Seattle-based HomeStreet Inc. has agreed to pay a settlement of $500,000 to the SEC over charges of improper hedge accounting and the later impediment of potential whistleblowers.
Company Treasurer Darrell van Amen also agreed to pay a separate $20,000 penalty to settle charges that he caused the accounting violations. Both the company and van Amen agreed to the SEC's order without denying or admitting any wrongdoing. The company disclosed recently that it had agreed in principle to settle the matter.
According to the SEC, HomeStreet originated approximately 20 fixed-rate commercial loans and hedged the exposure by entering into interest rate swaps. The company then designated the loans and the swaps in fair value hedging relationships, which reduces possible income statement volatility if hedge accounting is used. The SEC requires companies to periodically assess the hedging relationship and discontinue hedge accounting if the effectiveness ratio goes beyond a certain range.
The SEC claims that during 2011 to 2014, van Amen made unsupported adjustments in the company's hedge effectiveness testing so that the company could continue to use the favorable accounting practice, with the altered test results then causing inaccurate accounting entries in HomeStreet's books. The company and van Amen neither admitted nor denied the findings, according to the SEC's order instituting the fine.
The SEC also claims that some employees reported concerns about accounting errors to management, and were then suspected of being whistleblowers after the SEC contacted the company in April 2015 seeking documents related to hedge accounting. The SEC claims the company then took actions such as asking former employees to sign severance agreements that would waive potential whistleblower awards or else risk losing severance payments and other post-employment benefits, and suggesting to a suspected whistleblower that the terms of an indemnification agreement could allow HomeStreet to deny payment for legal costs during the SEC's investigation.