The Financial Sector Conduct Authority (FSCA) has levied a U.S$3.4 million administrative penalty on Viceroy Research, a U.S firm and its partners for peddling false and misleading information about Capitec Bank in 2018.

The report triggered a sharp fall in Capitec’s shares and an angry response by the bank, accused Viceroy of a smear campaign, which subsequently led to its suing.

Meanwhile, according to FSCA ruling, the Viceroy Research and two other people who participated in compiling the reports had contravened the Financial Markets Act by publishing “false, misleading or deceptive statements, promises or forecasts regarding material facts about Capitec, which they ought reasonably to have known were not true”.

“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 FSCA said in a statement summarising its findings.

Viceroy’s Report

In January 2017, Viceroy published a report titled, “A wolf in sheep’s clothing”, and accused Capitec of predatory finance practices by targeting low-income, high-risk borrowers by charging them way above the maximum interest rate allowed by law. The report also stated that when clients defaulted, Capitec bank would rollover the unpaid loans and issue new loans to the same customer.

Viceroy also claimed Capitec was understating its default rate and that the bank was on the verge of collapsing.

Part of the Viceroy report read, “Viceroy believes between ZAR 2.5bn and ZAR 3bn of Capitec’s loan book balance at the end of Financial Year 2017 was payable in 2017, and discretionally carried forward via the issue of new loans to repay delinquent loans. This activity would essentially conceal losses the size of Capitec’s earnings and elevate their loan metrics above their competitors.”

Above all, Viceroy concluded that Capitec was on its way to African Bank-style collapse, and issued subsequent reports sticking to its guns and building on its thesis.

The damning report hugely affected Capitec Bank and subsequently sent its stock nose-diving.

However, according to the FSCA verdict, it said Viceroy had relied on incorrect information and flawed calculations, and as a result there was “no basis to conclude that there existed a widespread Capitec practice, amounting to R3-billion per year, of rescheduling delinquent loans through the issuance of new loans”.

It can be recalled Delaware-based Viceroy became famous for its 2016 report on German payments company Wirecard, which it accused of fraud and corruption – allegations that were subsequently proven correct as Wirecard admitted that billions of euros in its accounts were non-existent.

Viceroy followed that up with a report on Steinhoff, detailing the dodgy transactions that finally led to the retailer’s stunning collapse in late 2017.

As a result, Viceroy’s reports grew in influence, and when its report on Capitec appeared, the bank’s shares took a heavy hit, forcing authorities – including the National Treasury, the Reserve Bank and the FSCA – to pay closer attention to the firm’s activities.

In recent times, pushing false information has become a popular way for activist investors to punish companies they believe are engaging in bad practices, and for hedge funds to make money on what they believe is an information gap.

The practice has gained traction in South Africa, although regulation has lagged. The FSCA decision to fine Viceroy represents a key test case for how short-selling might be treated in the future.