We wanted to understand what was going on. BLSA is committed to tackling corruption and growing our economy in an inclusive manner. We wondered whether Viceroy was part of the solution or part of the problem. So we commissioned financial research house Intellidex to produce an independent report on short selling, and Viceroy in particular. Their findings, available on their and our websites, make for alarming reading. Viceroy was an obscure three-man outfit with no formal registration, and little financial market experience.
But while operating anonymously, Viceroy hit the big time with its report on Steinhoff. That came out two days after accounting shenanigans at Steinhoff first began to emerge. Viceroy’s report came when the investment market was desperate for information. No one knew who was really behind Viceroy and a kind of mythology grew around it. The problem is that it was not what it seemed.
According to the Intellidex report Investment Research in the Era of Fake News, Viceroy’s report on Steinhoff was substantially plagiarised from a report by a London-based hedge fund six months earlier that had not been publicly released. So the prominence Viceroy gained from that report was unearned.
The Intelidex report further shows that it has since used that prominence to publish “much lower quality reports, some of which contain poor reasoning and wild unsubstantiated allegations”. These look like a calculated attempt to use the heft gained on the back of the Steinhoff report to smash share prices in order to profit. In the case of Capitec, it did this with a bank, a surely reckless act that is clearly damaging to the public interest.
Financial markets have seen this behaviour before. Where there is potential to profit, there is someone trying to make a fast buck. Back in the wild west of early stock exchanges, trading on insider information and spreading rumours was rife.
As regulations have caught up and investors wisened up, stringent rules have been created to protect the integrity of capital markets. That is to the benefit of us all, as it means investors - which include everyone with a pension fund - are not being taken for a ride by other traders exploiting the market. It also means companies are not damaged by cynical profiteers.
Of course this is not true of all short traders. Some produce highly professional, well-researched and responsible reports, setting out their reasoning. We have several good examples of those in South Africa. These play a valuable role in capital markets by informing investors and the public about issues with companies, and improve price discovery through their trading. Having good and ethical short-side analysts in a market should be encouraged.
What is new to the story is the growth of social media. Just as fake news has had an alarming impact on the functioning of democracies around the world, it is becoming clear that it can have an alarming and damaging impact on capital markets too. Viceroy’s Capitec report led to a 25percent intra-day decline in the Capitec share price on the day it was published, though the price recovered to close just 3percent down. That movement happened on news that Viceroy had published a report, rather than what the content of the report actually was. Rumours about Viceroy researching other companies also hit share prices.
So what can we do about it? There are some hard issues to address that social media bring to the fore. In an ideal world all research would be read critically and people would judge it on its merits. But that doesn’t happen anymore. An ill-founded accusation can fly across social media.
One step that would improve matters is increased transparency around short selling. A suggestion worth considering is Intellidex’s recommendation that South Africa should introduce regulations requiring disclosure of short positions. This already happens in Australia, the UK and the US. By tracking short positions, authorities are able to determine when some or other social media campaign is connected to traders’ positions. It will ensure the public has a better context to interpret information that is spread about companies.
Other larger markets, such as Germany, require all unregistered researchers to notify the financial regulator prior to publishing a research report. This enables the regulator to take action should it turn out that the research is spurious. According to Intellidex, Viceroy is being investigated by prosecutors in Germany over its research on companies there. Such rules are difficult to enforce in a global world in which short sellers can hide behind anonymity, but we need them as part of a tool kit that would better enable regulators to deal with the realities of a social-media driven interconnected world.
Bonang Mohale is the chief executive of BLSA.
The views expressed here are not necessarily those of Independent Media.