The U.S. Securities and Exchange Commission (SEC) announced that Ocwen Financial Corp. (NYSE: OCN) agreed to settle charges that it misstated financial results by using a flawed, undisclosed methodology to value its complex mortgage assets.

Ultimately, Ocwen agreed to pay a $2 million penalty following an SEC investigation that found the company inaccurately disclosed to investors that it independently valued these assets at fair value under U.S. generally accepted accounting principles (GAAP).

According to the release from the SEC:

In fact, Ocwen merely used the valuation performed by a related party to which it sold the rights to service certain mortgages that remained a financing liability in Ocwen’s accounting. Ocwen’s audit committee failed to review the methodology with company management or its outside auditor, and the related party’s valuation deviated from fair value measures. Ocwen consequently misstated its net income for the last three quarters of 2013 and the first quarter of 2014.

The SEC also found that Ocwen’s internal controls failed to prevent conflicts of interest involving Ocwen’s executive chairman, who played a dual role in many related-party transactions. Ocwen disclosed to investors that its executive chairman was required to recuse himself from transactions with related companies when he also served in a leadership position. However, Ocwen had no written policies or procedures on recusals for related-party transactions, and the recusal practice that existed was flawed, inconsistent and ad hoc. As a result, Ocwen’s executive chairman was able to approve transactions from both sides, including a $75 million bridge loan to Ocwen from a company in which he also served as chairman of the board.

Michael J. Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, commented:

Ocwen’s filings led investors to believe the company was valuing complex mortgage assets using GAAP rather than relying on a related company’s accounting methodology that later proved to be flawed. Ocwen released inaccurate financial statements because its internal controls were inadequate and its audit committee failed to scrutinize whether the methodology was an appropriate way to measure fair value.

Shares of Ocwen were trading up more than 3% at $5.68 on Thursday, with a consensus analyst price target of $8.17 and a 52-week trading range of $4.44 to $11.82.

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