Home Capital Group Inc. agreed Wednesday to pay a total of $30.5 million to settle both OSC allegations of misleading disclosure and a class-action lawsuit in a dual agreement that appears designed to help salvage the troubled mortgage lender as a going concern or viable takeover target.

“These settlements will enable us to move forward with regaining the confidence of our depositors and shareholders and creating value for all our stakeholders,” board chairwoman Brenda Eprile said in a statement.

“Home Capital will accept full responsibility for failing to meet its disclosure obligations to the marketplace and appreciates the importance of the serious concerns raised by the (Ontario Securities) Commission with respect to continuous and timely disclosure,” she said, adding that the company “acknowledges that the Commission is not to blame for the events of recent months involving its liquidity position.”

The regulatory settlement with staff of the Ontario Securities Commission stems from accusations Home Capital misled investors for months about an internal probe in 2014 and 2015 that led the alternative mortgage lender to cuts ties with 45 brokers over falsified income documentation used for some real estate loans.

Home Capital founder Gerald Soloway, former chief executive Martin Reid, and former chief financial officer Robert Morton are all part of the proposed settlement agreement with OSC staff, which must be approved by a panel of commissioners at Canada’s largest capital markets watchdog set to convene at a hearing August 9.

The class action settlement is dependent on court approval, and each settlement is dependent on the other.

In the OSC settlement, the company agreed to pay an administrative penalty of $10 million. In addition, Soloway will pay $1 million, and each of the two others named will pay $500,000.

If the proposed settlement is approved, Soloway, Morton, and Reid will be restricted in their capital markets activities. Soloway is to be reprimanded by the commission, and will be prohibited from acting as a director or officer of any reporting issuer for a period of four years. Morton and Reid are also to be reprimanded and will each be prohibited from acting as a director or officer of any reporting issuer for two years.

The bulk of the money to be paid to the OSC in penalties, up to $11 million of the $12 million in total, will go towards fulfilling the $29.5 million class action settlement.

The proposed class action lawsuit, which had not yet been certified, was filed in the Ontario Superior Court of Justice in February. It alleged misrepresentations had been made to investors in Home Capital stock because the problems in the broker channel were not disclosed in a timely manner.

Wednesday’s settlements should allow Home Capital to put regulatory and legal problems behind it and move on to deal with financial challenges that unfolded in the aftermath of the allegations, including massive withdrawals from the company’s deposit accounts.

The company’s shares climbed seven per cent Wednesday to close at $12.13, following a Reuters report that Home Capital was close to reaching a new funding arrangement with a syndicate of banks to replace an emergency $2 billion line of credit extended by a syndicate led by the Healthcare of Ontario Pension Plan (HOOPP). Analysts said the emergency loan had an effective interest rate of 22.5 per cent.

The liquidity crisis at the company that triggered the need for emergency funding was set in motion in late March when, just weeks before the OSC unveiled its April 19 statement of allegations, Reid abruptly left his position as chief executive. That sparked the beginning of the withdrawals from Home Capital’s high-interest savings accounts.

The crisis of confidence picked up steam after the OSC’s formal allegations were made public, and speculation on social media suggested some of Canada’s big banks were limiting client investments in Home Capital GICs or capping them at the $100,000 covered by the Canada Deposit Insurance Corp.

More than 90 per cent of funds have been withdrawn from Home Capital’s high interest savings accounts, which stood at $104.4 million on Thursday.

The pace of withdrawals slowed in recent weeks, with overall liquidity stabilizing. But the rapid erosion of the deposit base, which Home Capital used to fund mortgage loans, caused it to take on the expensive $2 billion line of credit from the syndicate of lenders led by HOOPP. Analysts said the emergency loan had an effective interest rate of 22.5 per cent.

Legal experts were surprised Home Capital did not settle with regulators earlier in the process, given the reputation and confidence issues triggered by the public release of formal allegations.

Financial Post