications in 2015.

According to a statement of allegations announced late Wednesday, the OSC claims Home Capital (HCG.TO) misled shareholders during a six-month period starting in February 2015 about a drop in its mortgage business that ultimately led the lender to announce on July 10 of that year it had cut ties with certain brokers. 

Home Capital's stock was trading down 12.7 per cent after opening bells Thursday. 

The regulator said in its statement of allegations that Home Capital's board of directors oversaw an internal investigation, code-named "Project Trillium," that was completed in February 2015, which "highlighted the scale of fraudulent documentation flowing through HCG, and the serious systemic underwriting control deficiencies at HCG." According to the OSC, Home Capital was aware of a number of Project Trillium's findings by February 10, 2015.

The OSC says Home Capital filed its 2014 annual statement and first-quarter 2015 interim paperwork on February 11, 2015, and May 6, 2015, respectively, knowing a drop in mortgage originations was not strictly attributable to external factors cited in the paperwork. The OSC also alleges "materially misleading" statements were made by Soloway and Reid on the company's earnings call on May 7, 2015. A month later, in June, the OSC alleges an unnamed Home Capital VP delivered a whistleblower report to the chair of the board's audit committee. 

The OSC has scheduled a hearing for May 4 to consider a number of orders, including possible financial penalties of up to $1 million for each securities law violation by Home Capital, Soloway, Reid and Morton. The regulator will also consider a trading ban for the three named individuals, as well as possibly prohibiting them from holding director or officer titles.

Reid took over as CEO in May 2016, after Soloway stepped down. Home Capital went on to fire Reid last month and replaced him on an interim basis with former Humpty Dumpty Snack Foods CEO Bonita Than on March 27, 2017. Soloway remains on Home Capital's board of directors.

Home Capital said in a statement Wednesday night it believes it lived up to disclosure requirements and that it will defend itself “vigorously” against the allegations, which it says are “without merit.”

"Home Capital has made significant progress in strengthening an already solid business, and we are confident in our prospects,” said Chair Kevin Smith in the statement. “We will share our accomplishments when we report our first-quarter results on May 3."

ANALYSTS REACT TO OSC ALLEGATIONS 

Raymond James downgraded Home Capital to Market Perform from Outperform and cut its price target to $23 from $34 on Thursday, citing “the increased uncertainty regarding the future leadership and governance of the company and the potential impact of heightened reputational risk on its operations.”

National Bank cut its price target to $23 and $27 and maintained its Underperform recommendation.

“We express concern this latest development could cause material damage to the company’s reputation which could lead to a) S&P to downgrade HCG to non-investment grade, b) weaker than expected deposit funding capabilities, c) weaker than expected mortgage loan growth, and d) impaired investor sentiment,” Analyst Jaeme Gloyn wrote in the report.