RE:Sh|t has hit the fan - Securities Class Action !!!For Home Capital, the risk of class action is more worrisome than potential OSC penalties. Home Capital said in the statement on Friday that it believes it had satisfied the applicable requirements, and will respond to the OSC before the regulator decides whether to push forward with proceedings.
Not all enforcement notices reach that level and until formal public proceedings begin, “we can only speculate as to potential financial impacts and/or other outcomes,” said National Bank analyst Jaeme Gloyn in a note on Sunday.
But the financial impact of any sanctions under the OSC framework are “likely manageable.” For example, sanctions could include a penalty of no more than $1-million for each respondent’s failure to comply, the note to clients said.
“Based on enforcement activity reported by the OSC in 2014 and 2015, potential financial sanctions appear manageable, in our view,” Gloyn said.
Total financial sanctions during that period amounted to an average of $800,000, the analyst added, though it noted Ernst & Young LLP reached an $8-million settlement over its role as external auditor for Sino-Forest Corp. in 2014.
More significantly, however, disclosure failures have led to class-action lawsuits in the past, the note said. Gloyn pointed to July 2009, when Manulife Financial Corp. was named as a defendant in a $1-billion class-action lawsuit in connection to its disclosure obligations regarding its exposure to equity markets — which came one month after the company received an OSC enforcement notice. On Jan. 31, 2017, Manulife settled the class action lawsuit for $69-million.
“In our view, this suggests that the severity of the situation could increase materially in the event a class-action lawsuit against HCG is brought forth,” Gloyn wrote.
Still, potential financial sanctions from the OSC or any related litigation are “secondary to the near-to-medium term outlook for the company.”
Bigger looming issues include the potential impact of regulatory changes (enacted and proposed) on Home Capital and “persistent earnings headwinds.”
“The resulting overhang from OSC proceedings only serves to reinforce our view that the market will ascribe a higher risk premium to HCG in the near term,” said Gloyn, reiterating its rating of underperform.
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