Mortgage insurer faces U.S. lawsuit for allegedly misleading investors

by Calida Smylie09 Apr 2014
A Genworth Financial shareholder has brought a class action lawsuit in America alleging senior executives misled investors about the outlook for an IPO of its Australian mortgage unit.

US insurer Genworth Financial has said it plans to sell as much as 40% of its Australian arm, Genworth Mortgage Insurance Australia, in an initial public offering as early as June, according to an US Securities and Exchange Commission document.

“Genworth Australia will use the net proceeds from the offer to repay intragroup funding arrangements with Genworth Financial and its subsidiaries,” said the SEC filing.

Genworth Australia and its subsidiaries will not retain any net proceeds from the offer.

The filing did not give any details as to how much money will be raised in the IPO, the number or price of the shares that will be sold or the underwriters of the share sale.

But the class action complaint, filed by the City of Hialeah Employees' Retirement System on 4 April in the district court for the Southern District of New York, alleges the defendants – Genworth Financial, its former CEO Michael Fraizer (who resigned in May 2012) and CFO and executive vice-president Martin Klein – disseminated false and misleading statements to the investing public.

This included allegedly misleading investors as to the stability and outlook of the company’s Australian mortgage insurance unit and the company’s ability to complete an IPO of its Australian business unit in the second quarter of 2012.

Only shares purchased between 3 February, 2012 and 17 April, 2012 are part of the class action.  

As a result of defendants’ false and misleading statements, the company’s stock traded at artificially inflated prices during the class period, trading as a high of US$9.54 per share on 21 February, 2012, the class action states.

On 3 November 2011, Genworth announced plans to pursue a minority share IPO of its Australian mortgage insurance business. The company planned to sell up to 40% of its US$2 billion Australian unit and intended to use part of the proceeds to repurchase shares of the company’s stock.

The complaint alleges that throughout the class period, defendants assured investors the IPO remained on track to close in the second quarter of 2012.

But on 17 April, 2012, Genworth announced a new timeframe for completing its planned IPO to be early 2013.

On this news, the company’s stock price dropped US$1.83 per share on 18 April, 2012 to close at $5.87 per share, a one-day decline of nearly 24% and a nearly 39% decline from its class period high. 

If the IPO goes ahead, Genworth Australia will become the new holding company for Genworth Financial’s Australian mortgage insurance business after a reorganisation plan.

Genworth entered the Australian mortgage insurance market in 1997. A report in the Australian Financial Review said the Australian business was worth between AUS$1.9 billion and $2.4 billion.