Viceroy came under fire this week for the quality of the reports it produced and the people involved in the entity.

The criticism was contained in a research report commissioned by Business Leadership SA (BLSA), relating to Viceroy, which specialises in short-selling and research to aid its investments.

Short-selling is the sale of a share or similar security that is not owned by the seller or that the seller has borrowed.

Such selling is motivated by the belief that a share’s price will drop, enabling it to be bought back at a lower price so as to make a profit, according to the Investopedia website.

Viceroy has written reports about Steinhoff and Capitec Bank.

These reports knocked billions of rands off the market value off both companies.

Capitec is a member of the BLSA, Steinhoff is not.

BLSA CEO Bonang Mohale acknowledged that the report was indirectly paid for by Capitec, since the company was a member of the organisation.

"The BLSA was alarmed at the impact recent short-seller activity has had on listed companies," Mohale said.

The report, released by the BLSA during a media briefing this week and titled Investment Research in the Era of Fake News, has lambasted the three individuals behind Viceroy, Gabriel Bernarde and Aidan Lau as having limited financial market experience and its founder Fraser Perring as having an alleged history of dishonesty.

"Viceroy was an obscure three-man outfit with no formal registration and little financial market experience," Mohale said.

He said the report was not primarily about Viceroy, even though the word was mentioned about 400 times in the 49-page report.

The Intellidex report said Viceroy’s Steinhoff note “was substantially plagiarised from a report produced by [London-based] hedge fund Portsea Asset Management six months earlier. Viceroy’s contribution of original content to the report appears to be negligible.”

Mohale said that "having good and ethical short-side analysts in a market should be encouraged".

'Failed dismally'

Addressing the media via video conference from London, Intellidex CEO Stuart Theobald said all Viceroy’s reports were analysed to measure them against standards of professional research, a test it failed dismally.

Painting a picture of Viceroy as being a total fraud, the work of which was littered with plagiarism, Theobald alleged that some media had been manipulated by Viceroy and that though Viceroy’s research could be categorised as outright false, its illegality might be difficult to prove.

Seemingly defending the independence of the report, Theobald said Intellidex had placed a condition that the BLSA pay for the report before completion.

"To protect that independence, we ensured that all the remuneration for this report had to be paid before it is finalised so that there is no possible leverage," Theobald said.

The Intellidex report pointed out that in Viceroy’s report on Capitec it made "unsupported exaggerations, and had poor reasoning, misunderstandings of the South African credit market and the history of the sector."

Despite the scathing criticism in the report, it had conceded that the allegations contained in the Viceroy report about Capitec – that the bank has been systematically rolling defaulting borrowers into longer-term loans – was a reasonable concern but also offered an "alternative potential explanation".

"Based on our research and due diligence, we believe that Capitec is a loan shark with massively understated defaults masquerading as a community microfinance provider. We believe that the SA Reserve Bank and minister of finance should immediately place Capitec into curatorship," the Viceroy report read.

In its response to the Intellidex report, Viceroy said it expected its work to be treated with skepticism.

"The quality of our research is like any other, subjective, but our content is thoroughly back-tested. Intellidex’s report does not disprove any of our published work," Viceroy said this week.

Viceroy defended its methods and reiterated that it had a network of industry consultants, which were used on a case-by-case basis under strict non-disclosure agreements.

"We have never shied away from this and the assertion that this is somehow uncommon in the financial markets is ridiculous. There are many organisations that specifically procure these specialist services for investment professionals. Again, the work of these consultants is funded internally," it said.

Fake news and capital markets

Mohale said: "What was new to the story is the growth of social media. Just as fake news 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," Mohale said.

"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," he said.

"Other large 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," he said.

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