Viceroy slapped with R50 million fine over “misleading” Capitec report

The Financial Sector Conduct Authority (FSCA) has imposed an administrative penalty of R50 million on short-seller Viceroy Research and its partners over a damning 2018 report it published on Capitec Bank.

The fine was issued in terms of section 167(1)(a) of the Financial Sector Regulation Act. It is jointly and severally payable by the respondents within 30 days from the date of the order, which was made on Monday, 6 September 2021.

In a statement issued on Wednesday, the FSCA named Viceroy partners Aiden Lau, Fraser John Perring, and Gabriel Bernarde.

According to the FSCA, Viceroy and its partners contravened Section 81(1) of the Financial Markets Act (FMA).

It stated that during January 2018, Viceroy published false, misleading or deceptive statements, promises or forecasts regarding material facts about Capitec, which they ought reasonably to have known were not true.

Despite 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, the FSCA stated.

Viceroy came to prominence when it published a report on Steinhoff in the wake of the collapse of the company’s share price in 2017.

Intellidex subsequently issued a report in which it concluded that Viceroy had “substantially plagiarised” its report on Steinhoff.

According to Intellidex, the group makes money by partnering with firms that have shorted a company’s stock, then sharing in the profits after releasing damning reports on its targets.

It published a report in late January claiming that Capitec was “cleaning” its loan customers, BusinessTech reported.

According to Viceroy, the bank did this by immediately granting loans to clients who had taken out other loans to repay their previous Capitec loans, without a cooldown period.

It said that this made Capitec’s loan books look healthier than they are in reality, while effectively “hiding” the risks of default from its client base.

Viceroy also accused Capitec of manipulating debt orders so that Capitec loans were paid off first, exacerbating strained financial positions of customers.

It declared Capitec “uninvestable” and called for the bank to be put under curatorship and a formal investigation to be launched.

Capitec consistently denied Viceroy’s claims, saying that the firm did not understand how its business operated.

The bank provided detailed responses to the allegations, and invited Viceroy to meet with the bank’s management to get a better idea of what was going on.

Viceroy later claimed that its engagements with Capitec proved fruitless, saying that the bank failed to answer any of its questions, and instead chose to be evasive and tangential with the data it did provide.

The group said it was a perfect example of why it did not want to engage with Capitec management in the first place — because they simply do not answer questions.

“Viceroy has been criticised for not engaging with management prior to publication of our reports. Capitec’s response is a prime example of why we choose not to.

“We maintain our recommendation that Capitec should be subject to an external, independent regulatory investigation, which we believe will result in Capitec being placed in curatorship to protect its consumers,” said Viceroy.

Unathi Kamlana, FSCA Commissioner
Unathi Kamlana, FSCA Commissioner

The FSCA said it took into account the following factors in determining an appropriate administrative penalty for Viceroy’s contraventions of the relevant legislation:

  • The need to deter such conduct — A contravention of section 81 of the FMA is a serious offense 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.
  • The degree of co-operation in relation to the contravention — The FSCA had to enlist the assistance of the Securities and Exchange Commission (SEC) of the USA to compel a representative of the Viceroy Research partnership to be questioned under oath. We thank the SEC for the assistance they provided.
  • The nature, duration, seriousness and extent of the contravention — The Respondents made a concerted effort to publish these statements 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.
  • Loss or damage suffered by any person as a result of the conduct — The publication of the statements immediately caused the Capitec share price to decline by 23.12%.
  • The extent of any financial or commercial benefit arising from the conduct — The Respondents gained financially from the decline in the Capitec share price.
  • Whether the person has previously contravened a financial sector law — there is no record of the Respondents previously contravening a financial sector law.
  • The effect of the conduct on the financial system and financial stability — 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.

“This penalty is particularly significant because it shows just how far the FMA reaches,” said FSCA Commissioner Unathi Kamlana.

“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”.

The FSCA said it also investigated possible insider trading and prohibited trading practices in Capitec securities during the period of the publications but has not found any evidence of such contraventions.

Those two investigations have therefore been closed without any enforcement proceedings being instituted.

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Viceroy slapped with R50 million fine over “misleading” Capitec report