FSCA probes Viceroy, fund managers over Nepi Rockcastle report

Regulator probing whether Viceroy was ‘negligent’ in releasing the report that unleashed a dramatic sell-off in Nepi shares.
The short seller's report caused a sell-off worth R9bn in Nepi Rockcastle shares. Picture: Moneyweb

Pressure is mounting on Viceroy Research, the short seller that has targeted three JSE-listed companies since 2017. The Financial Sector Conduct Authority (FSCA) confirmed that it has launched another investigation into the firm for possible market abuse and breaches of the Financial Markets Act.

Viceroy accused real estate company Nepi Rockcastle of overstating its profits in a report published in November 2018 – allegations that have since been rejected by the FSCA as it found no wrongdoing by the central and eastern Europe-focused company.

Brandon Topham, FSCA divisional executive for investigations and enforcement, says his office is investigating Viceroy for releasing the damning Nepi report, which could be “negligent” and “not in good faith” as its release caused a sell-off worth R9 billion in the company’s shares.

Read: Viceroy Research is a ‘hit squad,’ Kganyago says

The financial regulator is also investigating share trades prior to the release of the report – a probe that could also implicate local fund managers for insider trading if it is found that they knew ahead of time that Viceroy would publish its findings.

“We also need to look at the person(s) who said there was a misstatement [in Nepi’s financial statements] and caused a lot of transactions on the stock exchange,” Topham told Moneyweb in an interview.

“Why did they say this, and did they have enough basis for saying what they said? Did they make a personal profit out of it? That’s what we will investigate.”

Topham didn’t disclose which fund managers are on the FSCA’s radar.

Viceroy rose to prominence in 2017 when it published research on Steinhoff International soon after the company admitted to accounting irregularities (now accepted as massive fraud), which triggered a collapse into its share price.

Viceroy then set its sights on two other JSE-listed companies, Capitec and Nepi Rockcastle, saying the former should write off R11 billion to truly reflect its bad debts and be placed under curatorship by the South African Reserve Bank (Sarb). This led to a sell-off in Capitec shares, but large support for the company from National Treasury and Sarb, which both rubbished Viceroy’s findings.

On Nepi, Viceroy said its Romanian property assets recorded a pre-tax loss of about €41 million in 2017 and not the €284.8 million profit reported by the company. This, said Viceroy, led to a loss difference of about €325.9 million. Viceroy said in its report that this “suggests company earnings figures are massively overstated for at least the last three years”.

After considering Viceroy’s report, according to Topham, the FSCA on May 6 cleared Nepi as it found no evidence of false or misleading financial reporting by the group in 2017.

The FSCA is also investigating Viceroy for its report on Capitec after the company laid a complaint with the regulator. This brings the number of investigations into Viceroy by the FSCA to two (including Viceroy’s release of the Nepi report).

Viceroy may have to answer to the SEC and FCA too

The fact that Viceroy is not domiciled in South Africa means the FSCA can alert the Securities and Exchange Commission in the US and the UK’s Financial Conduct Authority about the research outfit’s conduct. Topham says it will be “very difficult” for Viceroy to prove that it wasn’t “negligent” because “we are comfortable in our investigation that there is no misstatement and need to restate Nepi’s financial results”.

Fund managers found guilty of insider trading for taking positions on Nepi shares in anticipation of its decline leading up to and after the release of Viceroy’s report could face monetary fines.

“We are investigating any other fund manager that would have known that the Viceroy report was incorrect or made trades on the Nepi share,” says Topham.

“Right now, we are looking at everybody that traded on that share.”

Nepi’s share price was already volatile after a cascade of reports released by fund managers accused the Resilient group of companies of trading large volumes of shares to artificially boost share prices and using questionable accounting policies to boost profits and net asset values.

The Resilient group of companies is considered by the market to include the Resilient real estate investment trust (Reit) itself as well as Nepi, Fortress Income Fund and Greenbay Properties (now known as Lighthouse Capital).

Although Nepi is off the hook (for now) regarding allegations of false or misleading reporting and insider trading, the FSCA has not yet cleared Resilient, Fortress or Lighthouse Capital of market manipulation.

The regulator could reopen all of its investigation into Nepi if it later discovers evidence of insider trading and false or misleading reporting relating to the company during its ongoing probes into other Resilient companies.

Viceroy responds

In response to Moneyweb questions, Viceroy said it has not received any communication from the FSCA regarding its investigation. “It’s difficult to imagine regulators in any developed financial community making comments to the press regarding an ongoing investigation, let alone one which the respondent has not been informed of,” said Viceroy founder Fraser Perring.

Viceroy still stands behind its report, saying that it still believes that a substantial portion of Nepi’s distributable earnings consists of income that is not generated from rental income as is the standard for real estate companies.

“We have highlighted that substantial portions of Nepi distributable earnings [in which real estate companies usually pay dividends from] consist of non-recurring items, such as the sale of securities and antecedent dividends,” says Perring.

“Viceroy anticipated Nepi raising debt as its coffers of listed security assets ran dry. Nepi has since raised unsecured debt to maintain its dividend and risks losing investment-grade status as [real estate and economy] fundamentals may continue to deteriorate.”



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If they are going to go after incorrect negative reports by shorts they had better get ready to go after those incorrect positive research reports by the longs.

Start with the Steinhoff BUY recommendations from the biggest asset managers…

Shorts are an essential part of a well functioning market. After all, if longs don’t lend out their shares, there would be no shorts and the longs would lose a significant part of their asset return. Lending shares is why the big fund managers can nowadays run on TER of 0.07% and some are going to zero fees.

For the business model to work, the discount fund managers have to earn interest on the shares they lend to shorts. If their cash flow depends on the number of loanable shares that they have “in stock”, then they have to own those counters that are in demand with short sellers. That implies that the individual who invests with a discount broker is actually the owner of the companies that are popular with short sellers. That brings us to the point, costs are irrelevant. The focus should be on performance after costs.


Yes they do earn on what they lend out and obviously they must own them to lend them. Retail investors score by their fund manager reflecting that income in their lower fees after income from lending. Within 5 years I would expect the largest ten ETF to have zero fees. Imagine a world where ETF pay you to invest : negative fees are not an absurd concept

End of comments.



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