Regulator fines Viceroy R50m for falsely accusing Capitec of being a 'loan shark'

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The FSCA says its investigations showed that Viceroy benefitted from a profit-sharing arrangement with one of its clients who had taken a short position in Capitec.
The FSCA says its investigations showed that Viceroy benefitted from a profit-sharing arrangement with one of its clients who had taken a short position in Capitec.
  • The FSCA has fined Viceroy Research R50 million for publishing false statements about Capitec in 2018.
  • Their report triggered a sharp sell-off in Capitec's share price.
  • The FSCA says its investigations showed that Viceroy benefitted from a profit-sharing arrangement with one of its clients who had taken a short position in Capitec. 

The Financial Sector Conduct Authority (FSCA) has fined the international group Viceroy Research LLC and its partners, Aiden Lau, Fraser John Perring and Gabriel Bernarde, R50 million for the "damaging" and "false" remarks that the short-selling firm made about Capitec three years ago. The remarks triggered a 25% slump in Capitec's share price in January 2018. 

The company or its partners have to pay the fine within 30 days.

The FSCA said not only did Viceroy not test its assumptions with Capitec or allow the bank to respond to its suspicions, but it refused to correct the misstatements it made about the Stellenbosch-based bank when evidence showed that it was wrong.

In January 2018, Viceroy Research published a report titled Capitec, a Wolf in Sheep's Clothing. It said its research showed that Capitec was "a loan shark" that massively understated its bad debts and went as far as recommending that SA Reserve Bank should immediately place the bank into curatorship.

The FSCA said it carried out the investigation internally but enlisted the help of the US's Securities and Exchange Commission (SEC) to force Viceroy Research to cooperate. It tested all the allegations the short-seller made by going back to analyse the financial statements the 2018 report was based on.

FSCA Commissioner Unathi Kamlana said what concerned the FSCA the most was that even when Viceroy was made aware that statements in its report were false, it didn't publish corrections.

Flawed calculations and profit-sharing motive

Brandon Topham, the FSCA's divisional executive of enforcement, said the regulator did an extensive investigation and review of Viceroy's calculations to see how the company got to the conclusions it did.

"It wasn't just the fact that they didn't go and speak to Capitec. There are a lot of other fundamental flaws that we found in their calculation," he said.

Topham said the FSCA's opinion was that Viceroy could have reasonably known that some of its assumptions were wrong and it could have used a higher standard to do its analysis.

Kamlana, on the other hand, said the FSCA's investigation showed that Viceroy published the report with the objective of benefitting from the profit-sharing arrangement the company had with one of its clients who had taken a short position on Capitec's share.

"So, they had a direct interest in the loss of value of the listed share in question. And, of course, that happened while potentially destroying the value for many investors in the stock, including retirement savings," said Kamlana.

He said given Capitec's status as a systemically important financial institution in SA, Viceroy's report could have led to systemic issues and financial instability in the country. So, the FSCA saw it fit to send a message to any other institution or analyst who could be thinking of destabilising SA's financial system that it will come after them.

"So, let this be a lesson or a warning to all the analysts out there … We're going to hold you liable for saying things, even on your personal blog. If that personal blog is on the public domain and those statements are negligent, we are going to come and hold you accountable," said Topham.

Although Viceroy is not located in SA and doesn't have any assets locally, Kamlana said the regulator would be able to enforce the fine.

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