Viceroy Research has hit back at the Financial Sector Conduct Authority (FSCA) after the regulatory body slapped it with a R50m administrative penalty for a report on Capitec it says was false, misleading and deceptive.
In an interview with Business Day, one of Viceroy’s founders, Fraser Perring, accused the FSCA of launching a “PR attack campaign” against it in an attempt to protect Capitec from scrutiny by those who have concerns about its business practices. He also alleged that the FSCA has not given Viceroy a chance to defend itself before the fine. The short seller will appeal.
The FSCA denies this and says it has not yet been formally notified by Viceroy that it intends to lodge an appeal, which would have to be heard by the Financial Services Tribunal.
The regulatory body announced the penalty on Wednesday, though it first notified Viceroy on August 30.
“They’re the attack dogs for Capitec,” said Perring. “What they’re saying is that if the information isn’t liked by the company we must correct it to what the company says otherwise the regulator will attack them.”
The debacle stems from a report published by Viceroy on January 30 2018 titled “Capitec — A wolf in sheep’s clothing”, in which it was alleged, among many things, that the bank was a predatory lender. It also claimed that Capitec’s loan book was enormously overstated and that its credit facility’s origination fee resembled “loan shark tactics”.
The FSCA deems these allegations to be false, misleading or deceptive and says Viceroy ought reasonably to have known the allegations were untrue.
In response, it imposed its financial penalty on Viceroy and its partners, which include Perring as well as Aiden Lau and Gabriel Bernarde.
The penalty is jointly and severally payable by the respondents within 30 days.
“We notified them of our right to appeal not just of the fine, but of the facts,” said Perring. “We’re going to appeal but I don’t know that we’re going to get a fair trial.”
The FSCA says that what it has received is a request for information on how the tribunal process would work.
The regulator also told Business Day that it has given Viceroy ample opportunity to make representations to it before the fine was imposed, but the company chose not to do so. Perring denies this.
FSCA commissioner Unathi Kamlana said on Wednesday that SA regulators take a “dim view” of Viceroy’s business model of trying to profit from the collapse of security prices in the wake of negative research it publishes about those assets.
Capitec is a systemically important financial institution and Viceroy’s publication could have triggered a run on the bank that could have caused instability in SA’s financial system, Kamlana said.
“We hope the sanction we have imposed will serve as a credible deterrent to this kind of behaviour,” he said.
The FSCA also disclosed that it had to enlist the assistance of the Securities and Exchange Commission (SEC), the US financial regulatory body, to compel a representative of the research house to be questioned under oath, because Viceroy is a New York-based partnership.
Perring said Viceroy co-operated voluntarily with the SEC, which had not recommended an enforcement action against it.
“If we didn’t co-operate with the SEC we would have enforcement action, wouldn’t we?” said Perring.
The decision to fine Viceroy potentially opens the way for the FSCA to penalise other so-called short-sellers — companies that deliberately seek to profit from the collapse of a security and often publish information to ensure that happens. It may also allow the FSCA to fine analysts who make recommendations to buy a security should their analysis be found to be negligent or intentionally misleading.
“We will investigate and impose fines on anyone who made a buy recommendation that was negligent or intentionally used something that they shouldn’t have known,” said Brandon Topham, head of enforcement at the FSCA.
Topham said the FSCA had also investigated Viceroy over its Steinhoff report but had closed the case after its statements on the disgraced company were found to be accurate.
“If they’re holding everyone to the same standard ... why has not one Steinhoff analyst ... been prosecuted for false and materially wrong information?” said Perring, adding that he intends to pursue the appeal against the FSCA ruling “to the end”.
“They started this; I shall finish it,” he said.
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