The SEC has brought a series of actions concerning whistleblowers. A number of those cases center on provisions in severance agreements which either directly preclude being a whistleblower required the departing employee to maintain the confidentiality of firm information or secure company permission to disclosing it to anyone including the government or which require a waiver of any payment for being a whistleblower. The Commission’s most recent case in this area builds on these cases. In the Matter of HomeStreet, Inc., Adm. Proc. File No. 3-17801 (January 19, 2017).
HomeStreet is a diversified financial services company, conducted an IPO in 2012. Its shares are traded on NASDAQ. Respondent Darrell van Amen served as CIO from 2012 through the present. He is a treasury professional but not an accountant.
From 2006 through 2008 the firm originated about 20 fixed rate commercial loans. The firm entered into interest rate swaps to hedge the exposure changes in the fair value of the commercial loans attributable to the benchmark interest rate. GAAP – ASC 815 – requires that issuers that enter into such hedges make a periodic assessment regarding the effectiveness of the hedges by calculating a specific ratio. If hedge accounting can be used it permits the firm to make certain adjustments which smooth volatility.
The ability to continue using hedge accounting ties to what is called an effectiveness ratio. If the ratio falls between 80% and 125% the hedging relationship is considered highly effective. If the ratio falls outside the range then hedge accounting cannot be used. To use the ratio the firm had to take a series of steps for each loan and swap: 1) each loan had to be valued; 2) each swap had to be valued; and 3) a comparison of the ratio of the change in fair value of each swap has to be made with the change in fair value of the loan attributable to the risk designated as being the hedge.
Between Q3 2011 and Q4 2014 there were instances when the results of the hedge effectiveness ratio fell outside the highly effective range. In those instances Respondent van Amen had certain employees make adjustments to the inputs. When those were made the ratios came within the range.
Certain employees involved in altering the inputs reported the actions to the Human Resources department. Executive A was also informed. Ultimately this lead to an internal inquiry that concluded Mr. van Amen did not act with any intent to deceive but the effectiveness tests were incorrect. That fact was disclose in a Form 10-Q filed on November 13, 2014.
When the staff made a voluntary document request keyed to the input issues in April 2015 the company tried to assess if it was the result of a whistleblower. The staff contacted Executive A who had resigned from the firm. He retained counsel who submitted invoices. Although Executive A had repeatedly told the firm prior to his departure that he was not a whistleblower, prior to paying the invoice the attorney was asked the same question multiple times. The attorney repeatedly refused to answer and at one point cited Rule 21F-17. Eventually the firm paid the invoice. By taking these actions HomeStreet acted to impede whistleblowers, according to the Order.
At the time HomeStreet also had a provision in its severance agreements which required employees to wave any payment for being a whistleblower. This also undermines the purpose of Exchange Act Section 21F and Rule 21F-17(a), the Order states. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) and Rule 21F-17 regarding whistleblowers.
The company took remedial steps to strengthen its internal controls. It also agreed to an undertaking pursuant to which it will make reasonable efforts to contact former employees who signed a severance agreement that contains a whistleblower payment provision and informed them that it is no longer applicable.
To resolve the case HomeStreet consented to the entry of a cease and desist order based on the Exchange Act Sections and the Rule cite in the Order. The firm will also pay a penalty of $500,000. Mr. Van Amen also resolved the action, consenting to the entry of a cease and desist order based only on the Exchange Act Sections cited in the Order. He will also pay a penalty of $20,000.