A former H&R Block Inc. (HRB) unit has agreed to pay $28.2 million to settle charges it misled investors by failing to disclose that its financial condition was significantly deteriorating, the Securities and Exchange Commission said.
The SEC alleges that Option One Mortgage Corp., now known as Sand Canyon Corp., promised investors in more than $4 billion worth of residential mortgage-backed securities that it sponsored in early 2007 that it would repurchase or replace mortgages that breached representations and warranties. However, the company didn't tell investors that it could not meet its repurchase obligations on its own, the SEC said.
Option One didn't admit or deny the SEC's allegations.
According to the SEC's complaint filed in a U.S. District Court in California, Option One was one of the nation's largest subprime-mortgage lenders with originations of $40 billion in fiscal 2006.
The company was generally profitable prior to its 2007 fiscal year, but when the subprime-mortgage market started to decline in the summer of 2006, Option One experienced a decline in revenue and significant losses and also faced hundreds of millions of dollars in margin calls from its creditors, the SEC said.
SEC said that at the time Option One offered and sold the RMBS, it needed H&R Block to provide it with financing under a line of credit in order to meet its margin calls and repurchase obligations, which Option One didn't disclose to investors.
The SEC also alleges that H&R Block never guaranteed Option One's loan repurchase obligations and that Option One's losses threatened H&R Block's credit rating at a time when H&R Block was negotiating a sale of Option One.
H&R Block sold Option One in 2008.
Last year, Option One agreed to make $115 million in loan modifications and provide $9.8 million in restitution to settle a lawsuit brought by Massachusetts Attorney General Martha Coakley.