Hero to short sellers rose from social work to Steinhoff win

New York - A year before unleashing a damning report that detailed accounting irregularities at Steinhoff International Holdings NV [JSE:SNH], one of its authors faced a reckoning of his own.

Minutes after Fraser Perring dropped off his 4-year-old daughter at school in December 2016, two men with Eastern European accents trapped him in his Audi. They threatened to harm his family unless he admitted writing extensive reports alleging wrongdoing at Wirecard. Frightened, and fuelled with adrenaline, Perring lied. He said he had nothing to do with the reports.

"It devastated me, but it made me stronger," Perring said.

It was a pivotal moment in Perring’s unlikely journey from UK social worker to hero among short sellers. In recent weeks, his research has jolted South Africa and established him as a force among some of the market’s most antagonistic investors, who try to expose corporate irregularities and generate massive profits, sometimes overnight.

But Perring’s run-in back in 2016 almost upended that ascent.

His partners at Zatarra Research were so alarmed it led to the dissolution of the firm. Months later, Perring connected with two energetic young researchers - Gabriel Bernarde and Aidan Lau - and started anew with a firm they called Viceroy Research. They operated anonymously until Perring revealed himself to Bloomberg this week.

Viceroy has published research reports on companies including MiMedx Group, Neuroderm and Syrah Resources. But it was Viceroy’s work on South African retail giant Steinhoff that established the firm’s stature among short sellers.

Perring, 44, had been interested in Mattress Firm in 2016 when Steinhoff announced plans to pay a 109% premium to acquire the chain. The outsize bid - for a company that Perring had already considered a candidate for shorting - piqued his interest in Steinhoff instead. There were no apparent synergies that could justify the premium, so there had to be another story, he reasoned.

"Our test was met," he said, describing the process by which Viceroy picks its targets.

CEO resigns

Former Steinhoff CEO Markus Jooste (Gallo)

Viceroy was almost finished with its research on December 5, when Steinhoff announced an internal investigation of its accounting. Chief Executive Officer Markus Jooste resigned a day later, prompting Perring and his team to accelerate publication of their report showing the retailer had used off-balance-sheet entities controlled by current and former company insiders to obscure losses and inflate earnings.

Its shares plunged more than 80% over the next few days.

Until then, medical-device maker MiMedx was among Viceroy’s biggest targets. Short sellers including Marc Cohodes and Citron Research’s Andrew Left began taking on the company last year, alleging it used undisclosed third-party distributors to circumvent anti-kickback laws and that its executives had repeatedly lied to investors.

MiMedx, based in Marietta, Georgia, sued Viceroy and other short sellers, saying they issued false and defamatory statements to manipulate the stock and reap profits.

Perring, the son of a farmer, was born in Canterbury, about 60 miles east of London. He studied social care, law and psychology and began a career as a social worker, while dabbling in the markets. As an investor, he had an uncanny ability to find stocks that went to zero, he said with a chuckle.

"It took 16 years of losing to realize that I was doing something wrong," he said.

He shifted into equity research and short selling full time in 2012 after an ugly episode ended his career in social work.

Forging records

Perring left his job as a child-protection officer during an investigation into his failure to contact a foster child’s extended family to arrange alternate care. A report from a regulator accused Perring of forging records to show that he had contacted the child’s relatives and lying to supervisors about it.

He was barred from future employment as a social worker in England.

Perring told Bloomberg he followed protocol and was punished for questioning why the child had been placed with the family. He later sued the regulator for mistreatment, defamation and breach of employment rights, receiving £24 000 as part of a settlement.

Barred from social work, Perring said he wasn’t sure what he would do until his wife told him to pursue his passion. He said he made more money in his first three months as a full-time investor than he did during his previous decade in social work.

"I love doing research," he said. "I’m not very good at investing but I made a few million and realised I had a talent for this. I believe a company’s right until you can prove them wrong."

His first big target was Wirecard, a German electronic-transfer company. Writing under the name of his research company, Zatarra, Perring alleged that Wirecard had evaded US internet gambling laws. The company has denied the allegations.

Perring was enjoying his new life as a short, and after dropping off his daughter at school that December morning, he paused in the parking lot to check his investments. One stock was moving, so he tried to place an order when an intruder opened the passenger door and got in.

Perring tried to escape, but another man pinned the driver’s-side door shut. The first intruder grabbed his arm, and the second hopped into the back, parking himself on a child booster seat.

They showed him documents and pictures - including one of Perring’s wife - and demanded to know his involvement with the Zatarra report on Wirecard. After about 40 minutes, the interrogation stopped and the men left him shaken but unhurt. The company said it had nothing to do with the incident. Perring said police have arrested one suspect and are still investigating.

'Solider on'

He said the ordeal crystallized his commitment to his work.

"You have to soldier on," he said. "My wife was impacted, my child was impacted, and we had to change how we lived. For the first six months we felt almost like prisoners, because they said they were coming back. You get conditioned to the fact that they might be back but you can’t stop it."

The ambush also alarmed his friends in short-selling circles.

"When you expose frauds and criminals, sometimes these cowards try to play rough and threaten and scare you," Cohodes said. "Fraser clearly doesn’t back down and that’s to be respected." 

In 2016, Perring was introduced to Bernarde and Lau through a mutual contact who recommended he collaborate with the young Australians.

Bernarde took an interest in short selling while earning an accounting degree from the University of Melbourne and teamed up with Lau, a friend who was studying engineering at the Royal Melbourne Institute of Technology, for research projects. The two quit their day jobs last year to focus on Viceroy full time.

The three men said they often work 100-hour weeks, with Perring getting just four hours of sleep each night.

"If you’re sufficiently convinced about something you’re doing, how could you sleep?" he said.

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