Skip to main content

Short seller Marc Cohodes, Home Capital Group's chief foil, says he is not closing out his short position in the stock and is prepared to combat the new narrative that renowned investor Warren Buffett has saved the beleaguered lender.

"They say Warren Buffett this, Warren Buffett that," Mr. Cohodes said Thursday as Home Capital shares leapt on the news that Berkshire Hathaway Inc. has agreed to invest up to $400-million in equity and provide a $2-billion loan to replace more expensive financing. "In the press release, they say it's subject to [Toronto Stock Exchange] approval based on the exchange's financial hardship provisions."

Those rules allow Home Capital to accept the dilutive financing deal without an initial shareholder vote – and if things are bad enough for that to happen, Mr. Cohodes argues, the true condition of the company "has been withheld from the shareholders."

David Berman: Why copycats can't follow Buffett's lead on Home Capital

Andrew Willis: Why Warren Buffett is bullish on Canada

Read more: The nuts and bolts behind Home Capital's deal with Berkshire Hathaway

Under the terms of the deal, Berkshire gets to buy a roughly 20-per-cent stake in Home Capital at just $9.55 per share – a discount of nearly 50 per cent from where the stock closed on Thursday. Normally, a financing like that would require shareholder approval, but the company is relying on a little-used exemption provided by the TMX for companies in financial distress.

The Berkshire news is an unfortunate turn for Mr. Cohodes, who has previously laid claim to being right on Home Capital when others have been wrong. I have spoken to Mr. Cohodes frequently, starting two years ago when the company's mortgage-disclosure problems first surfaced, and more frequently in recent months. He has been insistent the stock is headed to zero and that investors who have bid it up in recent weeks are wrong.

Now, he says, the Berkshire investment changes the timeline of his thesis – he no longer believes a collapse is imminent – but not his fundamental beliefs. One is that the company's balance sheet is worse than believed, and another is that its credit financing remains expensive. ("Last I looked, borrowing at 9 [per cent] and lending at 5 doesn't make sense," he said.)

Journalists understand that the first reporter on an exposé usually gets additional stories because the people with the best information come to them, seeing that reporter as the primary truth-teller. And because Mr. Cohodes has been the highest-profile bear on Home Capital for two years, he has arguably heard more stuff about the company than anyone else.

I recently met with Mr. Cohodes at The Bagel Deli, a restaurant at the southern tip of the city of Denver. He was in town because, maybe improbably, he's friends with the lead singer of '90s rock band Collective Soul, which played a show the previous evening. Mr. Cohodes and his wife, Aurora, were in from northern California for the event.

The two were 15 minutes early for breakfast; I arrived on time. The first thing he did was slide a copy of the February/March issue of Bloomberg Markets magazine across the table, the issue that includes an eight-page article on him, "The World According to a Free-Range Short Seller With Nothing To Lose." He autographed it: "David, Always Speak Truth To Power."

This is precisely what Mr. Cohodes believes he has been doing all along with Home Capital, whose shares took a precipitous fall earlier this year when the Ontario Securities Commission, to the surprise of many, charged the company and three former high-level executives with a breach of securities laws for its failed disclosures in 2015. (Home Capital and the three men have agreed to a settlement of the case that will see them pay a combined $12-million in penalties, most of which will go to investors in a class-action suit.)

Some market observers looked at the situation and faulted not Home Capital, but Mr. Cohodes and the OSC. It was a case of a feckless regulator, they said, browbeaten by an opportunistic, profane American short seller whose primary interest is lining his pockets, no matter the cost to Home Capital, its employees, and the Canadian banking system and housing markets.

This is not, as Mr. Cohodes notes frequently, his first rodeo, so while he sounds indignant at the criticism, he is not surprised. Mr. Cohodes, who says he now manages only his own family's money, has been short selling for three decades. He has tussled with a number of companies that turned into big corporate blowups, such as the European speech-software company Lernout & Hauspie. His battle with Novastar Financial, a U.S. subprime mortgage lender that collapsed to less than $1 per share, was turned into a Harvard Business School case study, as Mr. Cohodes enjoys pointing out.

When Mr. Cohodes's comments extend beyond Home Capital and make larger points about Canadian regulatory culture and the polite society, they will likely rankle many. The man casts his battle against Home Capital not just as a profit-making venture, but as a kind of crusade.

Canadian investors looked the other way when the Home Capital disclosure situation first arose in 2015, and regulators such as the Office of the Superintendent of Financial Institutions and the licensors of mortgage brokers have still been very quiet. If the company had to terminate dozens of brokers and brokerage firms for falsifying information on mortgage applications, where were the disciplinary actions? Where are the mortgages they made for Home Capital, with their fake income data? Are the brokers still out there today, making more fraudulent loans?

"However you slice it, investors need to know," Mr. Cohodes says. "Investors should know, and the bureaucrats who enforce stuff need to do their jobs. They need to do their jobs so this shit doesn't happen again and again and again, because mortgage fraud is a blight on the system, and when it's exposed and then apologists say, 'Well, it's only soft fraud,' or 'It's fraud for shelter.' Fraud is fraud, okay?"

Mr. Cohodes has been mostly right on Home Capital, and on many other names before. Now, with the stock shooting upward, he looks wrong. But he's not walking away. "I'm going back to the dugout, getting a bigger bat, and I'm going to swing harder."

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe