BOFI Federal Savings: Sleeping With the Enemy Can Cost a Bank a Lot of Money

In the evening of Aug. 8, 2016, a retired hedge fund manager named Marc Cohodes was puttering around the house on his Cotati, California, farmstead when he received a most unusual phone call.

The caller was Polly Towill, a partner with Los Angeles’ Sheppard Mullin and, according to Cohodes, she got right to the point: She was calling on behalf of her client, La Jolla, California-based BOFI Federal Savings Bank and she was authorized to explore retaining him as a consultant. What the bank needed him for, said Towill, was to help the bank’s legal team and its CEO, Greg Garrabrants, better understand how short sellers developed their opinions and how they shared their views.

Of particular interest to BOFI, said Towill, was anything Cohodes knew about short sellers who published their research on Seeking Alpha, especially the one who used the pseudonym “Aurelius.”

Given who Cohodes is, a more improbable request is difficult to imagine.

A short seller for 30 years as a partner — and then general partner — of a prominent short-biased hedge fund, Cohodes undoubtedly knows most members of the small community of dedicated short sellers either professionally or socially.

(His approach to short selling is simplicity itself. Those few hardy souls who are willing to wager considerable sums against popular or beloved companies, regardless of market or economic conditions have what he describes as nothing less than “a genetic defect.” Most people are predisposed to be curious about how things work; Cohodes and his friends wonder how things break.)

Moreover, unlike most short sellers who keep a low profile for fear of attracting legal headaches and inducing costly short squeezes, Cohodes is unafraid to vocally defend the right of short sellers to publicly express critical opinions without being sued.

And these days now that he is free of the concerns of running a hedge fund, Cohodes is practicing what he preaches, big time. He regularly takes to Twitter — where he has a following of 14,400 — to riff on whatever enters his mind, such as delivering eggs from his free-range chicken flock to a San Francisco store, companies he’s shorted with his personal account, his fondness for the rock band Collective Soul and rum punch. On occasion he’ll put on a collared shirt and expand his Twitter schtick into a presentation, as he did when he appeared at the Grant’s Interest Rate Observer conference in April.

It’s best to not let Cohodes’ amiably profane informality mislead you, however. His commitment to short-selling companies that are, in his view, both mismanaged and operationally unsound is every bit as robust as it was when he was a hedge fund manager.

A glance at the one-year stock price chart of two of the companies he recently shorted, Canadian mortgage lenders Home Capital Group and Equitable Bank, suggests that he’s generating a nice return for himself, rum punch and free-range chickens aside.

So as Cohodes saw it, a call from a lawyer asking him to help BOFI draw a figurative map to manage its response to a multiyear drumbeat of short-seller criticism, while possibly exposing other short sellers to litigation, was mighty damned strange.

Cohodes, whose public discussion of his short positions over the decades have made him intimately aware of the litigation process, told the Southern Investigative Reporting Foundation that he initially decided to respond “straight — no emotion, nothing.”

“I told [Towill] that since I’d never said or written a word about BOFI, I’d be useless,” Cohodes said. Trying to be polite, he suggested only that Towill and Garrabrants need not worry about short sellers, he recalled.

“Buckle down, execute on your plan and try to be as open as possible. The stock [price] will take care of itself,” Cohodes remembered telling Towill. (In an email reply to Towill after the conversation ended, he reiterated this suggestion.)

Towill acknowledged this was “decent advice” but wouldn’t take Cohodes’ broader hint to drop the matter. He said she told him, “Greg is really upset with all the criticism being leveled at [BOFI] and they needed advice on how to counter it.”

She asked if Cohodes would be willing to sign a contract and become a consultant. When he replied that he’d only done this once, charging $1,100 per hour, she wanted to know if that was still his going rate. Cohodes then tried being outrageous and countered, “$15,000 an hour, three-hour minimum, all expenses paid.”

Towill didn’t blink and asked, “Is that your final offer?”

Trying the direct approach, Cohodes plainly said there was no way he’d work for BOFI.

Finally seeming to understand that he wasn’t going to consult for BOFI, Towill floated  the possibility of using a subpoena.

“I told her this would be a terrible idea,” said Cohodes, who noted that she hasn’t subpoenaed him.

(Cohodes’ view about possibly receiving a subpoena? He is rich, has time on his hands and he “would never shut the fuck up about BOFI,” potentially turning any legal proceeding into a three-ring social-media circus. As things stand, he has aggressively started criticizing the bank on Twitter.)

Towill did not return a phone call seeking comment.

BOFI’s external public relations counsel, Sitrick & Company’s Stuart Pfeiffer, in response to questions from the Southern Investigative Reporting Foundation, provided a statement: “While we can confirm that Ms. Towill spoke to Mr. Cohodes, we are unable to discuss why the call was made or provide other answers that may constitute a waiver of privilege.”

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