Washington D.C., Jan. 19, 2017 —The Securities and Exchange Commission today announced that Seattle-based financial services company HomeStreet Inc. has agreed to pay a $500,000 penalty to settle charges that it conducted improper hedge accounting and later took steps to impede potential whistleblowers.
HomeStreet’s treasurer Darrell van Amen agreed to pay a $20,000 penalty to settle charges that he caused the accounting violations.
According to the SEC’s order, HomeStreet originated approximately 20 fixed rate commercial loans and entered into interest rate swaps to hedge the exposure. The company elected to designate the loans and the swaps in fair value hedging relationships, which can reduce income statement volatility that might exist absent hedge accounting treatment. Companies are required to periodically assess the hedging relationship and must discontinue the use of hedge accounting if the effectiveness ratio falls outside a certain range.
The SEC’s order finds that in certain instances from 2011 to 2014, van Amen saw to it that unsupported adjustments were made in HomeStreet’s hedge effectiveness testing to ensure the company could continue using the favorable accounting treatment. The test results with altered inputs to influence the effectiveness ratio were provided to HomeStreet’s accounting department, which resulted in 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. “Companies must follow the rules rather than create their own.”
The SEC’s order further finds that after HomeStreet employees reported concerns about accounting errors to management, the company concluded the adjustments to its hedge effectiveness tests were incorrect. When the SEC contacted the company in April 2015 seeking documents related to hedge accounting, HomeStreet presumed it was in response to a whistleblower complaint and began taking actions to determine the identity of the “whistleblower.” It was suggested to one individual considered to be a whistleblower that the terms of an indemnification agreement could allow HomeStreet to deny payment for legal costs during the SEC’s investigation. HomeStreet also required former employees to sign severance agreements waiving potential whistleblower awards or risk losing their severance payments and other post-employment benefits.
“Companies that focus on finding a whistleblower rather than determining whether illegal conduct occurred are severely missing the point,” said Jina Choi, Director of the SEC’s San Francisco Regional Office.
Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “This is the second case this week against a company that took steps to impede former employees from sharing information with the SEC. Companies simply cannot disrupt the lines of communications between the SEC and potential whistleblowers.”
HomeStreet and van Amen consented to the SEC’s order without admitting or denying the findings that they violated internal accounting controls and books and records provisions of the federal securities laws. HomeStreet also violated Rule 21F-17, which prohibits taking actions to impede communication with the SEC.
The SEC’s investigation was conducted by Rebecca Lubens and John Roscigno, and the case was supervised by Tracy Davis in the San Francisco office.