By N. Peter Rasmussen, J.D.
The SEC charged Option One Mortgage Corporation, a subsidiary of H&R Block Inc., 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 a leading subprime originator with originations of nearly $40 billion in its fiscal 2006. The SEC alleged that between January and March 2007, Option One offered and sold more than $4.3 billion of RMBS in seven separate offerings.
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 alleged 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.