The outcome of an application by Viceroy Research and its three partners to set aside a R50 million fine imposed by the Financial Sector Conduct Authority (FSCA) contains a few surprises.
The Financial Services Tribunal panel that considered the application concluded that the FSCA has no jurisdiction over Viceroy and its members because the damaging reports were written and distributed from outside South Africa.
The decision comes after the tribunal accepted the FSCA’s findings that Viceroy’s 2018 reports on the bank – the original of which was titled Capitec: A Wolf in Sheep’s Clothing – were false, misleading and deceptive.
“Viceroy did not prepare the Wolf report for altruistic reasons, something it freely disclosed in the ‘disclaimer’ where they state that they may continue transacting directly and/or indirectly in the securities of issuers covered in this report for an indefinite period and may be long, short, or neutral at any time hereafter regardless of their initial recommendation,” notes the tribunal in its ruling.
“The simplified facts are these: Viceroy had an agreement with a hedge fund, Oasis, under which it, at a monthly retainer of $10 000, would prepare reports that would assist Oasis in shorting securities in any chosen company,” states the ruling.
“In addition, Oasis would, on a yearly basis, pay Viceroy 12.5% of the net profit it made in the particular year on trades based on Viceroy’s reports.
“The applicants produced the report under the agreement and supplied it to Oasis to enable Oasis to take positions on Capitec securities. Oasis did, and to be able to profit, Viceroy had to make its bearish report public, which led to panic sales as described,” it adds.
“Oasis made an estimated profit of R82 million and the share of Viceroy in the profit from short positions taken by Oasis on Capitec was estimated by the FSCA to be close to $744 482 (R10 million at the time), which was shared equally between the applicants.”
Despite accepting the FSCA’s damning evidence, the tribunal found that the three Viceroy members – Fraser Perring, Aiden Lau and Gabriel Bernarde – are all foreign nationals and SA authorities had no jurisdiction to enforce the penalty.
Referring to other cases, the tribunal found that “a superior court would not have had jurisdiction in a civil case against the applicants”.
“It therefore ought to follow that the FSCA did not have jurisdiction to impose a penalty on the applicants.”
The tribunal agreed with Viceroy’s submission that the penalty needs to be reconsidered, accepting its arguments that “the acts committed by the applicants were not committed in South Africa” and, secondly, “that they are foreign peregrini of South Africa”.
Perring is a British citizen whose domicile is the US and Lau and Bernarde are Australian citizens staying in Australia.
The tribunal offered lengthy legal arguments that court actions are based on a person’s whereabouts, either by way of residing in or having a business presence in a country.
However, it said it does have jurisdiction over the person’s conduct.
“The facts do not support the applicants. Accepting that the Wolf report was compiled in the USA and Australia and ‘sent’ from there, this conduct had consequences in South Africa – irrespective of where the originating acts occurred,” states the ruling.
“The impugned statements were ‘directly and indirectly’ published (made public) by the applicants in South Africa and they ‘made a concerted effort to publish the statements as widely as possible in South Africa’.”
The penalty of R50 million was nonetheless set aside based on the requirement of physical jurisdiction.
Sly, swift, successful
The hatchet job was mostly successful as Viceroy targeted gullible social media users to spread panic about Capitec in its bid to drive down the share price.
The writers, at the time hiding their identities, cultivated the image that Viceroy was a large successful research firm that disclosed the truth about the fraud at Steinhoff International.
Read: Identity of individuals behind Viceroy Research revealed [Jan 2018]
It also primed the market by announcing that it was about to disclose damaging information about another SA company.
The tribunal noted that Viceroy went to great lengths to bring attention to its Capitec report when it was published at the end of January 2018, including using Capitec’s share code in Twitter messages to alert shareholders and traders.
It also sent out short excerpts of the report at intervals of “approximately every five minutes”.
Links to the report were sent to the media, and Viceroy “reported” Capitec to the Reserve Bank and the JSE.
By the nature of social media, most users took these short messages for fact. They probably did not look at the report, or wouldn’t have understood Viceroy’s garbled calculations about Capitec’s provisions for bad debt.
It’s argument that the Reserve Bank should place Capitec under curatorship – mentioning the collapse of African Bank – was made to sound as if Capitec’s demise was imminent.
Viceroy also spread the rumour that Capitec was about to lose a court case and that a class suit would seek damages of nearly R13 billion.
The tribunal notes that Capitec’s share price “fell by more than 23% to an intraday low of R705” when the campaign against it started – R80.56 lower than it had been immediately prior to publication – representing “an approximate R9 345 million decrease” in its market cap.
The share price recovered quickly when the Reserve Bank issued a statement to reassure investors and bank customers that the bank complied to all requirements.
Capitec ended the dramatic day only 5% lower and Viceroy’s subsequent attempts to cause panic failed miserably.
Capitec emerged victorious, as seen by its continued success. The share price went on to reach a high of more than R2 300 in April 2022.
It is interesting that the tribunal’s ruling to dismiss the penalty was not unanimous. Panel member Michelle le Roux SC did not agree fully with her two colleagues.
While she accepts the panel’s majority decision, she disagrees that personal jurisdiction rests on the requirement that “the summons is served on the defendant while in South Africa”.
She points out that a court ruling referred to by the tribunal in reaching its decision makes provision to develop a “new practice” regarding personal jurisdiction and, over time, should take into account the online or digital conduct in a modern and global economy.
“A requirement of physical service on the defendant while in South Africa is, in my view, unduly restricted and onerous and runs the risk of defeating the objects of the [Financial Sector Regulation] Act,” says Le Roux.
She lists the objectives of the act, which include the prevention of financial crime and the fair treatment and protection of financial customers.
“These objects or purposes of the Act, and specifically the obligations on the Authority and tribunal to apply section 81, must take account of the digital or online and global nature of financial markets, and research and analyst reports such as that prepared here by the applicants regarding the Capitec shares listed in the South African regulated market,” she says.
Not done yet
The FSCA said in a short statement that it noted the ruling and also took note of Le Roux’s minority view.
“The FSCA is studying the tribunal decision and will decide on the most appropriate way forward,” it says.
As for Viceroy, it is proud of its ability to ruffle feathers.
Its website prominently displays the accusation by Reserve Bank governor Lesetja Kganyago that Viceroy is “a hit squad”.
Read: Viceroy Research is a ‘hit squad,’ Kganyago says [Dec 2018]