SEC Enforcement Roundup: Egan-Jones Charged; H&R Block Arm to Pay $28 Million

In its action, the SEC said that Option One promised investors in more than $4 billion worth of RMBS offerings it sponsored in early 2007 that it would repurchase or replace mortgages that breached representations and warranties. However, it failed to tell investors that its financial condition was deteriorating and that it was relying on its parent company, H&R Block, to provide funds for it to meet its obligations. H&R Block was under no obligation to do so.

According to the filing, Option One was one of the country’s biggest subprime mortgage lenders with originations of $40 billion in its 2006 fiscal year. However, the meltdown in the mortgage market resulted in a decline in revenues and significant losses, and hundreds of millions of dollars in margin calls from its creditors.

Option One, now known as Sand Canyon Corporation, agreed to pay $28.2 million to settle the SEC’s charges, without admitting or denying the SEC’s allegations. It consented to the entry of an order permanently enjoining it from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and requiring it to pay disgorgement of $14,25 milion, prejudgment interest of $4 million, and a penalty of $10 million. The proposed settlement is subject to court approval.

$32 Million Settlement Reached in Insider Trading Case

In the third matter, the SEC reached a settlement in a $32 million insider trading case it filed last year against a corporate attorney and a Wall Street trader. The SEC alleged that the insider trading occurred prior to at least 11 merger and acquisition announcements involving clients of the law firm where the attorney, Matthew H. Kluger, worked.

Kluger and the trader, Garrett D. Bauer, worked through a mutual friend identified as Kenneth T. Robinson; Robinson acted as a middleman to facilitate the illegal tips and trades. To avoid being caught, Kluger and Bauer used public telephones and prepaid disposable mobile phones for their operations. Robinson, now also charged, cooperated in the SEC’s investigation.

Under the consent agreements with the SEC, Bauer, Kluger, and Robinson each agreed to give up their ill-gotten gains plus interest in order to settle the SEC’s charges: approximately $31.6 million for Bauer, $516,000 for Kluger, and $845,000 for Robinson. In parallel criminal actions brought by the U.S. Attorney’s Office for the District of New Jersey, Bauer, Kluger and Robinson have all pleaded guilty and are scheduled to be sentenced on June 4.