The reality is that what Viceroy Research did to Capitec Bank was illegal, and it’s as simple as as that.
This column was first published in Business Day.
Social media makes so much information visible that it is easy to assume it is all there is. But when it comes to investment research, the vast majority is not in the public domain. Good researchers aim to gain exclusive insights into the value of assets. They don’t give away their competitive edge.
I say that because of the nonsense that was widely spouted on social media after the Financial Services Conduct Authority (FSCA) announced a R50m fine of Viceroy for manipulating the share price of Capitec. While many rightly celebrated the FSCA’s decision to punish illegal manipulation of a share price, some loudly proclaimed that it was irrational, arguing that if you are going to fine Viceroy for taking a false short view on Capitec, you should also fine those who took long views on Steinhoff.
This gets wrong both what Viceroy did and what most research does.
First, let us understand what Viceroy was found guilty of. The Financial Markets Act makes it illegal to publish information you “ought reasonably to know” is “false, misleading or deceptive”. The act further requires that if you publish such a statement and later become aware it is false, you must “publish a full and frank correction”.
Viceroy was roundly informed that the extremely weak report it published on Capitec had errors, including by the SA Reserve Bank, yet refused to correct them. It was clear that Viceroy’s objective was not to publish accurate information, but to damage the share price of Capitec. Given that Capitec is a systemically important institution, Viceroy’s acts recklessly endangered financial stability. Indeed, because of this risk, my firm Intellidex was commissioned at the time to research Viceroy’s behaviour. Our conclusions in a report we produced then are in line with the FSCA’s findings.
Every year the Financial Mail publishes a ranking of the top analysts in SA. The ratings are derived from a survey of the biggest institutional investors in the country. These are the managers of giant pension funds, insurance funds, collective investment schemes, hedge funds and wealth managers. They rate analysts based on the quality of insight they gain from the work those analysts produce.
The best analysts track companies closely. They constantly communicate with their clients and update their views as new information comes to light. Analysts don’t get rated, and don’t get the financial rewards that come with it, if they knowingly publish false information or don’t correct what they later become aware of is false. There is a world of difference between this kind of investment research and that produced by Viceroy.
Most research aims to identify assets that, in the analysts’ view, are mispriced. Such research goes to clients and they use it to inform their investment decisions. Those clients can be long-only traditional asset managers, or hedge funds trading both long and short positions.
Why would information ever be put into the public domain the way a Viceroy does? Typically, an investor takes a position on the assumption that the market price will over time move in the direction predicted by the research. This requires that “the market” comes to recognise the mispricing. But sometimes that doesn’t happen, or at least not fast enough. As a result, some firms publish research to convince the market that the prevailing prices are wrong.
Examples include Bill Ackman’s five-year battle against Herbalife that ended in 2019. His fund, Pershing Square Capital, took a large short position and then published detailed research arguing that Herbalife was a pyramid scheme. In the end he failed. But there are also prominent successes like David Einhorn, who famously shorted Lehman Brothers before the financial crisis, going public with his thesis that the investment bank fudged its numbers.
These acts are literally talking your own book. Such efforts are often met with scepticism because there is a clear vested interest of those releasing the research. But if the research is high quality in that it is well reasoned and justified, and represents the genuine beliefs of the researcher, we are all better off being made aware of it.
The temptation, of course, is to publish something you don’t believe is true but will nevertheless deliver the share price outcome you desire. This is illegal. Viceroy did it on the short side, but there are corresponding efforts on the long side — the so-called “pump and dump”. A notorious example from the history books was when an “Edward Pastorini” managed to convince a Bloomberg journalist that he was preparing a $12.5bn bid for Goldfields in 2007. The news ramped up the share by 11%. It turned out Pastorini did not exist and Bloomberg had fallen for a scam. The pump and dump worked because it borrowed Bloomberg’s credibility.
Viceroy was able to do it because it earned credibility for a report it published in 2017 on Steinhoff shortly after the share price collapse of that company. It later emerged that Viceroy had substantially plagiarised that report from one written six months earlier by a hedge fund that had not put its research into the public domain.
There is a sharp difference between share price manipulation and the production of genuine research. Only one of those is illegal.
• Theobald is chair of research-led consulting company Intellidex.