Viceroy, fake news and the short-selling phenomenon

A new study examines the growing phenomenon of short selling in South Africa following questionable reports from Viceroy about some of the country’s companies – including Steinhoff and Capitec – which have shaken investor confidence.

Bonang Mohale, CEO: Business Leadership South Africa

Investment Research in the Age of Fake News was ordered by South Africa business management (BLSA) and conducted by Intellidex.

“Among other findings, our research revealed that Viceroy’s research report on Steinhoff was substantially plagiarized from a report produced by another hedge fund six months earlier. Additionally, there are several issues with other Viceroy reports, including Capitec and Advanced Micro Devices, such as unsubstantiated exaggerations, poor reasoning, and misunderstandings about the markets in which they operate,” says Dr. Stuart Theobald, president of Intellidex and one of the authors. of the report.

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“In our view, Viceroy has used the status it gained through its Steinhoff report, which benefited from the fact that it was published at a time when there was a high demand for information about accounting failures in Steinhoff, in order to publish misleading and weak reports. which have the effect of depressing the price of the shares.

Militant Short Selling

“We urge the public to critically review the content of Viceroy’s reports which we believe does not meet professional research standards,” he said.

“Viceroy’s Capitec report caused shock and confusion among regulators and investors when it was first published. There was a whirlwind of rumors about other companies that Viceroy might be targeting. Militant short selling is a new phenomenon in South Africa and we felt it was important to commission research that would pull out the facts and enable the public to distinguish good practice from bad. We commissioned the research primarily because our role as BLSA is to ensure that our members and our businesses in general build, protect and grow their investments to create shared prosperity and jobs in our economy,” said Bonang. Mohale, CEO of BLSA.

Gerrie Fourie, CEO, Capitec.  Photo: Capitec

“Short selling can play a positive role in exposing corporate wrongdoing and improving market efficiency. The BLSA believes that the economy benefits from vigorous criticism of corporate activity from the media as well as investors, both long and short. However, it is important that this criticism be based on a reasonable appreciation of the facts. It would hurt the economy if negative slanders were leveled at companies, not because they represent genuine research-based beliefs, but because they are intended to damage the value of companies for lucrative. Such market manipulation is in itself a form of corruption.

More regulation needed

Mohale calls on authorities to strengthen market regulation to ensure that all participants in our capital markets operate to the highest standards of business ethics. “We hope that the Intellidex report will contribute to the debate on business ethics and the need for regulation to catch up with sophisticated and more subtle but equally damaging forms of market manipulation, especially in an advanced economy like ours.

Specifically, we should consider improving transparency by introducing regulations requiring the disclosure of all short positions. This is already happening in Australia, the UK and the US. By tracking short positions, authorities are able to determine when one social media campaign or another is tied to traders’ positions. It will also ensure that the public has a better context in order to be able to interpret the information disseminated about the companies,” he said.

Two short-term research questions

Commenting on the report’s findings, Theobald said: “We also note that the South African Reserve Bank stated on the day of the Viceroy study that Capitec was well capitalized, solvent and had adequate liquidity. He later said he had confidence in the bank’s data and financial statements and that the substantive allegations made by Viceroy were not accurate. The National Treasury also described the Viceroy’s actions as “reckless” and “not acting in the public interest”.

“There’s a lot of great short-term research out there, but our analysis indicates that Viceroy’s work doesn’t fit into that category.”

Users of short-term research should ask themselves two questions:

  1. Does the research represent the authentic beliefs of the authors?
  2. Does the research contain adequate evidence and reasons for the beliefs it expresses?

In the case of Viceroy, the answer to the second question is mostly “no”, while in some cases we are forced to conclude that the answer to the first question is also “no”. Given this, we must conclude that the function of Viceroy’s research is not to share new facts and analysis, but rather to harm companies’ stock prices so that it generates a profit. This behavior is not in the public interest and may well be illegal in terms of market manipulation rules.