South Florida Arbitration & Litigation Lawyer Blog
Investment Advisor and Broker/Dealer Fraud and Misrepresentation FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
April, 2012:
Securities and Exchange Commission v. Option One Mortgage Corporation n/k/a Sand Canyon Corporation, United States District Court for the Central District of California, Civil Action No. SACV-12-633 JST (MLGx) (C.D. Cal.)
SEC CHARGES H&R BLOCK SUBSIDIARY OPTION ONE WITH DEFRAUDING INVESTORS IN SUBPRIME MORTGAGE INVESTMENTS
Recently the Securities and Exchange Commission charged Option One Mortgage Corporation (“Option One”), a subsidiary of H&R Block Inc. (“Block”), with misleading investors in several offerings of subprime residential mortgage backed securities (“RMBS”). To settle the SEC’s fraud charges, Option One, now known as Sand Canyon Corporation, agreed to pay over $28.2 million.
Option One originated, sold and serviced subprime mortgage loans. In 2006 and 2007, Option One was one of the nation’s largest subprime originators with originations of nearly $40 billion in its fiscal 2006.
In its recently filed complaint in the United States District Court for the Central District of California, the SEC alleges that between January and March 2007, Option One offered and sold more than $4.3 billion of RMBS in seven separate offerings. RMBS are debt obligations that represent claims to the cash flows from pools of residential mortgage loans. According to the SEC’s complaint, Option One misled investors in its RMBS by promising to repurchase or replace mortgages in its RMBS that breached representations and warranties. These promises were rendered misleading by Option One’s failure to disclose that its financial condition was significantly deteriorating and it could not meet its repurchase obligations on its own. The SEC further alleges that at the time Option One offered and sold the RMBS, it needed to rely on voluntary financial support from Block to meet its financial obligations but that Block was under no obligation to continue providing that financing. Option One never disclosed this information to investors.
Option One, without admitting or denying the SEC’s allegations, consented to the entry of an order permanently enjoining it from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and requiring it to pay disgorgement of $14,250,558, prejudgment interest of $3,982,027, and a $10,000,000 civil penalty. The proposed settlement is subject to approval by the court.