The SEC announced that Seattle-based financial services company HomeStreet Inc. has agreed to pay a $500,000 penalty to settle charges that it conducted improper hedge accounting and later took steps to prevent potential whistleblowers in violation of SEC Rule 21F-17, which prohibits taking actions to impede communication with the SEC.
According to the SEC’s order, HomeStreet originated approximately 20 fixed rate commercial loans and entered into interest rate swaps to hedge the exposure. The company elected to designate the loans and the swaps in fair value hedging relationships, which can reduce income statement volatility that might exist absent hedge accounting treatment. Companies are required to periodically assess the hedging relationship and must discontinue the use of hedge accounting if the effectiveness ratio falls outside a certain range. The SEC’s order finds that in certain instances from 2011 to 2014, HomeStreet’s treasurer Darrell van Amen made unsupported adjustments in HomeStreet’s hedge effectiveness testing to ensure the company could continue using the favorable accounting treatment. The phony test results were provided to HomeStreet’s accounting department, which resulted in inaccurate accounting entries.
The SEC also found that after HomeStreet employees reported concerns about accounting errors to management, the company concluded the adjustments to its hedge effectiveness tests were incorrect. 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 hunting down the identity of the supposed “whistleblower.” It was suggested to one individual considered to be a whistleblower that the terms of an indemnification agreement could allow HomeStreet to deny payment for legal costs during the SEC’s investigation. HomeStreet, in an effort to discourage and ferret out any whistleblowers, required former employees to sign severance agreements that would waive any potential whistleblower awards. These agreements also threatened to strip former employees of their severance payments and other post-employment benefits.
Commenting on HomeStreet’s efforts to silence any potential whistleblowers, Jina Choi, Director of the SEC’s San Francisco Regional Office said, “Companies that focus on finding a whistleblower rather than determining whether illegal conduct occurred are severely missing the point.” HomeStreet and van Amen consented to the SEC’s order without admitting or denying the findings that they violated internal accounting controls and books and records provisions of the federal securities laws. HomeStreet also violated Rule 21F-17, which prohibits taking actions to impede communication with the SEC. SEC
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