(Bloomberg) -- Some short sellers put their targets through a wringer. They bet that a certain company’s stock will drop, then level allegations about questionable business practices to try to make their wager pay off. These activist short sellers can keep markets and companies honest; at other times, they can undermine an upstanding business. And sometimes the short sellers themselves feel the burn of the spotlight. That’s what’s happening to Viceroy Research. The small New York-based short seller is seeking to repeat its recent success in raising questions that added to a plunge in the share price of South African furniture retailer Steinhoff International Holdings NV. But this time, the company in its sights is fighting back.
(Bloomberg) -- Some short sellers put their targets through a wringer. They bet that a certain company’s stock will drop, then level allegations about questionable business practices to try to make their wager pay off. These activist short sellers can keep markets and companies honest; at other times, they can undermine an upstanding business. And sometimes the short sellers themselves feel the burn of the spotlight. That’s what’s happening to Viceroy Research. The small New York-based short seller is seeking to repeat its recent success in raising questions that added to a plunge in the share price of South African furniture retailer Steinhoff International Holdings NV. But this time, the company in its sights is fighting back.
1. What is Viceroy’s new target?
Capitec Bank Holdings Ltd., South Africa’s best-performing stock of the past decade. On Jan. 30, Viceroy alleged that Capitec was hiding losses by refinancing defaulting loans and that it needed to more than double its provisions for bad debt. Capitec, founded almost 20 years ago, is the country’s biggest provider of unsecured loans and is headquartered in Stellenbosch, the same town near Cape Town that Steinhoff’s executives called home. Unlike Steinhoff, Capitec is not being probed by regulators; has spoken directly with shareholders, clients and the press; and has flat-out denied that there are any financial irregularities lurking in its books.
2. What’s been the response in South Africa?
Many analysts, plus South Africa’s National Treasury, have hit back at Viceroy, with the government department labeling the short seller’s actions “reckless” and calling for an international regulatory investigation into the firm. Some of Capitec’s clients -- many of them low- to middle-income earners who chose the bank for its cheap transaction rates -- took to social media to defend the bank and decry Viceroy. Customers said Capitec is one of the few lenders in South Africa giving poor black people access to finance. Nonetheless, Capitec’s share price felt the pain. It dropped as much as 25 percent in intraday trade on Jan. 30 and ended the week 2.1 percent weaker than it was before the Viceroy report was published.
3. What does Capitec say?
The bank said Viceroy made no attempt to contact it and produced a report “filled with factual errors.” It said that, like other banks, it sometimes extends the terms of delinquent loans, but it denied hiding losses and said initiation fees are not charged for rescheduled loans. It pointed out that it’s a diverse bank with a sizable deposit base, capital adequacy ratios more than three times the regulatory minimum and an array of funding options. Capitec also filed a formal complaint with South Africa’s Financial Services Board, a regulator that oversees trade in listed stocks. The board confirmed on Feb. that it’s investigating possible market abuse and breaches of South African laws by Viceroy.
4. Who exactly is Viceroy?
It’s a three-man team that has written critical reports on seven companies, including Steinhoff and Capitec. For more than a year, the three men concealed their identities. But in January, the head of the firm, Fraser Perring, came forward, confirming to Bloomberg News that he had been a social worker in the U.K. before being struck off the register over his handling of a case involving a neglected child. (He said he sued that former employer and received a settlement.) His Australian-based colleagues are Gabriel Bernarde, an accountant, and Aidan Lau, who trained as an engineer, according to Perring. Viceroy has only a “significant high-net-worth individual” in the U.S. as an investor, Perring said. Viceroy, which has a short position in Capitec, has a website prefaced by a reference to the tulip market mania of the 17th century. It’s hosted by the public-blogging service WordPress.com and its emails are from a free Google account. Viceroy is sticking with the report and its calls to have Capitec investigated by bank regulators, Perring said Feb. 2.
5. Do all short sellers work this way?
Not at all. Most shorting is done by hedge funds and institutional investors to cushion their investments against falling stock prices or to bet that shares have risen too high. Stocks are shorted every day on Johannesburg’s stock exchange, Nicky Newton-King, its chief executive officer, said in an opinion piece published Feb. 5 on the website Daily Maverick. What would be an offense, she said, would be “deliberately or negligently publishing false statements regarding a listed company.” Medical-device maker MiMedx Group Inc., which was among Viceroy’s biggest targets last year, is suing Viceroy and other short sellers, saying they issued false and defamatory statements to manipulate the stock and reap profits.
The Reference Shelf
- QuickTake explainers on short selling and Steinhoff’s battle for survival.
- Viceroy’s responses to questions about who it is and what it does.
- South African National Treasury’s take on Viceroy’s Capitec report.
- Viceroy’s Capitec report of Jan. 30.
- How banks analysts rate Capitec and what they have said since Jan. 30.
- A chart shows the short interest in Capitec before Viceroy’s report.
- MiMedx and it’s ongoing court battle with short sellers.
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