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Viceroy’s identity has been unmasked but its business model is a murky picture

There is little transparency on how the research firm makes its money, says Stuart Theobald of Intellidex.

RYK VAN NIEKERK:  A new research report was published today that analysed the quality of the research of the controversial Viceroy Group. The report is entitled Investment Research in the Era of Fake News, and was compiled by Dr Stuart Theobald and his team at Intellidex. Viceroy Research is of course best known for its research into Steinhoff, and a research report by Viceroy was published a day after Markus Jooste resigned from the company, which triggered its spectacular share price collapse. Earlier this year Viceroy published a report on Capitec Bank as well, which negatively affected Capitec’s share price.

Read: Viceroy’s report on Steinhoff was ‘substantially plagiarised’ – Intellidex

Stuart now joins us from London. Stuart, welcome to the show. Your report is pretty scathing on the quality of Viceroy’s research, especially in relation to Steinhoff and Capitec. What were your main findings?

STUART THEOBALD:  Our investigation was to understand short selling and to understand the impact of Viceroy. I think the clear findings are, number one, that Viceroy has really been able to have an impact because of their report on Steinhoff that came into the market when there was really no other information about to explain what had happened with Steinhoff, and it has developed a reputation and influence because of that.

I think, however, that that reputation is unearned – and I say that for the following reason. The Steinhoff report that Viceroy published was substantially plagiarised. It was plagiarised from work by another that had actually been published six months earlier. That was indeed good work, but it was not Viceroy’s work. So even rumours that it was doing work would move share prices. When it did eventually publish its report on Capitec, it had a big impact and in the short term on the Capitec share price.

But if you actually read the reports, we find there’s a distinct lack of quality in those reports. There is very little proper financial analysis, there are obvious mistakes in interpretation, and there are claims that we think are just patently untrue, and that Viceroy must have known were untrue. So the report is of a very low quality.

RYK VAN NIEKERK:  That begs the question: Why did so many investors react to it, and especially fund managers and professional investors?

STUART THEOBALD:  I think that’s a good question, and I think that those professionals had an obligation to really examine the research and the claims in the research. But we all get taken in by a good story. When Viceroy published its Steinhoff report it was anonymous, there was lots of speculation, there was a kind of mythology that was created that, when Viceroy was later exposed, thanks to good work done by Moneyweb, we discovered that the people behind it were a former social worker, who had been disbarred for dishonesty, and two 24-year-old Australians. That was very different from the mythology that had been created of the kind of big Wall Street market gurus. The myth sort of existed to some extent, and continues to exist.

I think now professional investors and markets need to come back down to earth and understand who these people really are.

RYK VAN NIEKERK:  What can the consequences be for putting out such reports?

STUART THEOBALD:  I think that it’s extremely complex and in a way regulators are still trying to catch up with how social media affects the flow of information. Social media makes it possible for spurious claims to spread like wildfire, and if those claims are being made with the intention of manipulating market prices it’s very hard to do anything about that.

I think that there are very difficult, if you like, philosophical questions about this kind of research. It might be the case that Viceroy genuinely believed the company was worth less than it is. However, its report doesn’t contain good evidence for its belief, so it has the belief but its evidence simply doesn’t support the belief, so the belief it put out is poorly founded.

In most cases it’s very difficult to decide whether there is anything happening that’s actually illegal. It’s really just poor research and beliefs that are based on poor evidence. If a company or a researcher knows that what they are publishing is false, that’s a different story. Then publishing it with the purpose of manipulating the market, there at least in theory there is something illegal happening. The problem is telling the difference between that case, where they know that they are publishing false information, and a case where they genuinely believe – even if their information doesn’t support that belief. It’s an extremely difficult and tricky area, and I think regulators are still grappling with that, and that’s a problem for regulators all over the world, not only South Africa.

RYK VAN NIEKERK:  Viceroy has responded to your research. It published a statement, which we will publish on the Moneyweb website in a minute. But it just states that they expect their work to be treated with the same scepticism as that of any party, and they have advocated the quality of the due diligence remains with readers. So, as you say, if the intent was to disrupt the market, it’s a totally different story than just putting poor and plagiarised research into the market.

STUART THEOBALD:  Yes, it is a different story. I haven’t yet seen Viceroy’s report. If they say that they want to be scrutinised like other researchers, well, that’s great. That’s what we’ve done.

RYK VAN NIEKERK:  Stuart, why did you do this research?

STUART THEOBALD:  We were commissioned to do the research by Business Leadership South Africa. They asked us to do it. From my understanding they were concerned about Viceroy’s research. There was lots of talk in the market. The Reserve Bank and the National Treasury had called it irresponsible, and they wanted to understand what was going on.

We accepted the commission on the basis that our work was fully independent, that we would deliver the results of our research, and that we could find either positively or negatively about Viceroy. We certainly did not commit to any preconceived conclusions, and we did deliver our work independently.

RYK VAN NIEKERK:  Stuart, do you have a sense of how much money Viceroy made off the Steinhoff report?

STUART THEOBALD:  It’s a very interesting question. There is very little transparency about how Viceroy actually makes its money. It claims to have exposures to the stocks, or at least it says in its report that it might have exposures to the stocks, the way a typical hedge fund does. But we know that Viceroy is not registered, or it appears, as far as we can find out, that it’s not registered with any fund regulator. So as a result of that it wouldn’t be able to open the trading accounts that a hedge fund would normally be able to have and to operate, because it wouldn’t comply with anti-money-laundering regulations. So if it is making money out of trading these stocks, it must be the individuals behind it that are doing so, not Viceroy in itself.

But we do note in our report that Viceroy occupies a kind of ecosystem of many other hedge funds and short sellers, and they are constantly interacting with each other. And we think that Viceroy in effect acts as a kind of publicity seeker for other funds, or at least about companies that other funds have positioned them. And Viceroy might be receiving some kind of remuneration based on the value it creates for those other hedge funds. So that might be the kind of business model at work here. But there is very little transparency about it.

RYK VAN NIEKERK:  Thank you, Stuart. That was Dr Stuart Theobald of Intellidex, who compiled a 49-page document entitled Investment Research in the Era of Fake News. This report analyses the quality of Viceroy’s research, the short seller that produced reports on Steinhoff and Capitec, which influenced their share prices.

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In a sense, there are entities trying to do that to whole nations (mostly emerging market nations) who are prepared to do anything to buy them cheaply.

Welcome the money lenders at your peril.

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