The Securities and Exchange Commission today announced that Ocwen Financial Corp. has agreed to settle charges that it misstated financial results by using a flawed, undisclosed methodology to value complex mortgage assets.
Ocwen agreed to pay a $2 million penalty after an SEC investigation found that the company inaccurately disclosed to investors that it independently valued these assets at fair value under U.S. Generally Accepted Accounting Principles (GAAP). In fact, Ocwen merely used the valuation performed by a related party to which it sold the rights to service certain mortgages that remained a financing liability in Ocwen’s accounting. Ocwen’s audit committee failed to review the methodology with company management or its outside auditor, and the related party’s valuation deviated from fair value measures. Ocwen consequently misstated its net income for the last three quarters of 2013 and the first quarter of 2014.
“Ocwen’s filings led investors to believe the company was valuing complex mortgage assets using GAAP rather than relying on a related company’s accounting methodology that later proved to be flawed,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “Ocwen released inaccurate financial statements because its internal controls were inadequate and its audit committee failed to scrutinize whether the methodology was an appropriate way to measure fair value.”
According to the SEC’s order instituting a settled administrative proceeding, Ocwen’s internal controls also failed to prevent conflicts of interest involving Ocwen’s executive chairman, who played a dual role in many related party transactions. Ocwen disclosed to investors that its executive chairman was required to recuse himself from transactions with related companies where he also served in a leadership position. But Ocwen had no written policies or procedures on recusals for related party transactions, and the recusal practice that existed was flawed, inconsistent, and ad hoc. Therefore, Ocwen’s executive chairman was able to approve transactions from both sides, including a $75 million bridge loan to Ocwen from a company where he also served as chairman of the board.
The SEC’s order finds that Ocwen violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13. Ocwen consented to the SEC’s order without admitting or denying the findings.
The SEC’s investigation was conducted by William Finkel, Elisabeth Goot, Kevin McGrath, Peter Altenbach, Kerri Palen, Sharon Bryant, and Daniel Nigro. The case was supervised by Daniel Michael and Steven Rawlings. The SEC appreciates the assistance of the New York Department of Financial Services and the Public Company Accounting Oversight Board.