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InvestmentsMortgage

Ocwen to pay $49 million to settle class action lawsuit over restated financials

Also agrees to provide $7 million in company stock to class members

Ocwen Financial will pay at least $49 million to settle a class action lawsuit over the nonbank restating its 2013 and 2014 earnings after its auditor found a potential “material weakness” in the way it valued and recorded a financial transaction.

Ocwen disclosed the settlement Thursday in a filing with the Securities and Exchange Commission.

The settlement stems from Ocwen misstating its net income for the last three quarters of 2013 and the first quarter of 2014 due to a flaw in the company’s system.

That flaw also led to Ocwen paying a $2 million fine to the SEC after an investigation found that the company misstated its financials on several occasions by using what the SEC called “flawed, undisclosed methodology” to value mortgage servicing rights that were sold to an Ocwen-associated company, Home Loan Servicing Solutions.

That SEC investigation also found that Ocwen’s close relationship with Altisource Residential, Altisource Asset Management Corp, Altisource Portfolio Solutions, and Home Loan Servicing Solutions and William Erbey’s former role as chairman of each company contributed to the faulty financial dealings.

Erbey founded Ocwen, and served as chairman of the board of Ocwen, Altisource Residential, Altisource Asset Management, Altisource Portfolio Solutions and Home Loan Servicing Solutions until the relationship between those companies became the subject of intense investigation by the New York Department of Financial Services.

That NYDFS investigation led to Erbey being forced to resign from his positions with each company and a $150 million fine for Ocwen.

The SEC stated that Ocwen’s internal controls failed to prevent “conflicts of interest” involving Erbey because Erbey did not recuse himself from dealings between the various companies he chaired, despite Ocwen’s claim to its investors that Erbey was required to recuse himself from those dealings.

Now, Ocwen will pay at least $49 million to settle a class action suit related to those issues.

According to Ocwen, the nonbank and the class members reached a settlement after a mediated settlement process.

In addition to paying $49 million to the class members, Ocwen also agreed to give $7 million in company stock to the plaintiffs.

Specifically, Ocwen agreed to give 2.5 million shares of the company’s stock to the class members, provided the shares have a total value of $7 million based on the company’s stock price over a five-day period.

However, if the value of the 2.5 million shares does not equal $7 million because Ocwen’s stock value is too low, Ocwen may be required to give the class members more shares.

Alternatively, Ocwen may simply give the class members an additional $7 million in lieu of the shares.

In its filing, Ocwen said that it expects insurance to cover between $12 million to $14 million of the $49 million payout.

Ocwen also said that it estimates the net pre-tax expense impact of the settlement on its earnings to be between $34 million and $36 million.

“While the company believes that it has sound legal and factual defenses, Ocwen agreed to this settlement in order to avoid the uncertain outcome of trial and the additional expense and demands on the time of its senior management that a trial would involve,” the company said in its filing.

The settlement agreement now goes to the United States District Court for the Southern District of Florida for approval.

Ocwen cautions that the there can be “no assurance” that the settlement will be finalized and approved by the court.

“In the event the settlement in principle is not ultimately finalized and approved, the litigation would continue and we would vigorously defend the allegations made against Ocwen,” the company added. “If our efforts to defend against such claims were not successful, our business, financial condition, liquidity and results of operations could be materially and adversely affected.”

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