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The Financial Sector Conduct Authority (FSCA) recently held a media round table discussion where they announced the imposition of an administrative penalty of fifty million Rands (R50 million) in terms of section 167(1)(a) of the Financial Sector Regulation Act 9 of 2017; on the partnership known as Viceroy Research and its partners, Mr Aiden Lau, Mr Fraser John Perring and Mr Gabriel Bernarde (the Respondents). The penalty imposed is jointly and severally payable by the Respondents within 30 days from the date of the order.
During the roundtable discussion, the FSCA outlined how the Respondents had contravened Section 81(1) of the Financial Markets Act 19 of 2012 (FMA) in that during January 2018 they published false, misleading or deceptive statements, promises or forecasts regarding material facts about Capitec, which they ought to have reasonably known not have been true. Further, notwithstanding being made aware that what they had published was false, they failed to publish full and frank corrections , as required by Section 81(2) of the FMA.
According to Unathi Kamlana, the Commissioner of the FSCA, this penalty is particularly significant because it shows just how far the FMA reaches. 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 made them subject to the stipulations of the Act. The penalty also makes it clear that breaching our financial sector laws has serious consequences.
Some background
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. The research report claimed that its analysis pointed to predatory lending practices from Capitec, where clients would be pushed to take out new loans, in order to pay off old ones, while being charged initiation fees each time, and incurring other costs. Viceroy went as far as recommending that that the South African Reserve Bank (SARB) place the bank into immediate curatorship.
Over the past few years, the FSCA carried out an investigation into the matter and internally 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 referring back to the financial statements the 2018 report was based on.
Determining the appropriate administrative penalty
The FSCA considered the following factors when determining the appropriate administrative penalty for the contravention:
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- 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.
- 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.
- The extent of any financial or commercial benefit arising from the conduct -
The Respondents gained financially from the decline in the Capitec share price.
- 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 degree of co-operation in relation to the contravention - The FSCA had to enlist the assistance of the Securities and Exchange Commission (SEC) of USA to compel a representative of the Viceroy Research partnership to be questioned under oath. For this, the FSCA is grateful to the SEC for their assistance.
- Whether the person has previously contravened a financial sector law - There is no record of the Respondents previously contravening a financial sector law.
- 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.
“We hope this decision is a deterrent to those hoping to make a quick buck by peddling false information. Although we are aware that we should not be banning short selling as an activity in the market, it should not be on the basis of people who deliberately peddle falsehoods around the business models of listed securities or companies in our regulated markets,” said FSCA Commissioner Unathi Kamlana.
The FSCA also investigated possible Insider Trading (Section 78 of the FMA) and Prohibited Trading Practices (Section 80 of the FMA) in Capitec securities during the period of the publications but has not found any evidence of such contraventions. These two investigations have therefore been closed without any enforcement proceedings being instituted.
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