LOS ANGELES (CN) – H&R Block subsidiary Option One Mortgage Corp. will pay $28.2 million to settle SEC charges of misleading investors in subprime residential mortgage-backed securities, the SEC said Tuesday.
“Option One, which is now known as Sand Canyon Corporation, agreed to pay $28.2 million to settle the SEC’s charges,” the SEC said in a statement announcing the settled complaint.
According to the SEC complaint: “This case concerns the fraudulent sale of residential mortgage-backed securities (‘RMBS’) by Option One.
“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.
“From on or about January 24, 2007 through March 12, 2007, Option One sponsored over $4.3 billion of RMBS in seven separate offerings.
“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 investor’s interest in the loan. The offering documents also contained risk disclosures that omitted important information about Option One’s financial condition.
“Further, certain Option One senior officers signed agreements and certifications representing that, among other things, they knew of no reasons why Option One would not be able to fulfill its obligations and that the offering documents did not contain any materially misleading statements.
“In reality, as Option One and its senior officers knew or should have known, Option One 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, H&R Block Inc. (‘Block’), through a subsidiary, to continue providing voluntary financial support to maintain its operations and meet its escalating loan repurchase obligations.
“The offering documents misled investors about Option One’s precarious financial condition and, hence, its inability to fulfill its obligations on its own to repurchase or replace loans for which there were breaches of a representation or warranty that materially and adversely affected the value of the loans or the RMBS investor’s interest in the loans.
“RMBS investors cared about Option One’s financial condition because they cared about Option One’s ability to meet its repurchase obligations.
“By using the misleading representations to offer and sell RMBS to investors and engaging in other transactions, practices, and courses of business that operated as a fraud or deceit on investors in each of the seven RMBS offerings, Option One violated Sections 17(a)(2) and 17(a)(3) of the Securities Act [15 U.S.C. § 77q(a)(2) and (3)].”
Option One must disgorge $14.3 million, plus $4 million in interest, and pay a $10 million fine.
The SEC said it has charged 102 people and entities, including 55 CEOs, CFOs and other senior corporate officers, in financial crisis-related enforcement actions, and collected more than $1.98 billion in penalties, disgorgement and other money.