Securities Regulation Daily Ocwen Financial Group sanctioned for executive chairman’s related party transactions
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Thursday, January 21, 2016

Ocwen Financial Group sanctioned for executive chairman’s related party transactions

By Amanda Maine, J.D.

Ocwen Financial Group agreed to pay $2 million to settle SEC charges that it misstated financial results because of flawed valuation methodologies due to related-party transactions on the part of a senior board member and its deficient internal controls (In the Matter of Ocwen Financial Corp.Release No. 34-76938, January 20, 2016).

Flawed accounting. Ocwen is a servicer of mortgages that have been securitized and are owned by residential mortgage-backed securities trusts. According to the SEC, an unnamed executive chairman (EC) at Ocwen approved transactions involving two companies with which he was involved. EC was the chairman of both companies and owned stock in the companies during the relevant period.

Despite EC’s involvement with these two companies, Ocwen, with EC’s approval as executive chairman, conducted business transactions with the companies. While EC recused himself from some decisions regarding these related-party transactions, he also repeatedly approved other transactions.

Ocwen’s filings with the SEC stated that it had policies and procedures designed to avoid these kinds of conflicts of interests. However, the SEC alleged that Ocwen had no written related-party transaction policies or procedures and that despite EC’s recusal from certain transaction decisions, the company’s policy was “ad hoc” and not adequate to protect against potential conflicts of interest.

Valuation misstated. The SEC also alleged that Ocwen materially misstated its financials. EC anticipated that a variance in a fair value estimate provided by his own company and the estimate provided by an independent third party would be significant. However, EC did not disclose this variance to Ocwen or to its external auditors. Ocwen eventually had to issue a restatement.

Audit committee. The SEC’s order pointed out that Ocwen’s audit committee failed to give significant independent consideration of the automatic use of estimates derived from EC’s company. Even though the audit committee reviewed the information that resulted from EC’s company’s valuation methodology, it did not review the methodology itself.

Settlement. In addition to the $2 million monetary penalty, Ocwen agreed to cease and desist from further violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B)and Rules12b-20,13a-1,13a-11,and 13a-13. Ocwen did not admit or deny the SEC’s findings.

The release is No. 34-76938.

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