HomeStreet settles accounting and whistleblower claims

HomeStreet has agreed to pay a $500,000 fine to settle SEC allegations that it conducted improper hedge accounting and later took steps to impede potential whistleblowers – the latter being an issue the agency has been keen to enforce in recent months.

HomeStreet’s treasurer and CIO Darrell van Amen also agreed to pay a $20,000 penalty to settle charges he caused the alleged accounting violations. Both he and the Seattle-based financial services company settled without admitting or denying wrongdoing.

The administrative proceeding stems from what the SEC calls books and records and internal accounting control violations arising from HomeStreet’s accounting related to certain commercial loans and related swaps designated as accounting hedges under Gaap.


ACCOUNTING
According to the agency, van Amen caused the company’s alleged violations by overseeing a practice of changing the inputs to an accounting test designed to measure the effectiveness of the hedges and, in some instances, instructing employees to follow that practice. Changing the inputs meant HomeStreet could demonstrate that certain hedges were highly effective and thus allowed for the use of fair value hedge accounting, SEC officials say in a related regulatory filing.

The application of hedge accounting, in turn, meant HomeStreet could offset changes in the fair value of the interest rate swaps with the changes in the fair value of the loans attributable to the hedged risk, according to the agency.

This accounting treatment means fair value hedge accounting can reduce income statement volatility for companies, the SEC says. For nearly three years, from the third quarter of 2011 to the second quarter of 2014, company treasury employees provided the adjusted inputs and test results to HomeStreet’s accounting department for purposes of preparing the financial statements, resulting in inaccurate accounting entries, the commission says.

The manner in which the treasury department implemented the hedge effectiveness testing, approved by Van Amen, was also inconsistent with the company’s internal policies and procedures and involved the creation of inaccurate books and records, according to the SEC.

‘HomeStreet disregarded its internal accounting policies and procedures to come up with different testing results to enable its use of hedge accounting,’ says Erin Schneider, associate director of the SEC’s San Francisco office. ‘Companies must follow the rules rather than create their own.’


‘IMPEDE EMPLOYEES’
The agency also alleges that HomeStreet took actions to ‘impede employees who were involved in or knowledgeable about the company’s hedge accounting from communicating directly with the commission staff about possible securities law violations.’

The company also included language in employee severance agreements that removed the financial incentives intended to encourage individuals to communicate directly with commission staffers about possible securities law violations, the SEC says.  

On November 13, 2014, HomeStreet disclosed in a regulatory filing that management had ‘discovered errors in the registrant’s analysis of hedge effectiveness’ related to 14 of the hedges, the SEC says.

The agency’s enforcement division in April 2015 served a voluntary document request on the company in connection with the hedge accounting issues, according to officials. HomeStreet assumed this may have been in response to a whistleblower complaint and, shortly thereafter, began taking steps to determine the identity of the presumed whistleblower, the SEC says, adding that HomeStreet said it did so to understand the nature of the investigation.

For example, the SEC alleges that although an unnamed executive had already told HomeStreet management that he was not a whistleblower before he left the company, HomeStreet made multiple requests that he reaffirm he was not the whistleblower before it advanced costs under his indemnification agreement.

The SEC says it is unaware of any instance in which any current or former employee of HomeStreet did not communicate directly with its staff about the alleged hedge accounting errors. But by taking actions to determine the identity of an individual whom HomeStreet suspected had brought the errors to commission officials ‒ including suggesting that the terms of an indemnification agreement could allow it to deny payment to an individual whom HomeStreet believed to be a whistleblower – the company acted to impede individuals from communicating directly with the agency about a possible securities law violation, according to the SEC.

In addition, the commission says, one form of HomeStreet’s severance agreements with employees states: ‘This release shall not prohibit employee from filing a charge with the Equal Employment Opportunity Commission or discussing any matter relevant to employee’s employment with any government agency with jurisdiction over the company but shall be considered a waiver of any damages or monetary recovery therefrom.’

The SEC says it is unaware of any instances in which a current or former employee of HomeStreet did not communicate directly with the agency about potential violations. But by using the severance agreement detailed above, the company ‘removed the critically important financial incentives that are intended to encourage [people] to communicate directly with the commission staff about possible securities law violations,’ the agency alleges.

‘Companies that focus on finding a whistleblower rather than determining whether illegal conduct occurred are severely missing the point,’ says Jina Choi, director of the agency’s San Francisco office, in an announcement of the settlement.


SETTLEMENT
In determining the settlement, the SEC took into account remedial acts undertaken by HomeStreet. According to the agency, these include:

• Implementing changes in its internal accounting controls
• Disclosing in its November 13, 2014 Form 10Q that it had implemented ‘enhanced oversight by the accounting department of complex accounting for financial instruments within the company’s treasury department’ and hired a CFO to oversee the treasury and accounting functions
• Revising in October 2016 its standard severance agreements to incorporate the following language: ‘Employee understands that nothing contained in this agreement limits employee’s ability to file a charge or complaint with any federal, state or local governmental agency or commission… This agreement does not limit the employee’s right to receive an award for information provided to any government agencies.’

As part of the settlement, HomeStreet has agreed to make reasonable efforts to contact former employees who signed the severance agreements identified in the proceeding and give a web link to the SEC order and a statement that HomeStreet does not bar former employees from reporting information to the commission or from seeking and obtaining a whistleblower award.

‘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,’ HomeStreet chair and CEO Mark Mason says 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 [CIO] 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.’

A spokesperson declined to comment beyond the statement when asked for comment from van Amen.