Ontario Securities Commission begins Home Capital Group proceedings

Lawyers for Home Capital Group Inc. appeared before the Ontario Securities Commission in Toronto on Thursday, the first hearing in a proceeding by the provincial securities regulator against the alternative mortgage lender and three of its executives and former executives.

Speaking before OSC commissioner Janet Leiper, OSCsenior litigation counsel Jennifer Lynch proposed holding a hearing on the merits on July 14, 2017. Lynch said the OSC would deliver its witness list, will-say statements, and expert reports to the respondents by May 24, and called for the two sides to work together to expedite the merits hearing.

The OSC gave notice of its action on April 19. During Thursday's hearing, Lynch said the OSC had delivered "99 per cent" of its disclosure at that time.

"In our opinion, there are few facts in this matter that are in dispute," said Lynch.

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Attorneys for the respondents, which include Home Capital Group, founder, former CEO, and current board director Gerald Soloway, CFO Robert Morton, and former president and CEO Martin Reid, were in attendance at the hearing.

Stikeman Elliott partner Peter Howard, representing Home Capital Group, pushed back against Lynch's proposed date for a merits hearing in July.He suggested that the OSC's timeline was intended for public relations purposes.

"It's disappointing that today's submissionsare not aimed at us but I think aimed at another audience," said Howard, gesturing towards reporters seated in the back of the hearing room.

The two sides ultimately agreed to hold a second hearing on June 2, at 2:00 p.m. ET.

The OSC's allegations against Home Capital

Home Capital disputes the allegations that the regulator has levied against it.

But theOntario Securities Commissionallegesthat Home Capital Group and the three executives breached Ontario securities law by misleading investors in 2015.

Starting in 2014, Home Capital Group launched an internal investigation into mortgage fraud perpetrated by independent brokers with which the company worked. That investigation led Home Capital to end its relationships with those brokers, fire some of its own mortgage loan underwriters, and review its internal practices.

Ultimately, that internalinvestigation meant that Home Capital Group was signing fewer clients up for mortgages information that would be important for investors to know, the OSC says. Although the Home Capital executives knew about the results of the investigation, the OSC alleges, they failed to appropriately disclose the potential financial impacts of those results in regulatory filings and on a conference call with investors.

Home Capital Group's credit rating cut

On Wednesday, credit rating agency DBRS cut its rating on Home Capital Group. DBRS said it was worried about Home Capital's decision to delay releasing its first-quarter earnings results, which were supposed to be released on May 2.

Although Home Capital's stock has declined precipitously since the OSC's action was announced on April 19, the company is keeping itself afloat with an expensive $2 billion line of credit.

Home Capital Group now plans to release its first quarter earnings report after markets close on May 11.