After running a media gauntlet, riding a stock market roller coaster, and ditching a consultant who helped shape the company, what's next for Cityscape Financial Corp.?

A foray into the conventional loans, the company says. Cityscape, already growing fast as a subprime lender, announced that it would form a conforming-loan division that would begin operations in the first quarter of 1997.

The unit will be run by three former principals of Mercantile Mortgage Bankers Inc., a regional lender, and will rely on Cityscape's existing broker relationships for originations. Currently, the company has more than 260 brokers and 130 correspondents, said Robert Grosser, president and chief executive officer.

The company's entry into conventional lending was spurred by low interest rates, and is expected to complement the company's subprime loan products rather than provide high volume, he said.

The move comes on the heels of a tumultuous autumn for Cityscape, whose executives have been battling to defend their image as poster boys of the subprime lending industry.

Reports that the terms of Cityscape's loans in the United Kingdom have come under local government scrutiny, plus the revelation that it had been using as a consultant a business associate of a convicted white-collar criminal, helped spark a free fall in the stock. The company's shares dropped from a high of $36.50 on Aug. 5 to a low of $19.25 on Nov. 18.

Cityscape's dropping of the consultant, Jay Botchman - who also sold his stock options in the company to Franklin Mutual Advisors Inc., Short Hills, N.J. - was rewarded by Wall Street. The stock is now trading at about $23.

The short position in Cityscape's stock - borrowed shares that have been sold in the hope they can be replaced later at a lower price - has been running high since the summer, averaging about two million shares. Cityscape has 29.6 million shares outstanding, all but 6.7 million of which are not held by insiders.

Mr. Botchman headed American Funding, the company that made loans to investors in the Atlantic City boardwalk renovation scandal of 1986.

John Galanis, who put together that deal, is now serving prison time for securities fraud in conjunction with the transactions. Mr. Botchman was not charged. The two were also involved in several civil suits together.

Mr. Botchman has maintained that he was an unwilling participant in Mr. Galanis' fraudulent activities. "I was more duped than anyone by John Galanis," he said in a recent interview.

Mr. Botchman also served as president of Consolidated Mortgage, Greenwich, Conn. Mary Little Parell, New Jersey's banking commissioner at the time, said losses stemming from loans bought from Consolidated were reponsible for the 1987 failure of Tri-County Savings and Loan Association, Camden.

Cityscape executives and analysts bullish on the company maintained that Mr. Botchman had a negligible role in Cityscape's day-to-day operations. Mr. Botchman says he was responsible for the company's moving into Britain and was the spark plug behind its original public offering.

Mr. Grosser acknowledged that Mr. Botchman will still receive a finder's fee for loans originated by the company's United Kingdom operations from Greenwich Capital's U.K. unit.

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