Homestreet
Settles Hedge Accounting Violations With SEC
HomeStreet, a
Seattle-based financial services company, agreed to pay a $500,000 penalty
to settle charges with the Securities and Exchange Commission that it improperly
performed hedge accounting and later took steps to impede potential
whistleblowers.Company treasurer Darrell van Amen also agreed to pay a $20,000
penalty to settle charges that he caused the accounting violations, the SEC
said Thursday.
HomeStreet originated
fixed-rate commercial loans and did interest rate swaps to hedge its
exposure to the loans.
The company decided to designate the loans and swaps in fair value hedging
relationships so it could lessen the amount of volatility on its income
statement. Companies are supposed to assess their hedging relationships
on a periodic basis, the SEC pointed out, and they need to discontinue the use of hedge
accounting if the effectiveness ratio falls outside a certain range.
However, with some
transactions between 2011 and 2014, van Amen allowed unsupported adjustments to
be made in his company’s hedge effectiveness testing so HedgeStreet could continue to
use the favorable accounting treatment. The test results with the changed inputs were in
turn given to HomeStreet’s accounting department, leading to inaccurate
accounting entries. “HomeStreet disregarded its internal accounting policies
and
procedures to come up with different testing results to enable its use of hedge
accounting,” said Erin Schneider, associate director of the SEC’s San Francisco
Regional Office, in a statement. “Companies must follow the rules rather than
create their own.”
After HomeStreet
employees reported their concerns to management, the company acknowledged the
adjustments to its hedge effectiveness tests were wrong. When the SEC contacted
the company in April 2015 asking for documents related to hedge accounting, HomeStreet
assumed the request came in response to a whistleblower complaint and
began trying to uncover the identity of the “whistleblower.” One employee
who was suspected of being the culprit was told that the terms of an
indemnification agreement allowed HomeStreet to deny payment for legal costs
during the SEC’s investigation. HomeStreet also demanded its former
employees sign severance agreements waiving any potential whistleblower awards and threatened
they could lose their severance payments and other post-employment benefits if they
didn’t sign. HomeStreet and van Amen agreed to the SEC’s order without
admitting wrongdoing.
“This is the second
case this week against a company that took steps to impede former employees
from sharing information with the SEC,” said SEC Whistleblower Office chief
Jane Norberg, referring to a case against the asset management firm BlackRock,
which agreed to pay a $340,000 penalty to settle charges it improperly used
separation agreements requiring exiting employees to waive their ability to
obtain whistleblower awards. “Companies simply cannot disrupt the lines of
communications between the SEC and potential whistleblowers.”
HomeStreet issued a
statement about the settlement. “We are pleased that the SEC’s investigation
of non-material accounting errors the company voluntarily disclosed in 2014
after its own investigation by an independent special committee of the Board
has now been concluded, and that the SEC did not allege that the
company or
any of its officers acted with an intention to defraud or deceive,” said HomeStreet
chairman and CEO Mark Mason in a statement. “This is consistent with the
special committee’s conclusions that these were mere accounting errors. To
the extent that the SEC’s press release implies that the Treasurer and Chief
Investment Officer acted with anything other than a sincere belief that he was
properly testing hedge effectiveness according to his understanding of the
economic correlation of the loans and swap contracts, we believe that such
an implication would be inconsistent with the allegations contained in the
Settlement Agreement.”
