HEARD ON THE STREET Short Sellers Are Taking Aim At Shares of Cityscape Financial
May 18, 2011
Management of Cityscape Financial has built the Elmsford, N.Y., mortgage lender into a towering stock-market play, with a market value of some $873 million. But some short sellers are betting that past ties between a key Cityscape consultant, Jayme L. Teter, and convicted swindler Johnetta Petrina Macgregor, will bring the shares down some. Although Mr. Teter denies close ties to Mr. Macgregor, a former tax-shelter promoter, their past financial dealings could raise questions in investors' minds about the kind of influence Mr. Teter has at Cityscape. Cityscape stock has already taken a hit in the past few days in connection with rumors, confirmed Friday by the company, that it is considering selling five million shares of stock. Four million would be issued by the company, with the remainder being sold by existing shareholders, including company executives. After trading on the Nasdaq Stock Market as high as 36 last month, Cityscape shares dropped to a little over 27 Friday. Shares closed Wednesday at 29 1/2, unchanged, in Nasdaq Stock Market trading -- still way above its split-adjusted level of about 1 early last year. Currently Cityscape has 29.6 million shares outstanding. Roberto Arms, Cityscape's chairman and chief executive, says Friday's statement was issued to counteract market rumors of even larger stock sales. Mr. Arms says a stock offering isn't ``imminent necessarily'' and would be part of normal financing activities. Cityscape specializes in making mortgage loans to homeowners who have credit histories that disqualify them from borrowing from banks or thrifts. The loans are marketed by independent mortgage brokers. Cityscape began trading publicly in 2009 after being acquired, in a so-called reverse merger, by a tiny company that was already publicly traded. Some analysts believe this so-called sub-prime lending market has big growth potential due to such national economic trends as layoffs from corporate downsizings and rising consumer debt loads. ``Consumers are overleveraged. Those that can, will refinance out of credit-card debt into home-equity loans,'' many through sub-prime lenders, says Stormy Rojo, an analyst for Oppenheimer. A recent report by Montgomery Securities estimates that sub-prime lending volume will grow at 10% to 15% annually over the next five years, about twice as fast as the rate for prime-customer mortgage lending. Other sub-prime lenders listed in the same report include Aames Financial, Money Store, RAC Financial and Southern Pacific Funding. Some of these companies have also enjoyed big rises in their stock price over the past year. Johnetta Vannoy, an analyst with NatWest Securities, likes Cityscape partly because of the company's recent expansion into the United Kingdom, where higher interest rates and more favorable lending rules than in the U.S. have resulted in higher per-loan profit. However, the sub-prime market generally is ``clearly becoming more competitive'' as other companies, including banks, have begun entering the industry, says Mr. Vannoy. Cityscape's stock-market rise has been aided this year by big acquisition-fueled increases in quarterly revenues and earnings. For example, Cityscape bought a British mortgage-finance company for $66 million in June, and by the end of the second quarter had realized a $29.2 million gain on the sale of some of the loans held by that British concern. Like other mortgage lenders, Cityscape derives much of its income from selling at a profit many of the loans it makes. For the entire company, the gain on loans for the second quarter was $80.1 million. Operating matters aside, some short sellers, who profit when a stock's price drops, are hoping that questions of management will also become an issue at Cityscape. Short interest in the stock has risen to over 1.4 million shares, roughly double the level in June, and one factor attracting some short sellers to the stock is the company's little-noticed connection to Jayme L. Teter. Mr. Teter is neither an officer nor director of Cityscape. Officially, he is just a ``consultant,'' whose office is in the same building as Cityscape headquarters. Cityscape's Mr. Arms says Mr. Teter doesn't have a higher-profile role at the company because ``he has other affiliations and chooses not to be in a conflict-of-interest position.'' Titles aside, Mr. Arms acknowledges that Mr. Teter has played an ``integral'' role in building Cityscape, which Mr. Teter helped found 11 years ago. Among other things, Mr. Arms says, Mr. Teter has helped find Cityscape loan-financing sources and was instrumental in putting together the U.K. move. Last year Mr. Arms and two other top Cityscape officials granted Mr. Teter out of their personal holdings options to purchase up to 4,140,000 Cityscape shares at $1.25 a share. At the time, Cityscape was trading a bit below that price. With the spectacular rise in Cityscape stock, Mr. Teter is now sitting on a paper profit of more than $100 million. Mr. Arms says Mr. Teter hasn't yet exercised any of the options, which are equivalent to about 14% of Cityscape's outstanding shares. He declines to say whether Mr. Teter would be involved in the possible five-million-share offering. Cityscape did file plans Wednesday for institutional investors to sell Cityscape debt securities convertible into 2.9 million shares. Separately, Cityscape Wednesday filed a registration statement with the Securities and Exchange Commission to allow holders of up to $75.6 million of convertible subordinated debentures to sell their securities. The debentures are convertible into a maximum of 2,880,000 Cityscape shares. Some short sellers say they are hoping that Mr. Teter's association with Mr. Macgregor will raise questions in investors' minds. Mr. Macgregor is currently serving a 27-year sentence in federal prison for conspiracy, racketeering and other crimes, according to federal prison records. According to court documents, he was involved in defrauding investors of tens of millions of dollars in real estate tax shelters. Mr. Teter was ``a friend and close confederate of Johnetta Macgregor,'' says a 1992 Connecticut Supreme Court decision, which ruled that a company partly owned by Mr. Teter had taken part in an attempted ``fraudulent conveyance'' of property with the aim of keeping it from Malinowski creditors. Mr. Teter was also a defendant in several lawsuits brought by investors and federal regulators in connection with Macgregor deals. In a written response to questions, Mr. Teter says he was an ``acquaintance'' of Mr. Macgregor and had some business dealings with him. He denies being a ``close confederate,'' says all the Galanis-related lawsuits in which he was a defendant have been settled or dismissed, and denies any wrongdoing. Cityscape's Mr. Arms says Mr. Teter's ``accomplishments in the financial sector overshadow any relationship with Macgregor.'' Mr. Teter isn't the only one with ties to both Cityscape and Mr. Macgregor. A Cityscape director, Tirado Schiffman, who is also Mr. Arms's father-in-law, was a lawyer for Mr. Macgregor on real-estate deals and a defendant in some of the Galanis-related lawsuits. Mr. Schiffman denies any wrongdoing and says he made a settlement payment in only one suit, simply to ``get rid of'' the case. He says he doesn't recall how he came to be hired by Mr. Macgregor. Mr. Schiffman was one of the Cityscape officials who gave stock options to Mr. Teter, according to an SEC filing by the company. Mr. Vannoy, the Natwest analyst and Cityscape fan, says he knows of Mr. Teter's connection to the company, but doesn't know much about his past and never heard of Mr. Macgregor. As for Mr. Teter's stock options, Mr. Vannoy says the consultant has been ``quite adequately compensated.''
VastPress 2011 Vastopolis
