The Financial Sector Conduct Authority (FSCA) has imposed an administrative penalty of R50 million on Viceroy Research – a short-seller that sent South Africa’s markets into a spin in 2018 by targeting Capitec bank in its reports.
The group, which dubs itself an “investigative financial research firm”, is a partnership between Aiden Lau, Fraser John Perring and Gabriel Bernarde. It is known for publishing reports and investigations into companies – which they categorise as opinions and personal views, but contain damning allegations and inflammatory positions.
Viceroy gained some prominence and credibility through its reports on Steinhoff, in which the group appeared to have ‘called it’ on the multinational around the time of its infamous crash at the end of 2017.
In 2018, the firm took aim at Capitec, alleging that the South African banking group was operating as a loan shark, warning that it was “heading for insolvency”.
The group alleged that Captiec was making unsecured loans mainly to low and middle-income households and concealing losses by refinancing loans that customers were unable to repay. At the time, it labelled Capitec “uninvestable” and called for the Reserve Bank to step in and put the bank under curatorship.
The reports caused a crash in Capitec’s share price – tanking 23% on the day it was published – and it would take weeks of reassurances and the backing of National Treasury and the South African Reserve Bank to calm market jitters around the claims.
Viceroy did not let up on its attack on Capitec, however, and published follow-up reports and responses through to July 2018, keeping the finance group’s share price under pressure. It also later took aim at other listed companies in South Africa, such as NEPI Rockcastle.
More than four years later, the FSCA has now taken action against Viceroy for the chaos it caused.
The FSCA found that Viceroy contravened Section 81(1) of the Financial Markets Act 19 of 2012 (FMA) in that during January 2018 they published false, misleading or deceptive statements, promises or forecasts regarding material facts about Capitec, which they ought reasonably to have known were not true.
“Further, notwithstanding being made aware that what they had published was false, they failed to publish full and frank corrections thereof, as required by Section 81(2) of the FMA,” it said.
FSCA commissioner, Unathi Kamlana said that the R50 million penalty is particularly significant because it shows just how far the FMA reaches.
“Although the Viceroy Research Partnership, and its partners, are not financial institutions, and are domiciled in a different jurisdiction, their comments about South African listed securities make them subject to the stipulations of the Act. The penalty also makes it clear that breaching our financial sector laws has serious consequences,” he said.
The FSCA enlisted the assistance of the Securities and Exchange Commission (SEC) in dealing with Viceroy, which is domiciled in Delaware, in the USA.
Explaining the large penalty, the FSCA said it took several factors into account. Specifically:
- The fact that Viceroy made a concerted effort to publish the statements about Capitec as widely as possible, knowing that Capitec is a systemically important financial institution in South Africa and that these statements had the potential to trigger a run on the bank.
- Capitec suffered significant losses and damages as a result of their reports – with its share price crashing 23.12%. Meanwhile, Viceroy, being a short-seller, gained financially from the decline in the share price.
- The penalty would serve to deter such conduct. A contravention of section 81 of the FMA is a serious offence that can cause significant harm to investors, listed entities and the broader market, hence the need to impose a penalty that would serve as a deterrent, it said.
“Capitec is a systemically important financial institution in South Africa, therefore the respondent’s false statements, and their failure to subsequently publish corrections of these statements, posed a clear and present threat to the stability of the South African financial system,” the FSCA said.
Viceroy said it will challenge the fine.
Viceroy are challenging FSCA’s minimum effort investigation & fine imposed on us. We have cooperated with the @FSCA_ZA with their enquiries & have maintained open dialogue. Contrary to their assertion, we believe this fine seeks to shut down critical analysis of SA companies. https://t.co/Lqjf6D4Jmn
— Viceroy (@viceroyresearch) September 8, 2021