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.”