Seattle-based financial services company HomeStreet has agreed to pay a $500,000 penalty to settle charges that it conducted improper hedge accounting and later took steps to prevent employees from blowing the whistle on the company.
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, the hedge accounting violations involved 20 fixed-rate commercial loans originated by HomeStreet for which it entered into interest-rate swaps. Under hedge accounting, companies must periodically assess the hedging relationship and discontinue the use of hedge accounting if the “effectiveness ratio” falls outside a certain range.
The SEC found 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 given to HomeStreet’s accounting department, “which resulted in inaccurate accounting entries,” the SEC said.
After HomeStreet employees reported concerns about accounting errors to management, the company concluded the adjustments to its hedge effectiveness tests were incorrect, the SEC said.
But 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,” according to the SEC.
The company’s counsel went so far as to suggest to a suspected whistleblower that the terms of an indemnification agreement could allow HomeStreet to refuse to pay the employee’s legal costs related to the SEC 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, the SEC said.
“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.