Home Capital's Founder to Step Down After Securities Probe

(Bloomberg) -- Home Capital Group Inc. said Gerald Soloway will step down from the board 31 years after founding the alternative mortgage lender, following last week’s allegations by Ontario’s securities regulator that the firm misled investors and broke securities laws.

Soloway, 78, will depart when a replacement with "recognized financial expertise" is named, the Toronto-based company said in a statement on Monday. Director Robert Blowes will be interim chief financial officer after first-quarter results are filed -- expected May 3 -- and former CFO Robert Morton will take on responsibility for special projects outside the financial reporting group.

“These are important steps in rebuilding confidence and putting the focus back on our profitable underlying business and its solid performance," Chairman Kevin Smith said in the statement. “We know that we have not met the full expectations of some of our valued stakeholders, which we deeply regret.”

Home Capital fell 6.6 percent to C$17.97 as of 3:47 p.m. in Toronto, adding to last week’s 11 percent drop after the Ontario Securities Commission set a May 4 hearing date. For Soloway, the firm’s third-biggest shareholder with a 5.5 percent stake, the decline equals a C$14.3 million ($10.6 million) drop in the value of his shares from a week ago based on 3.53 million shares he held at the end of February.

The stock is the most shorted among Canadian financial companies, with investors having a short interest in about 60 percent of the shares available to the public, according to data compiled by Markit. Short sellers profit from price declines by selling borrowed securities and repurchasing them at cheaper levels.

OSC Allegations

The company’s issues stem from an internal probe into loans that had faulty income information, which prompted the firm to cut ties with about 45 mortgage brokers in 2015. The OSC alleges the firm failed to satisfy disclosure requirements, made "materially misleading statements" and failed to comply with other securities rules in disclosing the investigation. Those allegations were made against Soloway, the former chief executive officer, as well as Morton and Martin Reid, a longtime president who took over as CEO for less than a year before the board removed him last month.

Home Capital said it’s "actively recruiting" a CEO and a successor will be named as soon as possible. The new CEO will select a permanent replacement for Blowes, who was CFO between 2012 and 2014. Soloway will stand for re-election to the board at Home Capital’s May 11 annual investors meeting since materials had already been mailed to shareholders, the firm said.

The firm also said Bank of Nova Scotia will resume sales of Home Trust deposit products starting Monday, subject to a C$100,000 per-client cap. Scotiabank had suspended the sales on Friday.

“While the board changes are likely to be viewed as a positive step toward bringing in new leadership at the management and board level, the significant news is the resumption of GIC sales at Scotiabank as this is likely to help alleviate a certain or full extent funding concerns," RBC Capital Markets analyst Geoffrey Kwan wrote in a Monday note.

Home Capital called the OSC’s allegations without merit in an April 19 statement, adding that it has always "carefully considered its disclosure obligations" and believes its disclosure satisfied applicable requirements.