An investment banker with one of Canada’s major banks, surveying the devastated state of Home Capital Group, has a question: “I want to know why the OSC (Ontario Securities Commission) perpetrated this thing.” Did Home Capital, whose shares have lost 70 per cent of their value since April 19, “perpetrate a fraud on the market? I don’t think so.”
As Home Capital geared up this week to face OSC allegations that the $28-billion mortgage firm may have breached disclosure regulations two or three years ago, the banker added in an interview with the Financial Post: “You don’t cause a panic in a bank. You’re just asking for trouble. And I can’t believe OSFI (the federal financial regulator) is happy with what these guys (at the OSC) did.”
ScreenshotMarc Cohodes' Twitter profile photo
What those guys did is send a company that, by most accounts and expert observation, remained a profitable mortgage-lending business into a confidence tailspin. In the wake of the OSC action, depositors started to flee — as one might expect — and the company’s shares dropped from $22 in late April to $6.
Home Capital was trading near $6 again Thursday after credit-rating agency DBRS downgraded the company and placed its various securities and investment offerings under review. There were no underlying reasons for the DBRS downgrade, except that the OSC had triggered an investor and depositor run on the company. The agency warned that the company, stripped of its top executives, might not be able to find new ones. It also might not be able to find new equity or keep depositors.
The sole cause of this investment wipe out is the OSC, whose mandate is to protect investors.As previously noted, the OSC last month called for dismissal of top executives on the grounds that Home Capital had failed to disclose relatively minor problems with a small number of its mortgage brokers back in 2014. The broker issue, ancient history to the market, turns on what will be the prime sticking point in OSC hearings: Has the commission turned what are largely minor and legally subjective management decisions about shareholder disclosure into a major corporate scandal that has wiped billions of dollars off the value of Home Capital and other financial institutions, large and small?
Short sellers spew bull about Home Capital, hurting the investors the OSC claims to protect
Whether OSFI — the federal Office of the Superintendent of Financial Institutions — is happy or not, it won’t say. In answer to a series of questions I sent to OSFI this week, the agency said it is “prevented by law” from confirming whether or not Ontario securities commissioners asked OSFI for advice before moving on Home Capital. As to whether OSFI approved or consented to the OSC action, the federal agency responded that “OSFI has no role in such decisions.” Is that a clue?
In the public arena, however, the OSC has an unofficial accomplice in the Home Capital story — a hyperbolizing, fake-news throwing, foul-mouthed, short-selling media star named Marc Cohodes.Cohodes has assorted attributes. He’s a famed short seller, a magnet for libel suits, and a pitcher of Kool-Aid in his Twitter avatar. As someone who’s betting heavily on a short position against Home Capital, his objective is to get people to drink his Kool-Aid and cash in.
When the OSC filed its Home Capital charges, Cohodes appeared on BNN to praise the regulator. “First of all, I really commend the OSC, who I also call the Queen Street Cowboys.” That must have been intended as a compliment, but you gotta wonder what it means to be a “cowboy” regulator. Then he said: “I am thrilled that they are riding on Home Cap … I think the fraud at this company is widespread. It extends to the board … it is top to bottom.”
Whether one likes regulators and short sellers, or considers both to be flawed participants in the marketplace, it is hard not to notice the gross double standard at work. In the Home Capital case we have the securities commission hounding the company for failing to disclose allegedly material information and prosecuting management for breaching contentious sections of securities law. On the other hand is Cohodes, who can appear on any TV network and feed his Twitter account with all manner of bullshit to the detriment of the investors the OSC is supposed to be protecting.
Is it okay to declare a company to be a “top to bottom” fraud? Was it okay when Cohodes tweeted that Home Capital chairman Kevin Smith, who served on the board of the Healthcare of Ontario Pension Plan, “is a creep and a liar”? Cohodes is free, perched in California, to announce that he thinks Home Capital’s “equity is worthless … the company should not be in business.”
It’s a free country, as they say in both Canada and California, but it’s obviously a lot freer for guys like Cohodes than for the executives at Home Capital. He’s riding his short to millions in profits, spouting unsubstantiated claims on the back of the OSC’s dubious charges that Home may or may not have breached the commission’s material-disclosure regulations, which one law professor says contain the most difficult and contentious rules in the industry.
On short street, where anything goes, the game is afoot. According to the latest TMX data, the short position on Home Capital as of April 30 was 2.7-million shares, up from 2.1 million a week earlier. That’s equal to about 4.5 per cent of the company’s outstanding equity. Unlike 100 per cent of shareholders, Cohodes is hoping Home Capital goes to zero. The OSC has been helping him get there.